Internal Market Forces: A Deep Dive into Supply, Demand, and Economic Policy

Posted on Dec 6, 2024 in Economy

Internal Market Forces

The behavior of economic actors in a country is expressed by supply and aggregate demand.

Average Price Level

It is the weighted average of all prices in an economy.

Aggregate Demand

Represents the total expenditure economic agents are willing to make (expected spending):

  1. Family or private consumption
  2. Corporate investment
  3. Public expenditure
  4. Net exports

DA = C + I + G + (XM)

Aggregate Supply

The quantity of production enterprises are willing to sell at an average price level and given production costs:

  1. Average price level
  2. Production costs
  3. Business expectations

Consumption

Refers to family spending in three categories:

  1. Durables
  2. Non-durables
  3. Services

Factors determining consumer spending:

  1. Disposable income: More income leads to more consumption.
  2. Permanent income: Income over the medium term, independent of individual events.
  3. Life cycle: Saving for a better future.
  4. Wealth effects: Money that can be saved.

Investment

Acquiring capital goods that indirectly satisfy human needs and contribute to future production.

Investment Functions

  1. Pull investment: Firms increase assets to meet demand.
  2. High production capacity: Accumulation of capital goods for higher economic growth.
  3. Investment in plant and equipment: Purchasing durable goods.
  4. Construction: Investment in construction equipment.
  5. Changes in inventories: Saving output instead of selling it.

Factors conditioning investment:

  1. Revenue
  2. Costs (interest rates, taxes)
  3. Future expectations

Marginal Propensity to Consume

The additional quantity consumed when there is extra income.

Marginal Propensity to Save

The additional quantity saved when there is extra income.

Savings

The proportion of available income not consumed, which is available for business investment.

Economic Policies

These are forms of intervention in the economy to achieve economic objectives.

Objectives

  1. Sustainable economic growth
  2. Full employment
  3. Price stability

Means

  1. Direct: Government agencies develop and implement economic policy.
  2. Indirect: Through market mechanisms.

Types

  1. Fiscal policy: Government action to increase or decrease economic activity.
  2. Monetary policy: Measures aimed at price stability.
  3. Foreign policy: State regulation of transactions with other countries.
  4. Incomes policy: Measures to control inflation.

Fiscal Policy

Intentional government action influencing revenue and public expenditure to achieve objectives.

Fiscal Instruments

  1. Discretionary fiscal policy: Government actions influencing revenue or expenditure (e.g., public works programs, tax rate modifications).
  2. Automatic stabilizers: Income or public spending that increases or decreases to stabilize the economy (e.g., progressive taxes, unemployment benefits).

Effect on the Economy

  1. Expansionary fiscal policy: Lower taxes or increased spending to stimulate aggregate demand.
  2. Restrictive fiscal policy: The opposite.

Public Budget (PGE)

Revenue

  1. Social contributions
  2. Taxes (direct and indirect)
  3. Other income (current transfers, property income, capital transfers)

Expenditure

  1. Current expenditure
  2. Investment
  3. Transfers and subsidies

There are two types of deficits: cyclical (occurring during economic downturns) and structural (permanent deficits).