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Revision Notes For School C Economics
People as producers and consumers All economies must produce goods and services to satisfy needs and wants. Production is the creation of goods and services. A producer is involved in this process. In the past self-sufficient economies existed. The producer and their households produced for their own consumption. They could be described as independent. They did not rely on others to satisfy their needs and wants. Today’s economy is one of interdependence. This has developed through a process of specialisation. There are two types of relationships between households and producers. The real flow occurs when producers rely on households for labour, and households rely on producers for goods and services. Because this is a market economy there is also a money flow. Households rely on producers for income for their contribution to production, while producers rely on households to use the money earned to purchase their goods and services. This interdependent relationship can be shown in a simple flow diagram.
Most individuals are producers because they receive wages; this could be for full-time or part time work. Unpaid work is also recognised as being part of production in school C economics. This definition could be extended to include registered unemployed. People who are only consumers are dependent on the producers of their households to satisfy their needs and wants. Organisations involved in production New Zealand like many other economies is a mixed economy. This means that both the public and private sectors are involved in production. The reasons for the public sector involvement will be explained when the types of goods and services are explained below. Public sector organisations The first split in the public sector is between central and local government. Central Government. The central government organisations are controlled from Wellington. The most directly controlled are the government departments. These are headed by an elected Member of Parliament but has an extensive administration that is appointed under them. The next tear is the State Owned Enterprises. SOE’s have shareholders but the major shareholder will be the government. It might have an independent management but the government as a majority shareholder has ultimate power in its direction. Local Government Local government is divided by the size of the area they control. The Regional Council controls a larger area than the City Councils or District Councils. The Community Boards is the smallest of them all. The idea is to bring local issues to the elected representative. Local roading, land zoning and local byelaws might be considered by these boards. The process of creating SOE’s has also occurred at a local level. These are called Local Area Trading Enterprises or LATE’s. The services provided by the LATEs are funded by the ratepayers of the area, but the local authorities can still influence their decisions. Why the Public Sector Producers Goods and Services. The public sector provides goods and services that are needed in society but the private sector will not produce them. The private sector will not provide some goods because they would be unprofitable to produce. Ether because of the high capital investment needed or the inability to allocate a price to charge the user. Examples include street lighting, defence, police, and light houses. to name a few. These goods are called Pure Public Goods. They also provide goods out of taxation. These are called Collective goods as they are provided collectively via taxation. The private Sector can also provide the same goods and services as collective goods such as health and education but when this happens the goods are known as Mixed goods. Finally the government might provide goods both public and mixed if they deem them to be good for society. These would be known as identifying the individuals and groups participate in the production of goods and services; Merit goods. Changes in the public sector Since 1984 the policies of Rogernomics have been operating. The term is derived from Roger Douglas who was the Minister of Finance. The idea is to create greater efficiency. It is assumed that the private sector is more efficient because it is motivated by profit and so has to keep a lid on costs but also provide excellent service. Many government Departments were broken up into SOE’s so that they could be run like businesses. This process was called corporatisation. Some times the government felt it was in areas that was exposing itself to financial risk, and the private sector was better suited for the production of the good. They sold shares or ownership to the general public. This process is called privatisation. One advantage of privatisation is the money raised from the sale could be used in other areas (most importantly accumulated government debt) but a disadvantage is possible foreign ownership of strategic New Zealand enterprises. The local government went through a similar process, but the SOE’s at a local level are called LATE’s. Organisations in the private sector. The next sections will deal exclusively with the private sector so a mere outline is required now. Firms: Firms are privately owned and provide goods and services for profit.
Co-operatives: These are communally owned by shareholders or members. While they are run like businesses they seek to benefit their members.
Voluntary organisation. There is a wide range of clubs, societies and churches to support the communitie4s interests.
Sectors in the economy Production is the process of changing resources or inputs into outputs which can be used to satisfy wants of the final consumer. But many individual firms are not concerned with production for the final consumer, but their output does contribute to final goods and services. If the economy is taken as a whole then firms can be classified into three sectors.
Primary sector deals directly with nature to make raw materials. They are the extractive industries
Secondary sector are industries concerned with manufacturing. They take the raw materials and process them into finished and semi finished goods.
Tertiary sector industries are concerned with the provision of services to the primary and secondary industries and to consumers. Organisations involved in production NZ has a mixed economy. This means that some g+s are produced by the private sector but others are provided by the public sector. You must note that there is an increasing movement to a free market.
Government The government can be divided into two parts, central and local government. Central government The government provides g+s. These can be classified as the following: Private g+s: sold to the consumer on a normal market. Collective g+s are supplied because the private sector is unable to produce them or supply them in sufficient quantity to satisfy the consumers. Why? (Return on investment is insufficient, difficult to charge a price)
A collective good can be defined as goods and services provided through the use of taxation. Collective goods can be broken up into two parts:
Public goods which are provided by the government and paid for by the taxpayer. NB only the government will provide these goods and services. An example?
Mixed goods which can be provided by both private and public sectors. An example? The trend in the NZ economy is to have more efficient private sector and less government involvement. This has been through a process of cuts in government spending and greater efficiencies. The efficiencies have been gained by running government departments like businesses. This has been done by:
Corporatisation: Running SOE’s as businesses.
Privatisation: Sale of state businesses and assets. ORGANISATION OF PRODUCERS Producer organisations can be classified according to different sectors. They can also be further classified by the type of ownership. The form of business or type of ownership ranges from the simplest sole trader represented by the local dairy, or a complicated registered company with interest in many parts of the world. We will review each in turn.
Sole Traders The smallest business unit is a sole trader. It is owed by one person. This person normally acts as manager and employee. It might also have other people employed. All the decisions affecting the firm is normally made by the owner.
Finances The financial resources of the firm are raised by the owner. These could be in the form of personal savings or a loan from the bank. The bank loan can be in the form of a lump sum that is secured by property, or as an overdraft. The government which has been encouraging small businesses might make grants available. The sole trader has unlimited liabilities. This means that any debts of the business are also those of the owner. If a sole trader is liquidated and outstanding debts are not covered the personal assets of the owner can be used to settle them. Partnerships A partnership is occurs when 2 to 25 people combine their money and skills in an agreement under the Partnership Act 1908. This deed will set out the profit/loss ratios of the partners. If no agreement exists then all profits are shared equally!
Management structure: The management is normally carried out by the partners. Even if professional managers are employed the final word will be the partners. Most partnerships are small and the partners are managers and employees. The most common type of partnership is professional partners such as doctors and lawyers.
Finances: all finances are provided by the partners. Because partners are liable for all the debts of the firm, loans are the responsibility of the partners, but as the risk is spread amongst more people the ability to raise loans is improved. Registered Company A Company is any organisation that is registered under the Companies Act of 1993.It is owned by the shareholders of the company. There are no restrictions under the Act as to the number of shareholders that can form a company, but restrictions can be imposed upon listed companies. Most Companies are unlisted. A registered company is a separate legal entity. This means that it has the same legal rights as a person. This special legal status removes the owners from the company, which means that they have limited liability. The risk that owners have is that they can loose the value of their investment in companies but can not loose their personal assets.
Finance Companies raise capital though the sale of shares. There are two types of companies: Exempt companies issue share to a select group of people. They are also called Unlisted companies. Issue companies sell shares to the general public. T They are also called Listed companies the public are made aware of the issue through a prospectus, which will outline the companies proposed business and projections. Interested people can purchase shares through brokers on the stock exchange. (Banks are also brokers) Capital can also be borrowed from financial institutions or they can also issue debentures. A debenture is a private loan to the company that will be paid back at some future date. Profits are distributed to shareholders. The company can keep some of its profits as retained earning or it can pay out dividends to its shareholders.
Management A shareholder has the right to vote for people on the board of directors. The board appoints the management of the company. The board represents shareholders, and management is responsible to the board. Management must ensure a good return for the shareholders investment. Management structures can be centralised or decentralised.
Co operatives Co-operatives are formed by people that have a common purpose that will be assisted by mutual co-operation. In the traditional sense members were equal shareholders that employed a management to provide a service for the members.
Producer co operatives: Mainly found in the primary sector. Individual farmers were the members and would provide the co-operatives with their products. These were then processes and marketed on a large scale.
Consumer Co operatives. A collection of consumers or purchases that could join together to gain the benefits of bulk buying and distribution.
Goals of producers In economics it is often assumed that the goal of a business is profit maximisation. To achieve this, resources must be efficiently and effectively organised to keep costs low. (Profit = sales – costs) But this might not always be the primary goal of the firm.
Sales maximisation A firm might want to increase sales. It could loss profits in the short term to gain new sales.
Prestige A company might expand unprofitable markets to add prestige to the organisation.
Satisficing firm A satisficing firm might not have high or difficult goals to aim for. Instead a level of profitability might be satisfactory and the extra time available to the owners used for leisure activities.
Product quality A firm might give up on some profits in an attempt to produce high quality products to maintain or establish a quality image.
Low cost products: A business might aim at providing low cost products. It might give up some profit to achieve this goal.
To provide a service to the community Many welfare organisations are non-profit seeking. Their aim is to provide cheap or free services to the public. They often receive donations and grants.
Interdependence of Firms and Service Industries As firms become more specialised they become more dependent on each other. This interdependence is more apparent when considering primary and secondary industries and the services they require from the tertiary sector. The tertiary sector sets up the infrastructure needed by the other sectors. At the same time however, the tertiary sector is dependent on these sectors for business. We are going to highlight interdependence by looking at financial services, transport services, Accounting services, marketing services and communications.
NB Notice the difference between firms and industries! An industry is a collection of firms involved in the production of similar goods and services i.e. the automotive industry. Firms are individual producers’ i.e. Ford
Financial services To establish a business and to expand its operations a firm needs finance. This might be in the form of loans, overdrafts or the sale of shares. Financial advice is available from banks, sharebrokers, specialised agencies as well as the government.
Transport services When operating a firm needs transport services for its inputs and outputs. These could take the form of road, rail, sea or air transport. Are there benefits for each form? Yes what are they?
Communication Services Communications are an essential part of a business. There are two types of service providers. A postal and courier service. Written mail and small goods can travel this way. (Snail mail) A telephone service allows for spoken communications as well as facsimile. It also allows for a wide net work of computers to be connected. Internal communications can be conducted on a local network of computers.
Accounting services Large firms tend to employ their own accountants, but smaller businesses like sole traders, partnerships and small companies would use the services of accounting firms. This relationship might be limited by the firms’ owners’ expertise and the extent of their book keeping. Most of the accountants’ work for these firms is to make summarises (balance sheets) and have dealings with the Inland Department of Revenue (IRD). NB They do not keep daily books.
Marketing services Marketing deals with the whole process of distributing the products from the producer to the final consumer. Goods pass through distribution channels. This would normally include wholesalers and retailers. There are other marketing agents that firms might use such as Manufacturing agents or wholesale agents. Market research agencies gain information on the markets potential and the changing tastes of the consumers.
Advertising agents prepare promotional material for the firm. Exports can be encouraged through international trade fairs. Appointment of agents or representatives in the countries or through government assistance. NB Marketing is not sales but a way of achieving sales. THE USE OF RESOURCES Producers use a combination of natural, human and capital resources to produce goods and services. Some resources are non-renewable while others are renewable. Renewable resources if properly managed can not be depleted Non renewable resources can not be economically replaced once they are used in production.
Natural Resources Natural resources are the "gifts of nature." They include
Resources must be conserved.
Human Resources Human resources are the people that are involved in production. They are made up from the working age population. Which can be subdivided into those outside the labour force (students, caregivers at home etc) and the labour force. This is made up of the employed (those that are working) and unemployed (those that are seeking employment).
The entrepreneurs are an important part of the human resources. They are able to see ahead, make decisions, face risks and take actions that lead to successful businesses. They drive the economy by creating new opportunities and jobs. Human resources can be improved through education. An educated work force is more productive and skilled. Educated work forces can be seen as human capital.
Capital Resources Capital goods are made by people to assist in production. Money is not capital but a way of financing capital. Capital can be obtained from reinvested profits, loans and sale of shares. One aspect of capital is that it wears out and needs replacing or updating. This is called depreciation. A way of budgeting or calculating depreciation is by subtracting it from total investment. Investment is the purchase or increase in capital goods. There are two types of capital. They can be distinguished by their use. Circulating capital or working capital is the investment in the ingredients of the firm, i.e. labour and raw materials. Productive capital or fixed capital is the investment in machinery and buildings. Resource Combinations A business will seek the lowest cost combinations to maximise profits. The firm has a some choice in its combination of capital and labour.
Labour Intensive methods of production uses proportionally more labour than capital. This method of production is best when labour is relatively inexpensive , or technology does not exist to introduce capital.
Capital Intensive production uses proportionally more capital than labour. This method of production is best suited to new technology, and high labour costs. More machines can be used than people.
Improving Resource Use To improve the use of resources their productivity must be increased.
Productivity Productivity is a measure of productions outputs in relation to the amount of inputs. It is also a measure of efficiency. Increased efficiency can only be achieved with increased productivity. Any of the resources productivity can be increased. The most important resource to improve is labour. Labour is the most flexible and also represents a large labour cost component.
Ways of improving productivity Specialisation The production process is broken up into specialised areas that trade with each other to produce goods and services demanded by consumers. This means today there are specialised occupation. People can choose an occupational specialisation for which they are best suited. They can develop in this specialisation through training and experience. This can make people more productive.
Specialisation of Management Management is an important method of obtaining higher levels of productivity. Management’s effectiveness is increased if specialised managers can control the firms main functions. These are:
Specialisation of management can have the following advantages:
Division of Labour Division of labour is the breaking up of the production into different processes and tasks.
The greatest advantages of division of labour increased productivity and cost reduction. The main disadvantage is worker dissatisfaction. Resource Use and the Growth of Firms Economies of scale: As the size of a business increases the cost per unit produced (average cost) decreases.
Diseconomies of scale: The growth of a firm reaches a size where the cost of producing each successive unit increases. Reasons for economies of scale
Reasons for diseconomies of scale
The growth of the firm: A firm can grow by increased investment in the business or by taking over other businesses. The firm must decide in which direction it might grow.
Vertical integration Vertical integration occurs when a firm takes control of other stages of production. A firm that has vertically integrated takes control of its inputs and selling its outputs.
Horizontal integration Horizontal integration occurs when firms in the same stage of production join together. The reason for this might be to reduce competition or increase efficiencies.
Mergers: A merger normally occurs with by an agreement between management of the two firms. A take over occurs when one firm buys out another firm. A hostile take over normally occurs when financial pressure has been put on one firm to force it into a position of merger or selling. Events such as price wars, or resource control can lead to hostile takeovers.
Business Failures The success or failure of a business normally depends upon the skill of its management team. (90% of business fail due to poor management.) A business faces many risks:
As a firm grows its management style must adapt to changing conditions. . The state of the economy or business cycle can also affect a business.
Output decisions Each producer must decide on how much to produce. They base these decisions on economic and non-economic factors. Economic factors 1) Cost of production A firm will only produce if it can cover its costs. If you assume the price of the product is fixed (the producer is a price taker) then:
2) Improved production methods Improved production methods will increase productivity and efficiency and lower the average cost per unit. With each improvement the producer will increase output.
3) Prices If prices rise producers will increase output. If prices fall they will decrease output. The producer is responding to the profitability of its product.
4) Prices of related goods If the price of a related good increases the supply or output of the original good decreases. A producer that could produce two related goods will switch to the more profitable good, decreasing the output of the original good. Non Economic Factors Environmental factors There are many restrictions and organisations that affect producers by:
Legal Factors
Trade Restriction Controls of trade between nations:
Political factors
Supply Supply is the quantity of goods or services that producers are willing to sell at a given price within a time period.
Market Supply is the horizontal summation of individual producer’s supplies.
Supply schedule: a table setting out the number of articles that a producer is willing to supply at a series of different prices. Supply curve is a graph of the supply schedule. The supply curve is a graphic representation of the quantity producers are prepared to supply at different prices within a given time period. Notice that supply is a quantity price relationship. This is a direct relationship or as price increases the quantity supplied also increases. This is also known as the law of supply. You already know that there are a number of factors that can affect output or supply. To simplify matters we assume that only price or quantity can change and all other factors are equal. This assumption is called ceteris paribus which means all things being equal.
Movement along the curve A change in price will cause a change in quantity supplied, which can be shown by a movement along the curve. Price is the only factor that can cause movement along the curve. NB To describe a movement along the curve we use the phrase "a change in quantity supplied." Shifts in supply Any factor other than price that affects the output of a firm will shift the supply curve. An increase in supply shifts the curve outwards; a decrease in supply will shift the curve inwards. NB To describe a shift of the curve we use the phrase "a change in supply." Economic factors that can shift the supply curve
Non economic factors Any of the non-economic factors that affect output decisions can change supply. The main mechanism that this will occur is through increased cost of production. Economic Decisions of Consumers Some definitions and ideas:
Scarcity:
Scarcity occurs when limited resources are used to satisfy unlimited wants. Needs: Things needed to survive; food, water, shelter, clothing, (recreation) Wants: things we would like to have Limited means For the individual: time, money, skills For society or groups: Factors of production, Natural resource, Capital, (Labour, Entrepreneur)
Choice is the outcome of scarcity, What to produce? (consumers) How to produce? (producers) For whom to produce?. (economic and political structure)
Opportunity cost: Forgone choice: What is given up when making a choice. (practical measurement: the next best thing that has been given up.)
Values A set of ideas that are used to direct our decisions. People gain their values through life experiences. Important values for Cert Eco
The Demand for Goods and Services Demand: the quantity of goods and services willing to be purchased at a give price.
Individual demand: the quantity of goods and services an individual is willing to be purchased at a give price.
Market demand: The sum of all individuals demand for goods and services at a given price. Or as "demand" above. For demand to occur the consumer must:
Demand schedule: a table setting out the quantity of an article consumers are willing to buy at each price:
Demand curve: A graph of the demand schedule. Demand is measured under the conditions of ceteris paribus. The law of demand: the lower the price , the greater the quantity demanded, and vice versa. There is an inverse relationship between price and quantity. Hence the demand curve for a normal good will be downward sloping. Reasons for the law of supply
Movement along the curve: A change in price of a good or service will cause a change in quantity demanded. This is represented by a movement along the demand curve.
Demand curve shifts The demand curve will shift if any factor (other than price) causes a change in demand. The main factors are:
Income An increase in income will mean more can be purchased at the same price. Less income means that less will be purchased. Income can be affected by:
Tastes and preferences A change in tastes, preferences and habits affect demand. There are many factors that can change tastes habits and preferences. Here are a few! A change in fashions, life styles, technology, advertising.
Price of other goods and service There are two important words here!
(Look out an Exception!) Oh! no not again The demand for normal goods increases as income increases. The demand for inferior goods decreases as income increases.
Aggregate demand and household spending Aggregate demand is the combined demand for all goods and services by households. By breaking up aggregate demand into different goods and services and comparing them with income levels some very interesting patterns emerge. As income increases the value of food purchased increases but reaches a peak. Clothing, then shelter and transport follow similar patterns but at higher levels. Health, education, and recreation in NZ can be seen as luxury goods and are near the top. The last item is savings. Savings is income not spent. It is only the upper income groups who have the ability to save! Interdependence of sectors of the economy Definitions, concepts and examples. Ensure that you can draw a five sector flow diagram Real flows: Actual goods and services provided by the sectors. Examples Households - Labour, Natural resources, Entrepreneurship. Producers - Goods and Services Financial sector - Finance services, Overseas sector - Provide imports and accept exports of goods and services Government - provides goods and services Money flows - Movement of money on the sector flow diagram. (most common representation) National Income: Total of all income received by households. (Y) e.g. Wages Interest, Rent, Profits (including dividends) Consumer spending: Sum total of all consumers’ expenditure on goods and services (C) Household saving: Income not spent (S) (withdrawal) Investment: Increase in productive capital (I) e.g. new equipment, buildings new breed of stock on the farm. (injection) Overseas sector: When it is included it shows an open economy. Exports goods leaving the country but money flows in. (X) Imports goods arrive in the country but money flows out. (M) Foreign exchange- changing of currency to suit export or import. Balance of payments - record of all transactions with other countries. Balance of the current account. Part of BoP that shows a record of normal business transactions. Balance of Trade - The difference between goods exported and those imported. Balance of invisibles- The difference between services, investment income and transfers exported and imported. Capital account - Movement of loans and investments in and out the country. Taxation: A compulsory payment from which the payer receives no direct benefit. (T) (withdrawal) Direct tax: Can not be passed on to others. Indirect tax; Passed on to the final consumer. Benefits: Social welfare payments. Subsidies: Financial assistance by the government to reduce the price of a good or service. Government spending: provision of goods and services e.g. law and order, defence, education, health care. (G) injection
Draw a five sector flow diagram. Indicate on the diagram the following interdependent relationships. Describe each relationship giving a clear example. Households + Producers Households + Financial sector Producers + Financial sector Households + Government. Households + Overseas Sector Producers + Overseas Sector The Concept of a Market The concept of a market is arrived at because it is no longer a place to buy and sell goods and services, but rather a situation in which buyers and sellers know what is being traded and can communicate with each other. Classification of markets
Goods and services Market is linked to the resource market by the two sector flow diagram.
The money market The money market acts as a bridge between savers and producers. It is made up of banks and other investor institutions. Interest rates is the price of money
Foreign exchange market Every country has its own currency. To facilitate exports and imports foreign exchange markets convert different currencies. Exports create a demand for NZ$ and imports the supply of NZ$. Export receipts flow into the country. Export payments flow out. Money and Exchange Money is almost essential for any exchange transaction today. Money assists exchange in the following ways:
A short history of money: Barter: a direct exchange of goods and or services Acceptable mediums of exchange Gold (Characteristics of a good medium of exchange Durable, Divisible, Acceptable, Portable, Recognisable and Scarce) Goldsmiths become bankers Central/Reserve Banks to stabilise currencies. Still on the gold standard. 1930’s off the gold standard, following different currencies. Today, little Reserves, Free floating, value determined by purchasing power.
Rights and Obligations in a Market Rights: What you are entitled to do (normally protected by law) Obligations or responsibilities: What you have to do normally enforceable by law. Responsibility of sellers:
Rights of sellers
Rights of Buyers:
Responsibilities of the buyer:
Contracts A contract is an agreement between two parties and it creates an obligation on each party that is enforceable by law. For a contract to be valid six conditions are required:
Fair Trading Act 1986
Pyramid selling: Making Misleading statements about the firm Offer gifts without giving them Accepting payment without supplying the goods
Labelling Packaging Advertising
Consumer Guarantees Act 1993 The CGA gives you rights when you buy faulty goods. It also ensures you have rights when you pay to have done is not done properly.
What guarantees can you expect? Goods must be of acceptable quality
Goods must do anything that you discussed with the supplier Goods must be the same as any description given Goods must be like any sample or demonstration model The supplier must have the right to sell the goods There must be spare parts and repair facilities
What are your rights if goods are faulty? Repaired, replaced, refunded, (or part refund) by the supplier or the manufacturer or importer.
Your rights and services. Services must be provided with reasonable care. Services must give you, or do, what you asked Services must be completed within a reasonable time, if you have not agreed on a completion time or date You do not have to pay more than a reasonable price where a price has not been agreed.
Ethical Rights and Obligations Ethics are the way people are expected to behave. Businesses today are taking a more ethical view of their activities. This means they set their own codes of practise. Laws are aimed at companies that do not follow ethical standards. Ethics are mainly concerned with their stakeholders. The companies concerns are as follows:
MARKET EQUILIBRIUM Market equilibrium exists when there is a balance between the forces of supply and demand. There can only be one combination of price and quantity demanded and supplied which satisfies both the consumers and suppliers. This can be shown on a graph where the demand curve intersects. This position will remain stable as long as ceteris paribus holds.
Excess Supply If for some reason price was higher than equilibrium market price, there will be an excess supply or oversupply. The reason for this is as follows:
If the price was below equilibrium price there will be excess demand or a shortage.
PRICE CONTROLS Price controls are tempting for both the government and the suppliers of goods and services.
Maximum Price. Maximum prices are set below the market equilibrium. In this situation there will be excess demand or a shortage. To overcome this shortage black markets and illegal trading often take place. Application of maximum pricing. The government might be attempting to increase social welfare by fixing: rents, electricity prices.
Minimum Prices Minimum prices are set above the equilibrium price. In this situation there will be an over supply of the good or service. Applications: The government minimum wage resulting in involuntary unemployment. Cartels seek increased profitability. (Cartels are a situation where a few large companies agree to set high prices). This tends to lead to non-price competition.
Factors affecting Market equilibrium Changes in supply Increase or decrease in supply There will be a shift in the supply curve when the following change:
Increase or decrease in demand. There will be a shift in the demand curve when the following change:
A new equilibrium price will be formed.
Combined changes in supply and demand Assume an increase in demand. This will shift the demand curve outwards to the right and a new market equilibrium is achieved at higher prices. At this level new resources will be attracted to the market and the supply curve will shift outwards. A new market equilibrium position is achieved.
Effect of world markets. World prices above domestic prices would mean that the producer could expand their production and gain a higher price though exports. When producers find higher priced export markets local consumers are forced to pay higher prices and consume less. If world prices are lower than domestic prices it creates an opportunity for imports to sell well in the country. Local producers lose market share and their output decreases or even stops. Consumers gain through lower prices, but some producers face closure and increased unemployment. The object of many tariffs is to preventing low priced goods flooding local markets and preventing industry closure. Change in world prices If prices fall for exports the exporters receive less income. The related industries to the exporter suffer a decrease in demand for their goods and services, but local consumers benefit from lower prices. If the price of imports rise and these imports make up part of the production process there will be an increase in the cost of production. As a result supply decreases. Taxation Direct taxes Direct taxes such as income tax affect a consumer’s disposable income. Disposable income is income that remains after tax. As a result of an increase in direct tax, incomes decrease and demand decreases. Indirect taxes. Indirect taxes are placed on consumer goods. (GST, Excise duties). If a tax is placed on a good then the supplier is prepared to supply less at each price level. The supply curve will shift to the left. The size of the shift is measured by the vertical distance between the two curves. This distance will be equal to the amount of tax. Note that not all the tax has been passed on to the consumer and the supplier also has lost revenue. Subsidies Subsidies are used to reduce the cost to the producer and supply more at lower prices. If a good receives a subsidy the supply curve will shift outwards to the right. The extent of the shift is the vertical distance between the two supply curves. Note that the price has been lowered and quantity has increased at equilibrium point.
INTERACTION OF FIRMS IN THE MARKET
PRICE COMPETITION It is normal to have competition between firms in an economy. Each firm is attempting to gain a greater share of the market and to increase their profits. There are three types of market situation, which is important for us to study. Situation 1 Many small firms selling similar products engage in price competition. Lower prices are charged to attract more customers to buy their products. Situation 2 One or more large firms are much larger than other firms in the same market. The larger firms are price leaders and force the other firms to follow there prices and engage in price competition. Situation 3 Price competition is avoided when there are only a few large firms sharing the market. When price competition does occur, a price war can be the result. The market share does not change due to the price war (unless some firms go bust) but the profitability of all firms’ decreases.
Non Price Competition Non Price competition is when firms attempt to win market share by using methods other than lowering prices. Smaller firms are able to compete against larger firms by offering something different, and larger firms can avoid price wars.
There are two methods of non-price competition: Product differentiation: A similar product made to look different. Product variation: Small changes to a product to made to similar products.
Product differentiation The aim of product differentiation is to make a product more attractive to its target market. A target market is a clearly identifiable group of people with distinct wants to whom the product is aimed. A product can become attractive to a target market by;
Packaging: Packaging exceeds the functional requirements. It also acts as sales person. It attracts a customer and then creates a desire or informs the customer so that they will buy.
Branding: A brand is a clearly identifiable logo of the manufacturer or reseller. It gives consumers an image the product as the brand can carry many different messages.
Sponsorship: The purpose of sponsorship is to link a particular product with a team or sport. When the team plays on TV the consumer is constantly bombarded with images of the brand.
Advertising: Advertising is widely used today. It can be classified by the type of media that carries the advertising. Each advert is placed in such a way that it should attract and inform its target audience.
Standard of service: The standard of service is critical form of differentiating products. Certain goods require more service than other. The image of the firm and its reputation is dependent on how the consumer feels while being attended to.
Location: Location adds some thing extra to the product. It could be convenience, or image. It is said that location can make or break a business.
Product variation Product variation modifies products to make them physically different to other products. The aim is to appeal to more customers by making the products more attractive to the target market. Vertical product variation occurs when a standard product has more features added to it. The aim of this is to make the standard product appeal to higher income earners that might be attracted to the new features.
Producers and non-price competition If non-price competition is successful in sell more goods then the producer has more market power. Sales profits and market share has increased. Competitors are forced to respond by making similar alterations to their products. Producers might engage in market research and product development to create a product that achieves more satisfaction for the consumer. Any technological developments will be matched by other producers. The end result is products of a higher quality. The introduction of technology in the production process can reduce production costs. But with large scale product variation the benefits of economies of scale are lost. Non price competition adds to the costs faced by the producer. Any costs on the marketing of a product must be made up by the increase in revenue from sales.
Consumers and non-price competition Consumers gain a wider choice of products through product variation. The choice might be imaginary with product differentiation. They will, however, find greater satisfaction. Product development means that the products are of a higher quality. The limit to production in terms of product variation and higher marketing costs means higher prices for the consumer. The alternatives to market allocation Introduction The allocation of limited resources to satisfy unlimited wants is the central problem to any economic system. The system that is the main focus of or study is the market system. If you recall under this system prices act as signals to producers on firstly how to use the available resources and secondly what goods and services to provided. It can give further information on the quantity of goods and services needed. It is the purpose of this section to provide alternatives to this system when it does not operate effectively. It is also provides an indication that other systems can operate within a market system. Fundamentals of an economic system. Any system must answer the simple questions of:
Pre market economies or traditional economies Maori society. Production was organised by family grouping in the form of whanau, hapu or iwi. Extensive division of labour and specialisation occurred within production units. The direction of production (the what in economics) was determined by available resources and the necessity of survival. The organisation of production (the how) was based on tradition and kinship powers within each grouping. The division of the goods produced ( the for whom) was a sharing and a system of utu. Utu was a system of gift giving that implied an obligation or connection between people and different groups. Surplus production was "traded" between different iwi. Each iwi had its own area of specialisation that could make this trading possible. The utu could also be used to bind power relationships with the societies. The Maori system was successful. This can be measured by the extent of the development of culture and non-essential production. (Art work, carvings, religions and beliefs) Many per market economies developed in similar patterns. The most studied of these is feudalism. The reason for this interest is firstly because it occurred in Europe and secondly because it gave rise to the capitalist or market system. The feudal economy also had moral obligations that tied people to each other and assigned them productive roles within society. These obligations however, became monetarised over time and allowed for the capitalist concept s of rent s and wages. It also created a capitalist class of entrepreneurs that were motivated by profit. An alternative to a market economy is a planned economy. Planned economies emerged in Eastern Europe at the turn of the century. They were based on the writings of Karl Marx and the actions of Lenin. The idea being that a few rich entrepreneurs could not dictate the direction of production. Rather the majority of people should control the value of their labour. The outcome of this is that a government as a representative of the people should make all the economic decisions. I.e. What should be produced, How it should be produced, And for whom. The success of the planned economy is debatable and rather academic at the moment. Those in favour might point out that Russia was a world power. Detractors of the system would point to the inability of the system to produce consumer goods to meet the desires and aspirations of the consumers. The planned economy does give us some insight into alternatives to the market economy when it does not function correctly.
Market failure. Market failure occurs when;
When market failure occurs in a market system the government and non-profit organisations step in to control and provide these goods and services.
GOVERNMENT AGENCIES Government agencies provide public goods which are goods and services that are difficult in finding a way of charging for them. Examples The army, the police, street lights, light houses, public parks, nature reserves
Mixed goods are provided by both the government and the private sector. Examples: Education, health
Merit goods are seen as being good for the individual and society. Sunscreen, immunisation,
Demerit goods are seen as being bad for the individual or society. E.g. smoking, under age drinking, marijuana, etc Collective goods are public goods, mixed goods and merit goods, The correct definition of a collective good is that it is financed through taxes, and the person receiving the good does not pay for it or the payment does not reflect the true market value of the good or service.
ALLOCATION OF GOODS AND SERVICES Collective goods are financed by taxation. They are allocated using non-market methods of satisfying people wants and not through price signals.
USER PAYS The change in policy has been away from a welfare state where many benefits and subsidies were used to support the NZ population. The costs to the government have been cut and are continuing to be cut. This means more people have become more self-reliant. VOLUNTARY ORGANISATIONS Voluntary organisations provide Welfare services Community services Health services These services are normally provided free. There are no market forces involved. Service and not profits are the motivation for providing goods. They are financed through 1. Donations 4. Donation of materials 2. Grants 5. Loans 3. Labour donations Clubs and societies Clubs are groups of people with similar interests. There services are not sold. Their key sources of income are 1. Donations and sponsorship 4. Grants 2. Membership fees 5. Fund raising 3. Members donations 6. Loans Non-market methods of allocation 1. Satisfy needs and wants without a profit motive and without a price. 2. They gain their resources from taxation, donations, grants and membership fees. 3. Goods and services are allocated by need and not by those who are prepared or are able to pay the price. |
