The Market System

Barter – goods are traded directly for other goods

Problems:◦ requires double coincidence of wants

Monetary economy has lower transaction and information costs

Barter vs. monetary economy

Relative price = price of a good in terms of another good

Nominal price = price expressed in terms of the monetary unit

Nominal value -refers to a value expressed in money terms (that is, in units of a currency) in a given year or series of years.

Real value - adjusts nominal value to remove effects of price changes over time

Relative and nominal pricesReal value and nominal value

In a market economy, the price of a good is determined by the interaction of demand and supply

To sell we need a supplier To buy we need a customer The two blades of

Marshall's scissors

Markets

In the words of Adam Smith:◦ It is not from the benevolence of the butcher, the brewer, or the baker that we

expect our dinner, but from their regard to their self-interest. (Adam Smith, Wealth of Nations, Book I, Chapter I)

◦ [A producer,]...by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (Smith, Book IV, Chapter II)

Invisible hand

Customers vote using their money

Consumer sovereignty?

Demand P profits S P Q

In a market economy:◦ profit maximization requires least-cost production

(holding quantity and quality constant).◦ sellers of a resource have an incentive to supply

the resource to its most highly valued use.

Market economy

buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting

Examples:◦ frictional unemployment resulting from job hunting

by workers◦ consumer theory, applied to analyze purchasing

decisions Whether a given job or product is acceptable

depends on the searcher's beliefs about the alternatives available on the market.

Search theory

Household sectorBusiness sectorGovernment sectorForeign sector

Four sectors of economy

includes everyone, all people, seeking to satisfy unlimited wants and needs.

this sector is responsible for consumption and undertakes consumption expenditures.

it owns all productive resources

Household sector

consists of one or more individuals sharing living quarters

the basic residential unit in which economic production, consumption are organized and carried out.

may be the synonymous with family.

Households

includes the institutions (especially proprietorships, partnerships, and corporations) that undertake the task of combining resources to produce goods and services;

this sector does the production; it also buys capital goods with investment

expenditures.

Business sector

includes the ruling bodies of the state and local governments.

regulation is the prime function of the government sector, especially passing laws, collecting taxes, and forcing the other sectors to do what they would not do voluntarily.

it buys a portion of gross domestic product (GDP) as government purchases.

Government sector

includes everyone and everything (households, businesses, and governments) beyond the boundaries of the domestic economy.

it buys exports produced by the domestic economy and produces imports purchased by the domestic economy, which are commonly combined into net exports (exports minus imports).

Foreign sector

1. State-owned – very inefficient2. Municipal – owned by local government

other administration unitse.g. in USA States -> counties -> township in Poland province (commune) ->second level

of local government administration in Poland->district◦ Utilities companies – water supplier, sewage

companies, public transportation companies, waste management companies

◦ City driven company – technology park

Entreprise types by owners:

3. Co-operatives - – organisation in which all the members own an equal share. Share of profit does not depend on the value of owned shares. ◦ Housing co-operatives – non profit organisation◦ Service co-operatives – for barbers, shoemakers◦ Production co-operatives – e.g. agriculture

producers of milk, cheese4. Private – the most effective

Entreprise types by owners cont.

◦ Sole Entrepreneur (Am. sole proprietorship)◦ Partnership

SC - mutual liability SJ - general partnership SP – partnership (only for professions like doctor,

architect, lawyer, artist) SK - limited partnership SK-A - limited joint-stock partnership

◦ Corporation Sp. z o.o. – Private limited company Ltd S.A. – Public limited company, joint stock (am.

incorporated enterprise)

Company types by legal forms Firms

Single owner Advantages:

◦ Autonomy◦ Easy to establish◦ No starting capital

Disadvantages◦ difficult to acquire funds◦ unlimited liability

Most common form of business organization (by number of firms)

Sole proprietorship

Two or more individuals share ownership Advantages:

◦ Pooled wealth and resources◦ Pooled business skills

Disadvantages:◦ Loss in autonomy (relative to sole

proprietorship)◦ Unlimited liability

Partnership

A legal entity separate from its owners Advantages

◦ limited liability Disadvantages

◦ double taxation◦ separation of ownership from control◦ required starting capital

Most output is produced by corporations

Corporation

Independence:◦ No fixed working hours◦ No fixed vacation date◦ No direct supervision◦ Management autonomy◦ Self-determined focus◦ Self-determined scale of operation◦ You are free to close down company at any time

Advantages of running a business:

No caps to your profit◦ The more you work the more you get◦ You can multiply profit by hiring people◦ You set your own gratification policy

Self-fulfilment◦ You work out your own ideas◦ You can put your skills to best use◦ direct relation between your performance and

your profits

Advantages of running a business (cont.)

Employees◦ You pick your own team ◦ You can hire your friends and relatives ◦ You can hire a secretary

Funding◦ You can take out investment credit◦ You can find a venture capitalist

Advantages of running a business (cont.)

Boons (additional benefit) of having company:◦ You can get wholesale deals◦ You have access to trainings, conferences which

are held by your business partners◦Getting to know VIP’s◦ Access to promo programmes of your business

partners

Other benefits: You determine your company location

◦ You can work from at home You can paint your office pink with orange dots You can do extra work You can establish a real multi-generation

family You can build your own self-esteem You can support charities and offer sponsor-

deals

High taxes◦ Compulsory social security contributions◦ Income tax◦ Indirect taxes (VAT, excise)

Responsibility◦ For you and your family◦ For your employees◦ For your customers◦ For product

Disadvantages of running a business

Bankruptcy risk◦ Mutual liability for some companies (you put

your own belongings at stake)  Starting investments:

◦ Money for your office space◦ Money to refurbish your office or buy equipment◦ Computer, software, telephone◦ Operation funds◦ Pension scheme contribution (ZUS)

Disadvantages of running a business

Accounting problems:◦ If done by yourself very time-consuming – you need to monitor the

legislation (amendments to tax code have a knock-on effect on your tax policy) and you need to deal with very impressive bureaucracy, filling up forms, filling statements and providing explanatory notes

◦ If done by accounting office or accountant – you have to pay for this service

Stress:◦ Unlimited working hours◦ You face the risk of your investments

  Security:

◦ Insuring company assets◦ Gangster extortions, protection racket

Disadvantages of running a business

„Government help”:◦ Bureaucracy◦ Audits from various agencies (tax office, social security

office, control office for labour) Competition:

◦ Pulling no punches◦ Real risk of market entry from competition

Costs:◦ Salaries◦ Operating costs◦ Maintenance costs◦ And dozens of things you can not even name now

Disadvantages of running a business

Dishonest:◦ Business partners◦ Company partners◦ Employees◦ Bureaucrats

Bad debts:◦ Business partners go bankrupt◦ Postponements of payments◦ Debt collection problems

External and random factors:◦ Market cycles, ◦ Poor legislation◦ Cataclysm, Acts of God◦ Macroeconomic factors

Disadvantages of running a business

Municipal Office◦ Company name◦ Scope of operation

Statistical office◦ Statistical ID

Tax office◦ determining your tax liability

Bank◦ Setting up an account

Social Security Office◦ Compulsory social insurance

Pension scheme, health care scheme and others

Registering commercial activity

Liabilities – money you owe to people Amount Due – money your business partners owe to you Due date – The date on which a payment to the

Company is due. This date is given on the invoice with bank account. In Polish economy due date has nothing to do with the date of real payment.

Payment notice – request for payment which was not paid until due date

Invoice – A commercial document in a form consistent with the trade identifying both buyer and seller, showing details such as: the articles sold, quantities, prices, due date, invoice number, the currency used for payment, bank account number etc.

Businessman's dictionary:

Debt collecting agency – An organisation that specialises in collecting their outstanding debts off its clients, charging at commission for doing so.

Accounting office – people who can do the most unpleasant work for you

Bankruptcy – the state of the company which isn't able to pay it’s debts and against which a bankruptcy order has been made by a court.

Businessman's dictionary:

Wikipedia.org Smith A., Wealth of Nations, Book I, Chapter I Haviland, W.A. (2003). Anthropology.

Wadsworth: Belmont, CA. http://www.amosweb.com/cgi-bin/

awb_nav.pl?s=wpd&c=dsp&k=circular+flow

Bibliography