Market Dynamics, Labor, Macroeconomics, and Public Sector

Posted on Dec 9, 2024 in Economy

Market Rates and Competition Levels

Perfect competition: A large number of suppliers and demand, no company influences the price, the consumer benefits more.

Imperfect competition: Bidders have some pricing power.

  • Oligopoly: The number of bidders is small for a large number of applicants.
  • Monopoly: There is only one bidder and it has control over prices. It’s worse for consumers.

Features

Perfect competition: There are very few barriers to entry and exit. Each producer has a negligible portion of the market. There is full information. By producing a single differentiated product, the producer has no power to fix prices.

Imperfect competition:

  • Monopolistic competition: Low barriers to entry. A large number of producers. The good is a differentiated product. The producer has some power to set the price.
  • Oligopoly: High entry barriers. The number of firms is small. They control a significant percentage of the market. The decisions taken by one of them have a decisive influence on what the others will do.

When are there monopolies? When a company controls all the resources necessary to produce a good. When you have the control technology to offer that product. When a state only allows a company to offer a certain product. There are also natural monopolies such as supplies to the population of water, electricity, etc.

The Labor Market

Supply and Demand for Labor

Labor supply depends on: The volume of the active population; the higher the population, the higher the bid. The number of hours that each person is willing to work; if wages increase, people are willing to work harder.

The demand for labor depends on: Companies will be willing to hire more workers, provided that such incorporation will yield benefits. If businesses increase wages, they will be less willing to hire.

Improving wages and productivity: If workers produce more in the same time, entrepreneurs are willing to pay more for their work.

Market Imperfections

  • Companies and unions influence wages.
  • Work is not a homogeneous product: there are compensating differentials, talent, human capital, efficiency wages, and discrimination.

Causes of Unemployment

  • Neoclassical theory: According to this theory, the labor market could be adjusted only if wages were flexible, and unemployment would not exist. In reality, this is not the case, on the one hand, due to the existence of unions, and on the other, due to the existence of a minimum wage.
  • Keynesian theory: Here, the main cause of unemployment is not the labor market but the market for goods and services. When there is insufficient demand, reduced business activity generates unemployment.

Types of Unemployment

  • Temporary unemployment: Job change
  • Seasonal unemployment
  • Cyclical unemployment
  • Structural unemployment: Positions offered do not match demand.

Global Economy

Macroeconomics: The part of the economy that prioritizes studying the economic problems of a country at large.

Macroeconomic Problems

Growth: Growth in goods produced is a key issue in economics. Growth creates jobs, improves living standards, and increases tax revenue. It is measured by GDP.

Employment: Unemployment is the main problem for a country. It is measured by the EPA (Economically Active Population).

Price stability: If prices rise significantly, there are imbalances in the economy that harm people. It is measured by the CPI (Consumer Price Index).

Balanced budget: When the state’s expenses exceed its income.

Quantity Derived from GDP

Domestic product to national product: While GDP reflects what occurred in a country, the Gross National Product (GNP) refers to the production obtained by the factors of production in one country but residing outside. GNP = GDP + RFN – RFE (where RFN is income from national factors abroad and RFE is income from foreign factors in the country).

Nominal GDP to real GDP: GDP is used to calculate market prices, which vary with time. If GDP increases, we should distinguish what part is real and what part is due to rising prices.

Aspects GDP does not include: Employment of domestic work, voluntary work, barter, and work done illegally (underground economy).

Prevailing Economic Systems

Prevailing economic systems are currently mixed economies. They try to combine the advantages of the market with state intervention.

Market Failures

  • Business cycles: Growth is cyclical, with expansion and recession.
  • Externalities: Many activities produce negative effects on third parties.
  • Public goods: The market does not satisfy all the demand for public goods.
  • Lack of competition: Firms in advantaged situations are detrimental to society.
  • Equity: The market generates a highly unequal income distribution.

State Functions in a Mixed Economy

  • Regulate economic activity: The state sets the rules that organize the activity of economic agents.
  • Produces and provides goods and services: Services such as education, health, and police are offered free to the public.
  • Sets and collects taxes: Public spending is financed mostly by taxes.
  • Redistributes income: With the aim of reducing income inequalities.
  • Tries to stabilize the economy: Planning and taking measures with the aim that fluctuations do not create unemployment or price increases.

Cyclical or Short-Term Policy

  • Fiscal: The state can increase economic activity by increasing public spending or cutting taxes, and vice-versa.
  • Monetary: Regulates activity through the setting of interest rates or control of the amount of money in circulation.
  • Exterior: The state can encourage exports with trade policy measures.
  • Revenue: If prices skyrocket, the state can control the evolution of the income of an economy and its impact on price stability.

Structural or Long-Term Policies

The modernization and reorganization of a sector of the economy or the creation of conditions for the development of a region through investments in infrastructure, transport, etc. These measures need more time to produce the desired effects.

Welfare State

A concept that considers the responsibility of the state to achieve full employment, a social security system covering the entire population, basic education and health, and ensure a decent standard of living for all.

Consumption and Investment

Consumption depends on: Disposable income of households, interest rates for credit facilities, and the life cycle (young and old people save less).

Indicators of Consumption Trends

  • Continuous survey of household budgets: Picks up spending expectations and optimism about the future.
  • Car registrations: A reliable indicator of consumption trends.
  • Sales in supermarkets: Provide useful data to measure consumption in food and consumer items.
  • Other indicators are: Fuel consumption, the survey of trade.

Investment

Economic investments include the acquisition of capital goods to produce other goods. Investment consists of investment in plant and equipment and housing for use by families.

Investment depends on: Interest rates (the higher the interest rate, the lower the investment), whether capacity is fully used, and confidence in the future. An investment will be profitable when the relationship between profit and investment is favorable.

Aggregate Demand and Supply

Aggregate demand is the total of goods and services that operators are willing to purchase at different price levels in a given period of time.

Aggregate supply is the total of goods and services that companies are willing to produce and sell at different prices.

The Informal Economy

The underground economy is that part of the economy that is not declared for tax and therefore not part of GDP. It represents 20% of the economy. Because of this, it reduces government revenue, employment is precarious, moonlighting prevents other people from working, and it creates safety and public health hazards.

The Public Sector

The Public Sector Consists of

  • Government: Central government, formed by the state and autonomous bodies, local authorities, and social security.
  • Public enterprises.
  • Institutions of the European Union.

Balanced Budget

Budgets are balanced when revenues are equal to expenditures. When incomes are unable to cover expenses, budget deficits occur. There is a surplus in the opposite case. The deficit is cyclical when in a period of recession. If the deficit remains year after year, we face a structural deficit.

Public Expenditure: The total expenditure incurred by the government.

Income Tax

The income tax is a direct tax levied on the production of income by citizens.

  • Regressive tax: Taxes everyone equally.
  • Proportional tax: People who have more pay more.
  • Progressive tax: Applies different rates to different amounts of income.