The law of demand
Economics can often be very confusing. But there are also obvious things to which all economists agree with – the law of demand. They all agree on it because it makes sense even to common people. Demand is hoe much people would like to buy. The law of demand says that demand for something falls as its price rises. Economists show this changes with the demand curve. The reason why the law of demand wors is obvious. The money we have is limited. If something becomes more expansive we will have less money available to spend on our other needs. So price has an effect on demand, but the strength of it differs. This strength is called price elasticity. Many other things affect demand apart from price.
The traditional economy
Its hard to imagine our lives whithout coins, banknotes and credit cards. But for most of human history people lived without money. There were no shops ar traders. Today we call such economy – the traditional economy. People who live in a traditional economy don’t have money because they don’t need it. They live lives of subsistence. They hunt only enough food to live. Families may own simple accommodations but land is shared by all the tribe. Like any system traditional economy has its benefits and drawbacks. The biggest benefit is peace. The bigget drawback if poorness.
The market economy
The market economy is something called the free market. It is not controlled in any way by government. It is also free from influence of tradition. The only reason why things are bought is because there is demand for them. Prices for goods are how much people are prepared to pay. It controls itself. Supply and demand control what is on the market and how much it sells for..
The role of a company is huge. There are two ways to make profit. First one is to raise the price, second way is to reduce their production costs. There are two more features of the market economy^ competition and technology. Competition if good for consumers because it helps o control price and quality. Companies cannot buy cheaper raw materials, so they make better use of time and labour. Technology helps to use tools and machines in a better way.
The planned economy.
It is the direct opposite to market economy. What is produed, how much is produced is contolled by the government. Planned economy tries to solute problems that market economy has. First problem is that people want and what they need is different. Government can stop the production of goods that are bad for our health. Second problem is the level of price. As in market economy producer can set any price and poor people cant afford it. So the government sets its own price. In a market economy it takes long time for big industries to grow from small countries. In a planned economy they can grow overnight, as the government can simply decide to spend money on factories and they appear. The planned economy has many drawbacks. First is supply as the government doesn’t always know exactly the size of demand.
The mixed economy
Most economists would say that there are no examples of a completely free market of a completely free controlled economy. Economies mix government control and free market in different ways. One way is to devide industries between slate sector and private sector. The state sector include industries that are important and need protection from the risks of free market. These state sector use money that the government collects in taxes. Often they do not need to compete, because government does not allow any other industry to provide the same product or service. However, many countries have started deregulation, which means freeing up the economy to allow private business to copete with state-run industries. Another way in which economies are mixed is hat government can ban certain goods if they are dangerous. They may also create laws to make sure companies trade honestly to prevent monopolies, which are bad for consumers and economy in general.
Consumer choices.
Every time you choose what to buy you solve a problem. This is called the consumer choice. In neoclassical economy people believe that all consumers make rational choices. So they buy what gives them maximum satisfaction at loowest cost. The amount of money you can spend is called budget constraint.
Cost and supply.
Companies have to spend money in order to earn money. The money they spend for to manufacture their goods or provide their services are called costs. There are fixed costs and variable costs. There is relationship between costs and profit. Profit is overall revenue minus costs. Fixed costs are costs that don’t change. They are costs that the company has to pay each month or each year. They do not change with the increase of production. Variable costs do. The larger number of goods you produce the more you pay for raw materials, for expl.
Market structure and competition.
We can think of a market structure as a kind of scale. At one end of the scale is perfect competition and at the other side is pure monopoly. In market structure with perfect competition there are many companies supplying the same good or service, but none of them are able to control the price. It is very difficult for such structure to exist. First of all because there must be many small companies competing. Secondly, products or services from these companies should be the same. Thirdly, customers and companies must have perfect and complete information. Finally, every company must have the same access to the resources.
Monopolies
In a monopoly, one company has a much larger market shre than any other company. It is so big, that others can not compete. When there is a monopoly the normal law of supply and demand do not work. When there is a pure monopoly, there is only one company in the market providing particular good or service. It is a situation directly opposite to perfect competition. They can appear naturally, like telephone company. Once they spend millions for laying cables, the system doesn’t cost so much. There are some aggressive ways to create a monopoly. One is to make a takeover. When a large company buy a small one of the same industry. Takeover can be horizontal(when company buys its competitor) or vertical(when it buys a company which produces for them material or services). Another may to make a monopoly is for the government to make it occur. The government can make one company the only legal supplier. Monopolies are not good for consumers, as they become price makers.
13.The labour market.
The relationship between employers and workers is similar to the relationship between consumers and producers. The market where the workers offer a service(their labour) and employees but it called the labour market. It obeys the law of supply and demand. Supply is the labour workers provide and demand is the employers need for labour. As the price for labour increases, the demand decreases. And as supply of labour increases, workers want higher wages. However, there can be shifts in demand. For example, if new technology can replace workers, then there will be an overall decrease in demand for labour. Another thing that affects demand for labour is workers productivity(how much they produce in a certain time). When the productivity falls, companies will pay less for labour.