Text 12 Market Economy

A market economy is an economy in which prices of things are freely set based on the laws of supply and demand. It is also free from the influence of custom or tradition.  In the real world, however, there is no such thing as a truly free market economy since the governments set limits in order to control the economy. The main characteristics of a market economy are its flexibility and decentralized nature.

A market or capitalist system contains six essential features. Main features of the market economy are: private property, freedom of choice and enterprise, self-interest as the dominating motive, competition, reliance on the price system, a very limited role for government.

Private property is a main feature of the market economy. The owners of the property have the right to own, control and dispose of buildings, machinery, and other natural and man-made resources. Private property provides the right to income from the property in the form of rent, interest and profit.

Freedom of enterprise is freedom to buy and hire economic resources, to organize them, and to sell their products in the markets. Freedom of choice is freedom of workers to enter and leave any occupations. Consumers are free to spend their incomes. Producers choose what to produce.

The motive for economic activity is self-interest. Each unit in the economy tries to do what is best: firms try to get maximum profits (or minimum losses). Owners try to obtain the highest possible rewards. Workers work there where they can have highest wages. Consumers spend their incomes on those things which yield the maximum satisfaction.

Competition is another feature of the market economy and the regulatory mechanism of capitalism. It limits the use of economic power in order to prevent to control a market and exploit the other buyers or sellers.

Price mechanism is the next feature of the market economy. The decisions of producers determine the supply of a commodity; the decisions of buyers determine the price. A change in demand and supply causes changes in market prices. The state plays little or no part in economic activity. The political authority is controlling prices or levying taxation.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities

Questions:

1. What is property?

2. What kinds of property do you know?

3. Do you have private property?

4. Are all units free within the market economy?

5. What does freedom of enterprise mean?

6. What does freedom of choice mean?

7. What do you think self-interest means?

8. Is competition positive or negative feature of the market economy?

9. What causes a change of the market price?

10. There are six main features of the market economy. Can you name them?

Text 13 Macro- and Micro- Economics

Economics studies the way people deal with a fact of life: resources are limited, but our demand for them is certainly not. Resources may be material things such as food, housing and heating. However there are such resources we cannot touch, such as time and space. Thus if a person spends more time working, he/she makes more money, but will have less time to relax. Every decision people make is a trade-off and economists the reasons for the trade-offs and the effects the decisions have on people`s lives and society.

The two most general fields in economics are microeconomics and macroeconomics.

Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics deals with people and private businesses and how their behavior determines prices and quantities in specific markets. Microeconomics focuses on supply and demand and other forces that determine price levels for specific companies in specific industry sectors. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and, better compete in its industry.

Macroeconomics is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. Gross National Product (GDP) refers to the market value of all final goods and services produced within a country in a given period. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

Microeconomics and macroeconomics are closely related. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public (micro effect). Both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained

Questions:

1. What does economics study?

2. How can you explain the phrase “Every decision people make is a trade-off”?

3. What are the two most general fields in economics?

4. What does microeconomics deal with?

5. What is microeconomics primarily focused on?

6. What are the subjects of macroeconomics study?

7. What does the term GDP mean?

8. Why are macroeconomic models and forecasts used by governments and large corporations?

9. Why are microeconomics and macroeconomics actually interdependent and why do they complement one another?

10. Why should microeconomics and macroeconomics be studied together?