Economic Agents PDF

Economic agents Watch this link on economic agents before reading this handout https://study.com/academy/lesson/economic-agents-types-roles.html Goods and services satisfies the need and wants of different groups in the economy. The three main groups in the economy are called economic agents and th...

Economic agents Watch this link on economic agents before reading this handout https://study.com/academy/lesson/economic-agents-types-roles.html Goods and services satisfies the need and wants of different groups in the economy. The three main groups in the economy are called economic agents and they are: 1. Households 2. Firms or producers 3. Government Households All those people living under one roof are considered a household. Households do two fundamental things vital to the economy. 1. Demand goods and services from product markets 2. Supply labour, capital, land, and entrepreneurial ability to resource markets. Households are rational utility maximizers. Economists assume that individuals, and thus households, attempt to maximize their utility. They act in their own best interest (in the interest of their own goals - maximizing their utility), and would not make choices that would make them worse off. Factors affecting Households/consumer decisions Price of the good itself Income of consumers Personal choices Expectations Bandwagon effect Types of work – influences the type of clothes or the type of car one owns. The rate of interest offered by the banks Level of education Taxes and subsidies Price of related goods (substitutes and compliments) Demand shocks - a surprise event that can lead to a temporary increase or decrease in demand for goods or services. Number of consumers in the markets Firms/producers Firms: Economic units, formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale. Firms are providers of goods and service. Prior to the 18th century, Britain had a cottage industry system. Firms supplied raw materials (lumber, wool) to households that turned raw materials into finished goods. This system still exists in some parts of the world.  With the expansion of the economy-more demand for final goods and services- entrepreneurs organized various stages of production under one roof. Work was organized in factories which 1. Promoted more efficient division of labour 2. Allowed for direct supervision of laborers 3. Reduced transportation costs 4. Facilitated use of machines. Types of firms Sole Proprietorships: A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts. (plumber, doctor) Must raise all the money to start business, is solely responsible for all debts. Partnerships: A firm with multiple owners who share the firm's profits and each of who bears unlimited liability for the firm's debts. Two or more people agree to contribute resources in return for a share of the profit or loss. (Law, accounting, medical partnerships) 3. Corporations: A legal entity owned by stockholders whose liability is limited to the value of their stock. Owners issued stocks that entitle them to profits in proportion to their stock ownership. Many individuals pool money (1000s even millions) Factors affecting firms/producers decisions Production cost Resources Profit margin Industrial relations Changes in demand Resource base – the quality or type of resources available to the firm will affect a firm’s decision to produce a good or service The government The government plays a vital role where business are concerned such as: Establishing and Enforcing the Rules of the Game. Promoting Competition Regulating Natural Monopolies Producing public goods. Public good: A good that, once produced, is available for everyone to consume, regardless of who pays and who doesn't. Externality: A cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction. Income Distribution  Full employment, Price stability, Economic Growth What is the goal of government? Households maximize utility Firms maximize profits Voluntary exchange vs. Coercion Market is based on voluntary exchange. Unless there is 100% agreement--government decisions involve some degree of coercion Factors affecting government Laws and grants General laws – for example, minimum wage Laws concerning the employment of the disabled persons Taxes Setting up of industrial zones – to encourage and facilitate activities of the firms Environmental issues Types of economic system