Goods and services
Suppose you are rescued from the desert island by a passing ship which takes you to
the nearest
port. Safe at last! Or are you? How will you survive here in the port city? Your basic needs are the
same as they were on the island but the opportunities for satisfying them are very different. The city
has water on tap and many different kinds of food and shelter. It has much more besides - luxuries
as well as necessities. To get almost anything though, you will require money (see MONEY AND
ASSETS). In the city as on the island, survival requires work. In the city, though, work and survival
are not connected directly. They are connected via the labour market and the food, housing and
other markets. Your chances depend on how well you can operate in various markets and how well
the markets operate for you.
A whole host of economic issues can be understood in part by thinking of them in these
personal
terms, but to understand them fully it is necessary to approach them in a more general way and to
look at evidence on a regional, national or international scale. The study of economics involves
three overlapping groups of issues. Taking up the theme of survival, the first group examines
problems of development and underdevelopment. This group merges into a second which deals with
the domestic economic issues that concern rich and poor alike. The third group deals with
international economic issues.
The economy- a circular system
In a market economy HOUSEHOLDS supply LABOUR to BUSINESSES via the labour market and
receive wages in return. Some households also supply land and invest money. To persuade people
to invest money, businesses undertake to pay it back with interest. For the use of land, they pay
rent. The levels of wages, rent and interest in this simplified picture are determined by supply and
demand in the labour, land and money markets. In reality GOVERNMENT, trade unions,
international institutions and other bodies have a role to play in this process. Businesses use the
factors of production (labour, land and capital) obtained the markets to produce products.
These are sold to households at prices determined by the interaction of supply and
demand in the
product markets Commodities (land, capital and products) flow clockwise round diagram, whilst the
payments would flow anticlockwise .
Types of economic organization
The description of the port city indicates that it is a market economy in which the
questions of what
to produce, how to produce and for whom to produce are answered by individual economic agents
(businesses and households) interacting through markets. In practice, market economies are also
capitalist economies. Capitalism involves the private ownership of the means of production. The
United States, Canada, Western European countries and Japan are all predominantly capitalist.
The state owns some industries in each of these countries. In the United Kingdom, for example,
the railways are state owned, which means they are run, indirectly, by the government. Because of
this, countries like the UK are said to be mixed economies. The revolution in Russia in 1917
ushered in a rival economic system, soviet communism, under which the state owns the means of
production and the economy is planned centrally. This system has now collapsed in. eastern
Europe and the states of the old Soviet Union are committed to bringing in a market economy as
soon as possible.
Work
In the city, as on the island, you will need to work to survive. What sort of work
is there? One way
of answering this question is to divide work up according to the type of thing that is being produced.
The simplest way to do this is to talk about primary, secondary and tertiary activities. Primary
activity includes AGRICULTURE, MINING and ENERGY production. Secondary activity is mainly
MANUFACTURING. Manufactured goods include domestic cookers (a example of a consumer
good) and windscreens (a producer good, since windscreens are sold to other producers in this
case car manufacturers). Tertiary activity includes retailing, banking and other SERVICES, plus
TRANSPORT AND COMMUNICATIONS. Primary activity tends to decrease in importance as
countries get richer.
Markets
A market is the name given to the trading arrangement for an economic good or service.
Goods are
physical products like cars and hot doges. Services are things like hair-cuts and bus rides. Some
commodities have a fixed market place but others, like housing and labour, do not. Sellers of a
good or service try to earn as much as they can but if they pitch thier price too high, buyers will
go
elesewhere.
Competition between sellers tends to make lthem fix their prices at about the same
level. When
there is just one seller in a market there is a monopoly. Monoplies can raise prices above the
competitive level but if they fix them too high people will look for substitute products inseaead.
Indeed nearly all prices are influenced by consumers ability to substitute one thing for another - to
buy pears instead of apples, or buy a bus ride instead of taking a taxi. The number of buyers in a
market is imporatnt as well. In a town dominated by one eimployer, wage rates could be fixed at a
lower level than if there was competition for labour. rouighly speaking the more buyers and sellers
there are the more competition there will be.
Supply and demand
The price of a commodity tends to depend on supply (the amount available in the market)
and
demand (the amount that consumers want to buy). The higher the price of a commodity the more of
it suppliers will want to sell, so supply tends to increase as the price increases. Conversely, the
higher the price the less of the commodity consumers will want to buy, so demand tends to
decrease as the price increases.
If the price is too high, supply will exceed demand. As a result, some of the commodity
will remain
unsold. There will be a surplus or excess supply.
If the price is too low, demand will exceed supply. As a result, there will be shortages
and queues.
If the price is pitched at the right level, 'market clearing' will occur (no excess
demand and no
excess supply).
