Economic activity and economic agents

1. Theme 2. Economic activity and economic agents

Questions:
• Economic activity and its components:
goals, goods, needs, resources
• Problem of alternative choice. Production
possibilities curve and opportunity cost.
• Economic agents and its functions

2.

• Real economy means a totality of all types
of economic activity.
• What is the economic activity?

3. The content of economic activity

Economic activity
• is a set of economic relations between
people
• is a process during which available
resources could be transformed in goods
needed by society;
• has a major purpose: to meet the
satisfaction of the needs of population;
• includes a lot of stages.

4. Stages of economic activity

5. Economic activity

Economic activity means all actions
that involve:
the production,
distribution,
exchange, and
consumption of goods and
services

6. Components of economic activity

• Needs - motive of economic activity
• Resources – necessary items
• Goods and services – results

7.

1. Needs, wants are desires of individuals to obtain
necessary conditions of civilized life.
• Needs – are basic requirements (food, clothing,
shelter)
• Wants – a way of expressing a need, not
necessarily what we always need but what we
desire.

8.

Characteristic features of wants:
Our wants are subjective. What is a luxury to one
individual may be a necessity to another;
Material wants are unlimited over a long period of
time , but limited in capacity over short period.
Over time wants multiply. Material wants have a high
reproduction rate;
Wants are complementary and competitive

9.

–
Secondary
needs
Selfactualization
Calling for self-realization
and personal growth
–
Esteem
Reputation and prestige
status
–
Love and a sense of
belonging to groups
Belongingness
and love
–
Primary
needs
Safety
Safety, security of Home
and family order and
stability
–
Physiological needs
Maslow’s Hierarchy of needs
The requirement for
survival: food, cloth,
shelter

10.

Level of economic development
of a country
Level of disposable income
Level of culture of population
Period of time
Level and quality
of satisfaction
of needs

11. 2. Goods and services A good is an item that is economically useful or satisfies an economic want. Services are actions that

someone
performs
for
someone.

12.

GOODS
All things that
satisfy Human
needs
Free
Economic
all individuals have
access to them
quantity exceeds the
wants
consumption is free
result of economic
activity
quantity is limited in
comparison with
wants
consumption is valued

13.

material
(tangible)
nonmaterial
(intangible)
(looking to
form)
substitute
complementary
independent
(looking to
grade of
dependence)
ECONO
MIC
GOODS
durable
nondurable
(looking to
period of
consumer (final)
productive
(intermediate)
(looking to
destination)
private
public
(looking to
exclusivity)

14.

3. All elements used in the production of
goods and services are called the economic
resources.

15.

• Natural resources include land as a ”gift
of Nature” and raw materials (oil, minerals,
agreeable land, gold etc.)
• Human or Labor resources – people and
all their efforts, abilities, and skills
• Capital resources (capital goods) – the
tools, equipment, machinery and factories)
• Entrepreneurial resources – risk takers
in society who do new thing with existing
items in our economy

16.

Economic resources
Economist classify them as either:
1. Property resources – land or raw
materials, --or human resources – labor and
entrepreneurial ability;
2. Primary resources (land) or derived
resources (capital);
3. Regenerated or non regenerated
resources.

17.

Generally, economists distinguish the
following resource categories (are often
called factors of production, or Inputs) :
Land
Labor
Capital
Entrepreneurial ability

18. Distinguish between Economic and free resources?

• Economic resources: they are scarce and
therefore bear value and price, e.g –
arable land, natural resources, qualified
labor…
• Free resources are those resources which
are provided by nature in plenty. Price is
not paid for them. Each person has an
access to free resources.They are free gift
of nature, e.g - sunshine, air, trees...
• In some conditions free resources could
be transformed in economic resources

19.

Two fundamental facts:
1. Society’s material wants are virtually
unlimited
2. Economic resources are limited or
scarce.

20.

21.

Economic
resources are
scarce and
limited
Quantitative
contradiction
Wants,
needs are
unlimited
Restrictions for satisfaction of wants
Alternative choice

22.

You can not always get what you want !
Why ? Our wants are unlimited. Available
economic resources to satisfy our wants are
limited, scarce.
Scarcity – is the fact that available resources
are insufficient to satisfy all our wants. Only
“free resources” are not scarce (air, water).
In some conditions free resources could be
transformed in the economic resources.

23.

Scarcity forces us to make economic/
alternative choices
You have got only 50 lei in your pocket, the
necessity of choice is reality to you.
When we cannot have every thing that we want,
we have to choose among the available
alternatives.
Problem of alternative choice is a core problem
of Economics.

24. Alternative choice

iPod
OR
24
Моbile
phone?

25. The problem of alternative choice in the production

• What to be produced ? (what boons, at
what quality and at what quantity?)
• How to be produced ? (of what resources
and their combinations, with the help of
which technologies?)
• For whom to be produced ? ( who and how
many goods will consume?)

26.

Model of Production Possibilities
The production possibilities curve (PPC)
illustrates the problem of alternative choice in
Economics.
PPC marks the boundary between those
combinations of goods that can be produced
and those that cannot.
Production possibilities curve (PPC)
shows the alternative combinations of final
goods and services that could be produced with
all available resources and technology.

27.

Example. Suppose, in an ideal economy officials make choices
about the production of two goods – pizza and robots
in conditions of limited economic resources.
All alternatives are following:
Table
Production possibilities of pizza and robots with full employment
of available resources
PRODUCTION ALTERNATIVES
TYPE
OF PRODUCT
A
B
C
D
E
0
1
2
3
4
10
9
7
4
0
Pizza in hundred
thousands
Robots
(in thousands)
Table shows consequences of a decision to produce pizza and robots.

28.

To ensure our understanding of the production possibilities
table, let’s view these data graphically.
We employ a simple two – dimensional graph.
Robots
Q
A
10
B
9
W
8
Unattainable
C
7
6
Attainable
5
N
4
D
3
2
1
E
0
1
2
3
4
Q
Pizza
Attainable but inefficient
Figura 1. The production possibilities curve

29.

Long-run PPC: shifts of PPC
Robots
Causes of growth =
1) Improvement in
technology
2) Increase in
resource supply
Growth
3) Education
Pizzas

30.

• Every time we choose to use scarce resources in
one way we give up the opportunity to use them in
other ways.
• In making choices we face costs. Economists use
the term “opportunity cost”.
Opportunity cost is what is given up in order to get
something else.
• It is the price of our choice (desires).
• The opportunity cost of any action is the best
alternative forgone.
• EXAMPLE:
Money spent on a book is not available for
spending on a CD.
The opportunity cost of the book is CD
forgone.

31.

Opportunity cost
More of X (pizza) means less of Y (robots).
The amount of one product which must be
forgone or sacrificed to obtain some amount of
other product is called the opportunity cost.
Opportunity cost can be determine by the
formula:
Y
OC
X

32. Alternatives of the production of pizza (X) and robots (Y)

А
В
С
D
Е
Х
Y
oС х/у = - Qy / Qx ↑
0
1
2
3
4
10
- (Qx=0)
9
1 (9 - 10) / (1 -0)
?
7
2 (7 - 9) / (2 -1)
?
4
3 (4 - 7) / (3 -2)
?
0
4 (0 - 4) / (4 -3)
?
oc y/x

33.

• In moving from possibility A to E the
quantity of sacrificed robots involved
in getting each additional unit of pizza
increases. It is an illustration of the
action of the law of increasing
opportunity cost.
• Why does
the sacrifice of robots
increase as we get more pizza?
• The answer is that
economic
resources are not completely adaptable
to alternative use.

34. Opportunity cost can be expressed

• in natural form (number of goods)
in monetary terms,
in time (lost time in terms of its alternative
use)

35.

• Examples of opportunity cost
• The cost of reading of book is not the price
of book. It is the value of the best
alternative of the use of time.
• A large component in the cost of university
education is income forgone by students.
It is an opportunity cost
• Conclusion: ‘there is no such thing as a
free lunch”.

36.

Conclusion
PPC illustrates 4 essential principles:
1) Scarce resources.
2) Alternative choice (Alternatives A, B, C, D, E).
3) Opportunity cost. More of X (pizza) means less of
Y (robots).
4) Law of increasing opportunity cost says that we
must give up the quantity of other goods
in order to get more of a particular good.

37.

Economics is concerned with the choices
made by the economic agents:
• Households, including all consumers
• Business firms, including all firms as
producers
• The government, including all government
agencies
• The foreign sector including all foreign
organizations, agencies

38.

Decision makers at micro level
Decision makers are the economic actors or
economic agents.
They make choices and fulfill several
functions. At the microeconomic level we
identify two types of decision makers:
Firms
Households
.

39.

• A household is any group of people
living together as a decision-making unit.
Every individual in the economy belongs to
a household.
• Households are:
Major consumers of goods and services;
Major proprietors of economic
resources;
Major savers.
• The most important goal of households
as consumers is to maximize utility.

40.

A firm is an organizational form of economic
activity. Car makers, farmers, and insurance
companies are all firms.
All producers are called firms, no matter how
big they are or what they produce.
Firms are:
Major producers;
Major investors;
Major consumers of economic resources, for
example, of labor force.
The most important goal of a firm is to maximize
the benefits (profit).

41.

• Households and firms make decisions that
result in the transactions in the market of
goods and services and resource market.
• A market is any arrangement that
facilitates buying and selling.
• The flows resulting from these decisions
by households and firms are shown in
figure below.

42.

Resource
market
Businesses
Households
Market of final
goods and
services
The circular flow of output and income in free
market economy