Download Business Sector

Coordination
Mechanisms
How is the allocation of resources
to the various production
activities determined?
- Centralized decisionmaking
- central authority, dictator,
communism, socialism
- Decentralized decisionmaking
- laissez-faire, market-economy,
capitalism
Market Economies
The idea: (Adam Smith, 1776, The Wealth
of Nations)
Each individual makes choices based on
his/her own self-interests, within the
guidelines of the laws.
All exchanges are voluntary and so no
exchanges take place that either trader
believes is not in his/her self interest.
There are no impediments to trade.
Then, subject to certain important
conditions, the resulting economic
outcome will be production-efficient
and allocative-efficient. An “invisible
hand” directs the economy to an
“optimal” outcome.
Markets
The exchanges that take place in a
laissez-faire economy occur in
markets.
Markets are the mechanisms through
which voluntary exchanges take place.
They can have specific physical
location (e.g., a supermarket) or not
(e.g., “e-bay” or the jobs section of a
newspaper’s classified ads).
That is, a market is any mechanism
through which “buyers” and “sellers”
make exchanges.
Markets
(cont’d)
Virtually all current economies are “monetary
economies” which means that most markets
operate as follows:
A particular commodity (good or services) is
sold by a seller to a buyer in exchange for a
certain amount of money, which is the market
price of the commodity.
The market outcome is described by the quantity
(the amount of the commodity bought and
sold) and the price (units of currency per unit
of the commodity).
An alternative market structure: barter
How are market
outcomes determined?
The Supply and Demand Model
Traders and Markets in
the Macroeconomy
Traders (Decisionmakers;Sectors)
- Household Sector (Consumers)
- Business Sector (Producers)
- Government Sector
- Foreign Sector (Rest of the
World)
H + B = Two-Sector Economy
H+B+G = Three-Sector Economy
H+B+G+F= Four-Sector Economy
Household Sector
-Owns the economy’s resources
-Sells the services of these
resources to firms in exchange
for $’s = factor income
-Purchases goods and services
produced by (domestic and
foreign) firms in exchange for
$’s = consumption +
investment (saving)
- Pays taxes to the government
Business Sector
Employ factors of production,
which are purchased from
households, to produce goods
and services, which are sold to
households.
Government Sector
Purchases goods and services
from the business sector to
produce public goods to the
the economy (e.g., national
defense, police services, public
roads, public parks, services of
government employees)
Collects taxes to finance these
purchases (and borrows from
households).
The Circular Flow
Representation of the
Economy
Graphical representation of the
activities of the various sectors
and the markets that
coordinate these activities