Part 1 Flashcards
Economy is dealing with the…
satisfaction of human needs / wants
Tension between …
Limitation of natural resources/Limitation of goods availability vs Unlimited human needs / wants
Basic terms?
Need: Basic human requirement, Material needs (like air, water, food…), Immaterial needs (safety, recreation, entertainment…)
Wants: Needs become wants by directing to specific object
• The need of “food” à the want of
– Rice
– Bread
– Kobe Beef
Demands: Demands are wants for specific products or services backed by an ability to pay
• Big demand for rice and bread, but small demand for Kobe Beef
Maslow’s Hierarchy of Needs
- Self-actualization needs (Self– development and realization)
- Esteem needs (self-esteem, recognition)
- Social needs (sense of belonging, love)
- Safety needs (security, safe income, protection)
- Physiological needs (food, water, shelter)
Demand & Supply definitions
• Demand
Willingness & ability of buyers to purchase a product (good or service).
• Supply
Willingness & ability of producers to offer a good or service for sale.
Market price / equilibrium price
is the the price at which the quantity of goods demanded and the quantity of goods
supplied are equal
The Concept of Homo Oeconomicus
Alternative term: REMM =Rational, Evaluating, Maximizing Man
The concept of homo oeconomicus considers human beings to be rational animals seeking after individual advantages.
BUT:
- Each person is driven by the desire to make profit
- Maximisation of self-interest leads automatically to maximisation of the Wealth of the Nation.
->National economy is self-controlled by an invisible hand
Perfect competition and competition forms in a realistic market environment?
- Perfect Competition
Polypoly: - Monopolistic competition
- Oligopoly
- Monopoly
Monopoly?
Market or industry in which there is only one producer, who can therefore set the prices of its products
Oligopoly
Market or industry characterized by a handful of (generally large) sellers with the power to influence the market prices
Monopolistic competition
Market characterized by numerous buyers and relatively numerous sellers trying to differentiate their product from competitors
Perfect competition
Market or industry characterized by numerous small firms
– Laws of demand & supply: Going prices are set exclusively by supply and demand and accepted by both sellers and buyers
– Similarity of products: products of each firm are so similar that buyers view them as identical to those of other firms
– Information transparency: Both buyers and sellers know the prices that others are paying and receiving in the marketplace
– Freedom of entrepreneur: Because each firm is small, it is easy for firms to enter or leave the market
Liberalism Principles
- Laissez Faire Principle
- No governmental intervention - Principle of the contract
- contractual agreements
– Contracts contain only conditions which are market compatible
– Contracts provide safety against calculated economical risks, breach of a contract will be sanctioned - Principle of the ownership control
- Entrepreneurialautonomy(privateownership)
– Ownership of capital legitimates the control of the company à Liberal basic principle of corporate governance
– Unity of ownership, control and risk taking (profit & loss)
Today’s major criticism of market economy concerns 3 dimensions:
– Theoretical: Assumptions not tenable (e.g. homo oeconomicus)
– Empirical: Assumptions not fulfilled (e.g. perfect competition)
– Normative: Consequences not wanted (e.g. mass dismissal)
Additional problematic in the modern economy
• Unity of ownership and control as defined in the liberalism principles not fully applicable in large size public listed companies, where top executives and stakeholder groups have strong influences
• Complex inter-dependence between companies and national economies in a globalized business environment
