Economy PDF

1 Economics and economy Economics gets to the heart of everyday issues, analysing individual and corporate behaviour, as well as social and political institutions, to see how well they perform at converting humanity's limited resources into the goods and services that best satisfy human needs and w...

1 Economics and economy Economics gets to the heart of everyday issues, analysing individual and corporate behaviour, as well as social and political institutions, to see how well they perform at converting humanity's limited resources into the goods and services that best satisfy human needs and wants. 1.1 Economics Economics is a term which comes from a Greek word “oikonomia” which means managing the economy. Economics is a social science that seeks to analyse and describe the use of scarce resources for production, followed by distribution, and consumption of wealth. Economics is split into two realms: Microeconomics is a branch of economics that studies the behaviour of individuals and companies in making decisions regarding the allocation of scarce resources and the interactions among these individuals and companies. Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole. Economics is also divided into positive normative economics: Positive economics is concerned with the development and testing of positive (real) statements about the world that are objective and verifiable. Positive statements can be tested, at least in theory, if not always in practice. Normative economics deals with normative statements about what the economy should be. The validity of normative statements can never be tested. 1.2 Economy The economy is a social domain that emphasises the practices, discourses, and material expressions associated with the production, use, and management of resources: an economy of a company, an economy of a household, an economy of a country, an economy as a trade, an economy as a production. 6 The economy is a system of trade and industry by which the wealth of a country is made and used. It is also a state of a particular country or region in terms of the production and consumption of goods and services and the supply of money. As well as economics, the economy is divided into two realms: Macro-economy is represented by the economic activity of interconnected and interdependent market subjects within the national economy. Micro-economy is focused on the economic activity of individual market subjects (households, companies, governments). The economy consists of economic units (market subjects) and their activities. The main aim of these activities is to satisfy human needs. These economic units are dependent on each other: households – all those people living under one roof are considered a household (each household is a single decision-maker); companies – companies are formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale; governments – the government is a special economic unit which gets taxes and fees from households and companies and provides them with grants, social benefits and public goods and services (public lighting, public roads and sidewalks, etc.). 7 Task No. 1.1: Specify the difference between economy and economics by using the Cambridge Dictionary available at https://dictionary.cambridge.org/ Vocabulary economics – ekonómia economy – ekonomika needs – potreby wants – túžby microeconomics – mikroekonómia scarce resources – vzácne zdroje macroeconomics – makroekonómia production – výroba discourses – rozpravy industry – odvetvie trade – obchod realms – sféry (oblasti) positive economics – pozitívna ekonómia statements – tvrdenia verifiable – overiteľné normative economics – normatívna ekonómia macro-economy – makroekonomika interconnected – vzájomne prepojené interdependent – vzájomne závislé micro-economy – mikroekonomika economic units – ekonomické jednotky fundamental – základný (hlavný) decision-maker – ten, kto robí rozhodnutie profit-seeking – snažiaci sa o zisk entrepreneurs – podnikatelia taxes – dane 8 1.3 Scarcity Scarcity is an economic concept where individuals must allocate limited resources to satisfy their needs. Scarcity affects the monetary value individuals place on goods and services. Things that are scarce, like gold, diamonds, or certain kinds of knowledge, are more valuable for being scarce because sellers of these goods and services can set higher prices. In fact, economists view everything people want, strive for, or can’t achieve effortlessly as scarce. 1.4 Satisfying needs Think about your wishes and desires. Why do you have them? Because there are some needs that you want to satisfy. Economic theory is based on satisfying the needs of individuals and an economy as a whole: Need is a feeling or an awareness of the lack of something. Needs are congenital or acquired requirements of the human organism which people realise as a feeling of scarcity and try to remove them by satisfying them. Wants are items that people desire but aren’t essential for survival. 9 Task No. 1.2: Provide examples of needs that you satisfy: a) every day, b) once a week, c) once a month, d) occasionally. 1.4.1 Types of needs Needs according to the importance: basic needs – associated with biological needs (eat, drink, sleep, etc.); higher needs: o luxury needs – associated with some life level (car, designer clothes, etc.), o cultural needs – associated with mental requirements (theatre, education, etc.). Needs according to the subject: individual needs – relate to an individual, collective needs – relate to a group of people. Needs according to their nature: physical needs – need to eat, mental needs – need to learn, social needs – a need of friendship. 1.4.2 Means of satisfying needs Means of satisfying needs are products which are divided into two groups: goods – physical objects that come from production or nature, services – actions or activities that people or companies perform for another people or companies. 10 I. Goods Goods according to the method of obtaining: free goods – come from nature and occur in an unlimited amount (air, sea water, etc.), scarce goods – come from production and occur in a limited amount (food, clothes, furniture, etc.). Goods according to the purpose of use: consumer goods – serve for an immediate satisfaction of needs (food, cosmetics, etc.), capital goods – serve for the production of other goods and services (machinery, material, etc.). Goods according to their nature: tangible goods – we can touch them (fruit, computer, etc.), intangible goods – we cannot touch them (sunlight, software, etc.). II. Services Services are non-physical means of satisfying needs which can be divided into two types: material – are related to goods (car repair, eating in a restaurant, etc.), non-material – are not related to goods (medical services, education, etc.). Vocabulary scarcity – vzácnosť needs – potreby wants – túžby scarcity – nedostatok requirements – požiadavky products – produkty goods and services – statky (výrobky) a služby obtaining – získavanie consumer and capital – spotrebné a kapitálové tangible and intangible – hmotné a nehmotné developing countries – rozvojové krajiny mass production – veľkovýroba 11 1.5 Economic decisions Economic decision-making refers to the process of making choices about how to use resources in order to achieve the best possible outcome. It's about weighing the costs and benefits of different options and choosing the one that provides the highest net benefit. Scale of preferences The scale of preferences is a list of goods and services prepared for purchase in order of priority. It is a priority rating of all individual wants, according to their importance in one's valuation and the means to achieve or obtain them: rational behaviour of a consumer – a consumer follows his/her list of wants according to the importance, irrational behaviour of a consumer – a consumer buys the products impulsively (e.g. a Christmas sale). Opportunity costs Opportunity costs represent the benefits an individual, investor or company misses out on when choosing one alternative over another. The value of the next-best option is called opportunity costs. The formula for calculating opportunity costs is simply the difference between the expected return on the best foregone option (FO) and return on chosen option (CO). opportunity costs = FO – CO Vocabulary scale of preferences – škála (stupnica) preferencií opportunity costs – alternatívne (obetované) náklady foregone option – zabudnutá (nezvolená) možnosť 12 1.6 Production For an economy to exist, production of goods is very essential. In fact, the performance of an economy is also measured by the level of its production. Production is the processes and methods used to transform tangible inputs (raw materials, unfinished goods, subassemblies, etc.) and intangible inputs (ideas, information, knowledge, etc.) into goods. Resources are used in this process to create an output that is suitable for use or has an exchange value. The production preparation is a very important stage of production which influences future sales of products and trading income of the company (profit or loss). Production of new products is influenced by: new needs of people (e.g. facial creams with UV factor as a result of a stronger UV radiation caused by the ozone holes, etc.), satisfying needs of people at a higher level (e.g. replacing the CD player with the MP3 player, etc.). Flow production Flow production is a type of production where identical, standardised items are produced on an assembly line. Most sweets, pastries, beverages, detergents, etc. are mass-produced in large factories using conveyor belts and expensive machinery such as robot arms. Main characteristics of the flow production: high degree of repeatability, a permanent production programme, products do not differ, production machines and equipment are specialised (intended to produce one type of product), use of modern technology (mechanisation and automatisation), high productivity, costs reduction. 13 Batch production Batch production is a type of production where groups of items are made together. Each batch is finished before starting the next block of goods. Mostly bicycles, clothes, sofas, seasonal decorations, etc. are produced in batches. For example, a bicycle manufacturer first produces a batch of 50 silver bicycles and only after they are completed a bicycle manufacturer will start producing 50 black bicycles. Main characteristics of the batch production: a combination of the flow and job production, a limited number of products, flexible adaptation to market, use of universal machines and equipment (less specialised), lower productivity, higher costs. 14 Job production Job production is a type of production where items are made individually, and each item is finished before the next one is started. Designer dresses, bridge structures, bouquets, custom furniture, etc. are made using the job production method. Main characteristics of the job production: products differ, more qualified workers, uneven use of universal machines and equipment, low productivity, high costs. Vocabulary production – výroba inputs and outputs – vstupy a výstupy raw materials – surový (nespracovaný) materiál unfinished goods – nedokončené výrobky subassemblies – dielce flow production – hromadná výroba batch production – sériová výroba flexible adaptation to market – pružné (flexibilné) prispôsobenie sa trhu productivity – výkonnosť (produktivita) job production – kusová výroba custom furniture – nábytok na mieru uneven use – nerovnomerné využitie 15 1.7 Factors of production While people’s needs and wants are unlimited, the resources available to meet those wants and needs are limited, or scarce. Factors of production are represented by three groups of resources that are used to make all goods and services – land, labour, capital. Land Land refers to all of the natural resources used to produce goods and services. Natural resources are materials found in the nature. Labour Labour is the effort that people devote to a task for which they are paid. Capital Capital is any human-made resource that is used to produce other goods and services. It is divided into three groups: physical capital – any human-made objects used to create other goods and services (fabric, tools, buildings, etc.), human capital – knowledge and skills a worker gains through education and experience, financial capital – money which is used to buy physical and human capital. Task No. 1.3: Which of the following would not be classified as a factor of production? a) Jim is a bricklayer for a local construction company, b) the cement mixer Jim uses, c) the cement Jim puts in the mixer, d) the building plot Jim works on, e) the wage Jim gets paid at the end of the month. To summarise, factors of production is an economic term that describes the inputs that are used in the production of goods or services to make an economic profit: elementary factors of production – fundamental inputs without which company transformation process could not happen (workforce, assets, etc.), derived factors of production – they provide the control of the company transformation process (executives who carry out activities according to the management unit in which they operate). 16 1.7.1 Scarcity and alternativity of factors of production To solve the problem of scarcity, companies produce goods and services for people to consume. This production involves using various factors of production. Factors of production are scarce because their quantity is limited. An alternative use of factors of production is represented by many ways of using them (land can be used for crop production or as a building plot). Vocabulary factors of production – výrobné faktory land – pôda labour – práca capital – kapitál natural resources – prírodné zdroje physical capital – fyzický kapitál human capital – ľudský kapitál financial capital – peňažný kapitál fertile land – úrodná pôda mineral resources – nerastné suroviny elementary factors of production – základné (elementárne) výrobné faktory derived factors of production – odvodené (dispozívne) výrobné faktory crop production – pestovanie plodín building plot – stavebný pozemok 17 1.8 Economic systems An economic system is a mean by which governments organise and distribute available resources, goods and services across a geographic region or country. Economic systems regulate factors of production, including land, labour and capital. They are divided into traditional, command, market, and mixed economic systems. 1.8.1 Answering the three economic questions Because economic resources are limited, every society must answer three key economic questions: What to produce? How to produce? For whom to produce? Which goods and services should be produced? Each society must decide what to produce to satisfy its needs and wants. Because of our limited resources, each producer would produce goods and services that society needs and wants. How should the goods and services be produced? The next question we face is how to use our resources to produce goods and services. Every producer wants to achieve the highest profit, and that is why producers try to reduce inputs (e. g. by the use of new technologies). Who consumes the goods and services? The answer to this question depends on the differences between economies. Societies must decide how to distribute the available goods and services (who gets to consume which goods and services). Each society answers the question of distribution based on its unique combination of social values and goals. 18 1.8.2 Types of economies Depending on how the three economic questions are answered, there are several types of economies – traditional, command, market and mixed economy. Traditional economy (traditional economic system) The traditional economic system is based on goods, services, and work, all of which follow certain established trends. It relies on people, and there is very little division of labour or specialisation. The traditional economic system is very basic and most ancient. Some parts of the world still run a traditional economic system. Particularly, rural settings, where economic activities are predominantly farming or other traditional income-generating activities. There are very little resources to share in communities with traditional economic systems. The reason is the resources don't occur naturally, or access is restricted. Thus, the traditional economic system lacks the potential to generate a market surplus. Command economy (command economic system) In the command economic system, there is a dominant and centralised authority, which is usually the government, which controls a significant portion of the economy. Also known as the planned economic system, the command economic system is common in communist societies since production decisions are a preserve of the government. If an economy enjoys access to many resources, the government comes in and centralises the control over valuable resources, such as gold or oil. The people regulate other less important sectors of the economy, such as agriculture. In theory, the command economic system works well as long as the central authority performs the control with the general population's best interest in mind. However, command economic systems face many challenges since they react slowly to any change because the power is centralised. What to produce? – This is determined by the government according to its plans. It has to do the research regarding the level of production, consumption and demand. After this, it comes up with the economic plan for the country. The government wants to take care of people and satisfy consumers’ needs by determining the types of goods which will be produced. How to produce? – This is also determined by the government. It has to conduct an input-output analysis and identify the methods and technologies which should be used 19  by the producers. The need of factors of production should be calculated and prepared properly to be efficient for the economy. For whom to produce? – In theory, consumers have a choice of goods, however, only goods allowed by the government are offered. There are restrictions on the amount of selected goods which one person or household is allowed to buy (e.g. one car per one family). The prices are stable and influenced only by the government. The role of the government in the command economy is to make the most economic decision for a country and to manage the distribution of the resources. It plans and organises the production and employment process. Market economy (market economic system) Market economic systems are based on the concept of free markets. In other words, there is very little government interference. The government has no control or say over resources, and it does not interfere with important segments of the economy. Instead, the regulation comes from the people and the relationship between supply and demand. The market economic system is mostly theoretical because a pure market doesn't exist. All economic systems are subject to some interference from a central authority. For instance, most governments enact laws that regulate fair trade and monopolies. The greatest downside of the market economic system is that it allows private entities to amass a lot of economic power, particularly those that own resources of great value. Thus, the distribution of resources is not equitable because a few enjoy most of them, while a huge part of the remaining population fight for the little that is left. What to produce? – The consumers are the ones who indirectly make this decision. Producers have to manage the production of their companies according to what consumers are willing and able to buy. If the companies produce unwanted goods, the would be more likely to lose profit or even go bankrupt. How to produce? – The methods used for the production are chosen by individuals within the companies. Those responsible for this decision have to find the most efficient way to reacg as high profit as possible. It is also necessary to reduce the costs of production. For whom to produce? – Companies produce goods only for those who can buy them. As a result, a higher number of expensive products is produced because people with higher income can afford them. 20 The role of the government in the market economy is to protect consumers and companies by passing the suitable laws. It issues money, provides public goods and services and prevents the domination of some companies. Mixed economy (mixed economic system) Mixed economic systems combine the characteristics of the market and command economic systems. For this reason, mixed economic systems are also known as dual economic systems. The mixed economic system is defined as a market economic system under strict regulatory control in certain segments of the economy. The mixed economic system combines the best features of market and command economic systems. Many countries in the west follow a mixed system. Most industries are private, while the rest, comprising of public services, is under the control of the government. Thus, the government and the private sector serve a significant role in maintaining a mixed economy. The public sector – This sector is controlled by the government. Its duty is to provide public goods and services to people. Public goods and services seem to be for free but the consumers (citizens) pay for them indirectly by paying taxes and fees. The reason for that is that the amount of money needed for this sector is invested into roads, public lightning, healthcare, education, etc. The private sector – Decisions in this sector are made by the private companies. They manage the production process in response to the demand of consumers. However, a cooperation between the companies and government is essential. Vocabulary society – spoločnosť traditional economy – tradičná ekonomika habits, customs, traditions – návyky, zvyky, tradície command economy – príkazová ekonomika centrally planned economy – centrálne plánovaná ekonomika central authority – ústredný orgán market economy – trhová ekonomika mixed economy – zmiešaná ekonomika e 21 2 Market and market mechanism The market is one of the many varieties of systems, institutions, procedures and social relations whereby parties engage in exchange. Parties may exchange goods and services by barter or in exchange for money. 2.1 Market A market is a place where buyers and sellers meet as to buy and sell a particular commodity at a particular price. Any effective arrangement for bringing buyers and sellers into contact with one another is also defined as a market. Market conditions: 1. there must be a commodity which is bought and sold, 2. there should be a free interaction between buyers and sellers so that only one price is agreed upon for the commodity, 3. for such interaction, the physical presence of buyers and sellers isn’t necessary, 4. the market doesn’t have to be a particular place; it can be a whole area wherein buyers and sellers of a commodity are spread over. Market functions: 1. the market provides information about production, buyers, and sellers, 2. the market influences the behaviour of producers and consumers, 3. the market allows the purchase and sale to happen, 4. the market allows the distribution of incomes of households, companies, and governments by setting the price of every commodity being bought and sold. 2.1.1 Types of markets Markets according to the territory: local market – market situated for example in a city or a region, national market – several local markets within one country together, international market – several national markets of several countries together, world market – national markets of all countries together. 22 Markets according to the subject: market for goods and services – a market where goods and services for personal needs are bought and sold, market for factors of production – a market where land, labour and capital are bought and sold, financial market – a market where available financial funds are bought and sold. Markets from the quantitative perspective: partial market – a market where one kind of product is bought and sold, aggregate market – a market where all kinds of products are bought and sold. Markets from the legal perspective: legal market – a market which operates according to the law, illegal market – a market where illegal products are bought and sold. Task No. 2.1: Identify the right type of market according to the territory: a) Grandmother sells apples at the marketplace next to the church. b) The company sells furniture in every Slovak shop with furniture. c) A telecommunication company sells its products worldwide. d) A Slovak clothing company sells its products in Slovakia and Hungary. Task No. 2.2: Find more information about night markets (night bazaars) which are street markets operating at night. They are typically open-air markets. Night markets are very popular in Asian culture: night markets date as far back as 836 BC, in ancient China, night markets were known as ghost markets, there are more than 300 night markets in Taiwan. 23 Task No. 2.3: Answer the following questions: a) What type of market is in the picture above? b) What do we call such market? c) What can we buy at this market? d) When can we visit this market? e) Do you have similar markets in your city? Vocabulary market – trh existence of market conditions – podmienky existencie trhu physical presence – fyzická prítomnosť local market – miestny trh partial market – čiastkový trh aggregate market – agregátny trh legal market – legálny trh illegal market – nelegálny trh night market – nočný trh bazaar – bazár 24 2.2 Market failures A market failure refers to the inefficient distribution of goods and services at the free market. The market failure occurs when there is a state of disequilibrium at the market due to market distortion. It takes place when the quantity of goods or services supplied is not equal to the quantity of goods or services demanded. Some of the distortions that may affect the free market may include monopoly power, price limits, minimum wage requirements, and government regulations. 2.2.1 Causes of market failures Externalities An externality (a side effect or consequence) refers to a cost or benefit resulting from a transaction that affects a third party that did not decide to be associated with the benefit or cost. It can be positive or negative. A positive externality provides a positive effect on the third party. For example, providing good public education mainly benefits the students, but the benefits of this public good will spill over to the whole society. On the other hand, a negative externality is a negative effect resulting from the consumption of a product, and that results in a negative impact on a third party. For example, even though cigarette smoking is primarily harmful to a smoker, it also causes a negative health impact on people around the smoker. Public goods Public goods are goods that are consumed by a large number of the population, and their cost does not increase with the increase in the number of consumers. Public goods are both non- rivalrous as well as non-excludable. Non-rivalrous consumption means that the goods are allocated efficiently to the whole population if provided at zero cost, while non-excludable consumption means that the public goods cannot exclude non-payers from its consumption. Public goods create market failures if a part of the population that consumes the goods fails to pay but continues using the good as actual payers. For example, police service is a public good that every citizen is entitled to enjoy, regardless of whether or not they pay taxes to the government. 25 Market control Market control occurs when either the buyer or the seller possesses the power to determine the price of products at a market. The power prevents the natural forces of demand and supply from setting the prices of products at the market. On the supply side, the sellers may control the prices of products if there are only a few large sellers (oligopoly) or a single large seller (monopoly). The sellers may collude (co-operate in a secret or unlawful way) to set higher prices to maximise their returns. The sellers may also control the quantity of products produced at the market and may collude to create scarcity and increase the prices of commodities. On the demand side, the buyers possess the power to control the prices of products if the market only comprises a single large buyer (monopsony) or a few large buyers (oligopsony). If there is only a single or a handful of large buyers, the buyers may exercise their dominance by colluding to set the price at which they are willing to buy the products from the producers. The practice prevents the market from equating the supply of products to their demand. Imperfect information at the market Market failure may also result from the lack of appropriate information among the buyers or sellers. This means that the price of demand or supply does not reflect all the benefits or opportunity cost of a product. In order to eliminate market failures, several remedies can be implemented. The lack of information on the buyer’s side may mean that the buyer may be willing to pay a higher or lower price for the product because they don’t know its actual benefits. On the other hand, inadequate information on the seller’s side may mean that they may be willing to accept a higher or lower price for the product than the actual opportunity cost of producing it. 2.2.2 Solutions to market failures Use of legislation One of the ways that governments can manage market failures is by implementing legislation that changes behaviour. For example, the government can ban cars from operating in city centers, or impose high penalties to companies that sell alcohol to underage children, since the measures control unwanted behaviours. 26 Price mechanism Price mechanisms are designed to change the behaviour of both the consumers and producers. For products that cause harm to consumers, the government can discourage their consumption by increasing taxes. For example, taxes on cigarettes and alcohol are periodically increased to discourage their consumption and reduce their harmful effects on unrelated third parties. Vocabulary an externality (a side effect or consequence) – externalita (vedľajší vplyv alebo následok) non-rivalrous – nesúperiace non-excludable – nevylúčiteľné collude – protizákonne sa dohodnúť 2.3 Market subjects Market subjects are market participants involved in the market exchange. They buy and sell goods, services, and factors of production at particular markets. Market subjects are identical with main economic units (households, companies, governments). Households The main goals of households are: to purchase goods and services at the market for goods and services, to sell production factors at the market for factors of production. Companies The main goals of companies are: to purchase factors of production at the market for factors of production, to sell goods and services at the market for goods and services. Governments Basic characteristics of governments: they are very special market subjects because they make and adopt the laws, they deal with the negative aspects of the market, they purchase goods and services. Vocabulary market subjects – trhové subjekty to purchase – zakúpiť wage – mzda 27 2.4 The market mechanism The market mechanism is a term referring to the interrelations between buyers and sellers. It is an open and understood system by which a market solves the problem of allocating resources, especially when deciding how much of a good or a service should be produced. The main market mechanism processes: the demand creation process – demand generation, the supply creation process – supply generation, the price discovery process – price determination. The market mechanism supports the interaction of buyers and sellers which determines the prices of most goods and services as well as what quantity of a good or a service will be produced. Buyers demand goods and services, sellers supply those goods and services, and the interaction between the two groups lead to an agreement on the price and the quantity traded. Vocabulary market mechanism – trhový mechanizmus demand creation process – proces tvorby dopytu supply creation process – proces tvorby ponuky price discovery process – proces tvorby ceny agreement – dohoda 28 2.4.1 Demand Demand refers to a quantity (how much) of a product or service desired by buyers. Quantity demanded is the amount of a product people are willing to buy at a certain price. The demand curve The demand schedule below shows the relationship between the various prices of a cup of rice and the quantity Mr Chen is willing to buy at each price per week. Price per cup of rice Quantity demanded per week 300 5 250 10 200 15 150 20 100 25 50 30 The demand curve is a graph showing the relationship between the price and quantity of a commodity demanded. The law of demand The law of demand states that, all other things being equal, the higher the price, the lower the quantity of goods will be demanded; or the lower the price, the higher the amount of goods will be demanded: a change in price will result in a movement along the demand curve, a change in a non-price variable will result in a shift in the demand curve. 29 Shifts in the demand curve An increase in demand (D2) is a rise in demand at any given price, causing the demand curve to shift to the right. A decrease in demand (D3) is a fall in demand at any given price, causing the demand curve to shift to the left. Causes of changes in demand: changes in disposable income (income after taxation, national insurance contribution), changes in the price of related products (substitute is a product that can be used in place of another, complement is a product that is used together with another product), advertising, changes in population, change in taste and fashion. Vocabulary the demand curve – krivka dopytu the law of demand – zákon klesajúceho dopytu substitute – tovar, ktorým je možné nahradiť iný tovar complementary – tovar, ktorý sa používa s iným tovarom national insurance contribution – poistenie (časť odvodov) advertising – reclama 30 Determinants of the demand curve Dd = f (Px, Py, Y, X, T, O) Px – the price of a commodity x Price represents the most significant influence on the demand curve of a certain product. Py – the price of a substitute (and complement) Price and availability of a related good – there can be a situation at the market when the product is unavailable, so the consumer tries to find a similar product (substitute). Also, demand for one product is sometimes influenced by the price and availability of a product used with it (e.g. an increase in the price of a tennis racket can affect demand for tennis balls). Y – income An average income level – in case of an increase, demand also increases. On the other hand, when the income decreases, demand decreases as well. X – the size of the population The size of the population is an important indicator stating that when the size of the population increases, demand also increases, and vice versa. T – taste, preferences and changes in fashion Taste, preferences and changes in fashion represent individual factors that can influence customer behaviour and demand. O – other determinants (e.g. unique preferences, advertising, taxation, legislation, etc.) Task No. 2.3: What happens to people’s willingness and ability to buy a product when its price falls? a) willingness increases, ability increases, b) willingness increases, ability decreases, c) willingness decreases, ability decreases, d) willingness decreases, ability increases. Task No. 2.4: Decide whether each of the following is a substitute or a complement to a Volkswagen car: a) public transport, b) petrol, c) a Ford car. 31 2.4.2 Supply Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a particular price or the amount available across a range of prices. The supply curve The supply curve is a graph showing the relationship between the price and quantity of a commodity supplied. The law of supply The law of supply states that, all other things being equal, the higher the price, the higher the quantity of a commodity that will be supplied; or the lower the price, the lower the quantity of the commodity that will be supplied: a change in the price of a good or service, all other things being equal, will result in a movement along the supply curve, a change in the cost of input will impact the cost of producing a good or service and will result in a shift in supply, a change in expected demand for a good or service will result in a shift in supply. 32 The shift in the supply curve An increase in supply (S2) is a rise in supply at any given price, causing the supply curve to shift to the right. A decrease in supply (S3) is a fall in supply at any given price, causing the supply curve to shift to the left. Causes of changes in supply: changes in the costs of production, improvements in technology, taxes, subsidies (payments by a government to encourage the production or consumption of a product), weather conditions and health of livestock and crops, prices of other products, disasters and wars, discoveries and depletions of commodities. 33 Determinants of the supply curve Sx = f (Px, PI, T, W, GP) Px – Price of commodity x When the price of the commodity is high, the producers or suppliers are willing to sell more commodities. Thus, the supply of the commodity increases. Similarly, when the price is low, the supply of the commodity decreases owing to the direct relationship between the price of a commodity and its supply. PI – Price of inputs The price of inputs or the factors of production such as land, labour, capital, and entrepreneurship also determine the supply of the goods. When the price of inputs is low, production costs are also low. Thus, at this point, the firms tend to supply more goods in the market and vice-versa. T – Technology A producer using new technology saves inputs and reduces production costs. Thus, firms produce more and supply more goods. W – Weather conditions The factors like weather conditions, floods, drought, pests, etc., also affect the supply of goods. When these factors are favourable, the supply will increase. GP – Government Policy The taxation policies and the subsidies given by the government also impact the supply of goods. When the taxes are high, the producers are unwilling to produce more goods; thus, the supply will decrease. On the other hand, when the government grants various subsidies and gives financial aid to the producers, they increase the production of goods. Thus, the supply also increases. 34 2.4.3 The relationship between supply and demand The relationship between supply and demand is affected by a rise or fall in prices; while demand falls and supply rises when the price falls, demand rises, and supply falls when the price rises. The law of supply and demand predicts that prices will fall if the supply of goods or services outstrips demand. If demand exceeds supply, prices will rise. In a free market, the equilibrium price is the price at which the supply exactly matches the demand. Vocabulary the supply curve – krivka ponuky the law of supply – zákon rastúcej ponuky subsidies – dotácie livestock and crops – hospodárske zvieratá a plodiny disasters and wars – katastrofy a vojny discoveries and depletions – vynájdenie a vyčerpanie 35 2.4.4 The process of creating market equilibrium Consumers and producers react differently to price changes. The higher prices tend to reduce demand while encouraging supply, and the lower prices increase demand while discouraging supply. Economic theory suggests that in a free market there will be a single price which brings demand and supply into balance, called the equilibrium price. The price discovery process In its simplest form, a constant interaction of buyers and sellers enables the price to come out over time. A buyer either accepts the price or does not make a purchase. Eventually, the price is found which enables an exchange to take place. For markets to work, an effective flow of information between buyers and sellers is essential. The market clearing situation The equilibrium price is also called the market clearing price or the competitive price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing left over. This is efficient because there is not an excess (surplus) of supply and wasted output, nor a shortage and the market clears efficiently. This price will tend not to change unless demand or supply changes and the equilibrium quantity is called the market clearing quantity or the competitive quantity. Market equilibrium The market is in equilibrium when there is a balance between demand and supply. Market equilibrium, in this case, refers to a condition where the market price is established through competition such that the amount of goods or services bought by buyers is equal to the amount of goods or services produced by sellers: market equilibrium means a state of equality or balance between demand and supply, prices, where demand and supply are out of balance, are called points of market disequilibrium. 36 If something happens to disrupt market equilibrium (e.g. an increase in demand or a decrease in supply), then the forces of demand and supply respond (and price changes) until a new market equilibrium is established. At some markets, the equilibrium point is changing many times per second as demand and supply try to reach a point of balance. At other markets, there is much less instability, and price changes are less frequent. Market surplus a A market surplus occurs when there is excess supply (S > D). In this situation, some producers won't be able to sell all their goods. This will force them to lower their price to make their product more impressive. Many companies will lower their prices to stay competitive. In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity. Market shortage A market shortage occurs when there is excess demand (D > S). In this situation, consumers won't be able to buy as much of a good as they would like. In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply. The increase in price will be too much for some consumers, and they will no longer demand the product. Meanwhile, the increased quantity of available product will satisfy other consumers. Eventually, equilibrium will be reached. Task No. 2.5: Equilibrium price is the price at which: a) everything that is produced is sold, b) the amount consumers demand is equal to the amount sellers supply, c) the number of buyers equals the number of sellers, d) supply exceeds demand. Vocabulary market equilibrium – trhová rovnováha equilibrium price – rovnovážna cena market price – trhová cena market surplus – trhový prebytok market shortage – trhový nedostatok bureaucracy – byrokracia incentive – stimul (povzbudenie) 37 **Economics: Understanding Resource Allocation and Market Dynamics** **Core Concepts of Economics** - **De nition**: A discipline analyzing how individuals, companies, and institutions convert limited resources into goods and services - **Key Branches**: * **Microeconomics**: Studies individual and company decision-making * **Macroeconomics**: Examines overall economic performance and structure **Fundamental Economic Principles** - **Scarcity**: Limited resources require strategic allocation - **Needs and Wants**: * **Individual Needs**: Personal requirements * **Collective Needs**: Group-oriented necessities * **Types**: Physical, mental, and social needs **Economic Systems** - **Types of Economies**: * **Traditional**: Basic, relies on established trends * **Command**: Government-controlled economic decisions * **Market**: Minimal government interference * **Mixed**: Combines market and command system characteristics **Market Mechanisms** - **Supply and Demand**: * **Demand**: Quantity of products consumers want to purchase * **Supply**: Total amount of goods available - **Market Equilibrium**: Balance between supply and demand - **Factors In uencing Market Dynamics**: * Price changes * Consumer behavior * Government policies **Production Types** - **Flow Production**: Standardized, mass-produced items - **Batch Production**: Groups of items produced together - **Job Production**: Individual, customized item creation **Factors of Production** - **Land**: Natural resources fi fl  - **Labour**: Human effort and skills - **Capital**: Physical, human, and nancial resources ↳ ↳* 9. 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