Globalization: Economics, Politics, and Culture

• Globalization is the process of businesses, organizations, and countries operating internationally, influenced by economics, politics, and culture.
• Globalization can reduce costs for businesses through outsourcing to developing countries.
• Developed economies can benefit from the technical advancements of other nations due to globalization.
• Globalization generally improves living standards in developing countries.
• Globalization can negatively impact local economies and workers, according to some analysts.

Key Questions on Globalization

• What are the benefits of international trade?
• How do trade barriers protect local workers and companies?
• What are the downsides of globalization, and are they justified by the benefits?

Globalization Discussion Points

• What enables globalization?
• Are small economies forced to engage in global trade, and if so, how do they participate?
• For producers, is internal or external demand more important in global trade?
• What are the advantages and disadvantages of globalization from different perspectives?

Labor

• Labor includes all productive resources requiring human effort, both manual and mental.
• Payments for labor are wages and salaries.
• The International Labour Organization (ILO) includes employed and unemployed persons in the working-age population.
• Division of labor increases efficiency by splitting work into specific tasks.
• Specialization allows workers to focus on tasks they perform best.
• Economies of Scale increase output and reduce average production costs.

Capital

• Financial capital includes money, loans, and commodities.
• Physical capital has two forms: fixed and circulating.
• Fixed capital refers to long-life assets used repeatedly in production, such as machinery and buildings.
• Circulating capital is used once in production, such as energy and raw materials.
• Depreciation/Amortization is an accounting method to track capital loss over time.

Opportunity Cost

• Opportunity cost is the value of the next best alternative when making a decision.

Production Possibility Frontier (PPF)

• PPF is a curve showing possible output combinations given limited resources.
• PPF illustrates efficiency, opportunity cost, and economic trade-offs.
• Specialization increases efficiency by allocating tasks based on worker skills.
• Example: A hunting tribe specializes in either making arrows or hunting, improving total output.

Law of Diminishing Returns

• As more resources are devoted to one task, the additional output per unit declines.

Demand and Supply

• Elasticity of Demand measures responsiveness of demand to price/income changes.
• Elastic Demand shows a large change in quantity with price changes, as seen in luxury goods.
• Inelastic Demand shows little to no change in quantity with price changes, as seen in necessities.

Factors Affecting Demand

• Substitutes & Complements: Price changes in one good affect another.
• Income Levels: Higher income shifts demand for normal goods but reduces demand for inferior goods.
• Consumer Preferences: Trends and social factors influence demand.
• Law of Supply: Higher prices encourage producers to supply more.

Factors Affecting Supply

• Production Costs: Lower costs increase supply.
• Subsidies & Taxes: Government policies affect production incentives.
• Technological Advancements: Improves efficiency and increases supply.

Market Equilibrium

• Price Equilibrium: Where supply equals demand.
• Surplus: Excess supply forces prices down.
• Shortage: Excess demand pushes prices up.

Government Interventions

• Price Ceilings (e.g., rent control) lead to shortages.
• Price Floors (e.g., minimum wage) lead to surpluses.

Market Failures

• Market Failures occur when free markets do not allocate resources efficiently.

Causes of Market Failures

• Externalities (e.g., pollution) that can be addressed with government taxes.
• Public Goods (e.g., national defense) supplied by government.
• Monopolies & Oligopolies, addressed with government regulations.
• Information Asymmetry, addressed with consumer protection laws.

Solutions to address Market Failures

• Government regulations (e.g., antitrust laws).
• Subsidies and taxes (e.g., carbon tax for pollution control).

Speculation

• Speculation involves buying assets in anticipation of price changes.
• Speculation can both stabilize and destabilize markets, such as in the housing market.
• Hoarding can create artificial shortages, such as food storage for price increase.

Government Intervention Example: EU's Response to the 2022 Energy Crisis

• Gas price caps, energy subsidies, windfall taxes on energy firms were implemented.
• Increased renewable energy investments were made.
• Policies to regulate speculation and monopolies were put in place.

Market Structures

• Perfect Competition has many firms, no barriers to entry, and identical products.
• In perfect competition, firms are price takers and cannot influence the market price.
• The profit-maximizing rule in perfect competition is Marginal Cost (MC) = Marginal Revenue (MR).
• Monopoly: A single seller controls the market.
• Monopolies lead to higher prices, inefficiency, and lack of competition.
• Legal Monopolies: Patents, copyrights.
• Oligopoly: A few firms dominate the market.
• Oligopolies may engage in Collusion & Cartels, such as OPEC oil production agreements.
• Government intervention aims to prevent price-fixing in oligopolies.

Perfect Competition

• Firms are price takers and Marginal Cost = Marginal Revenue for profit maximization.
• Break-even point: Where total cost = total revenue.
• Shutdown Point: Firm stops production if revenue doesn’t cover variable costs.

Monopolies

• Natural Monopolies: Exist due to high infrastructure costs (e.g., utilities).
• Government Regulations: Patents, trademarks, and price ceilings are examples.
• Inefficiency & High Prices: Monopolies lack incentives to innovate.

Oligopolies

• Collusion Risk: Firms coordinate pricing to maximize profits.
• Cartels: Groups of firms agreeing to fix prices (e.g., OPEC).
• Antitrust Laws: Governments regulate oligopolies to prevent price-fixing.

Regulations to Prevent Market Failures

• Sherman Antitrust Act (1890, USA) prevents anti-competitive behavior.
• Government price controls (e.g., subsidizing essential services).
• Reducing entry barriers promotes competition.