Foundations of Economic Systems and Production
Economic Agents
Economic agents are categorized as follows:
- Consumers: Families and households that decide to consume goods and services necessary to meet their needs.
- Production and Business: Entities making decisions on the distribution of goods and services in exchange for a benefit.
- The Public Sector: Various public administrations.
Consumers
When two or more goods or services meet the same characteristics and the same necessity, which one does the consumer choose? This depends on the tastes and preferences of the person.
Income Level: Even if preferences are set, one cannot satisfy an economic necessity due to the unavailability of funds.
Income and Family Composition
Income: Represents the value or price paid for using a productive resource in a given period of time.
Composition of Families:
- Entrepreneurs: Those who organize and coordinate production activity to achieve objectives.
- Human Element: Workers involved in the production process who provide employment in exchange for a wage.
- Annuitants: For many families, work is the main source of income.
- Strict Consumers: This name groups all people who do not participate in the production process.
Companies
Profit Maximization Equation: Benefit = Business Revenue - Expenses.
Companies aim to stabilize and grow, create jobs and wealth in their area of influence, and respect the environment.
Circular Flow of Income
- Payment of Income: Companies pay families in exchange for work and other productive factors within the market of goods and services.
- Payment of Money: Families pay companies in exchange for the goods and services they produce within the market of production factors.
The Public Sector
The public sector consists of local, regional, and central administrations.
- Taxes: Amounts paid by businesses and families.
- Expenditure: Includes the provision of public goods and services, subsidies, and transfers.
- Legal Framework: The legal and institutional framework consists of the laws governing and guaranteeing the smooth functioning of economic systems.
The Company and Value Added
The Company: The union of natural resources and working capital to produce and provide goods and services that society needs, seeking a profit in return.
Value Added: The additional utility brought to the production of items by giving them a value greater than what they previously had.
Production Perspectives
- Economic Perspective: Indicates the purpose of production in the circular flow of income.
- Functional-Utilitarian Perspective: Notes why production occurs.
- Technical Perspective: Describes how the production takes place.
Technology and Efficiency
Technology A is more efficient than technology B when it uses the smallest possible number of factors of production to achieve the highest possible production.
Economic Formulas and Calculations
FC: Fixed Costs (do not vary)
CT = CF + CV: Total Cost = Fixed Cost + Variable Cost
CMI = TC / Q: Average Total Cost
IT = P x Q: Total Revenue
Imi = IT / Q: Average Revenue
BT = IT - CT: Total Profit
BMI = Imi - CMI: Average Profit
ΔIT = Ima / ΔQ: Marginal Revenue (Change in Total Revenue)
CMA = ΔCT / ΔQ: Marginal Cost (Change in Total Cost)
Ima = RMA - CMA: Marginal Profit