1.

The agents of economy

The agents of economy are:

 households (consumer)
 business organisations (companies)
 government (state)
 economic units beyond our borders (abroad, foreign countries)

Households are the smallest economic and social units, typically consisting of relatives. Although households and
families can be similar concepts, they are not the same. Families are based on blood-related relationships, while
households are economic communities.

Households are economic communities of people who live together and formulate one unit of income and
consumption and they pay living expenses together.

Households are economic units which have the following features:

 the members have needs which have to be fulfilled

 fulfilling needs is carried out through consumption
 they need income to fulfil needs
 the source of income is lending workforce
 they can accumulate money through e.g. savings

The fundamental economic process in the household is consumption, therefore consumers and households are the
same.

The basic function of business organisations is production; to produce goods that are suitable to satisfy consumers’
needs. Companies are the basic units of production; their activity is characterised by:

 independence, economic separation from other economic agents

 profit orientation, so that profits surpass expenses
 taking risks as profits cannot be guaranteed, there is a chance of failure
 the efficiency of their activity is determined by the market.

The state and state institutions play important roles in modern societies. Governments are not only agents of the
economy but also a factor actively influencing all economic processes.

There are three fundamental economic functions in terms of influencing the economy:

 enforcing social efficiency where market regulations cannot

 realising social justice and fairness through the redistribution of income
 the state intervenes in case of economic deflections and turmoil in order to stabilise macroeconomy

The government operates state owned companies, maintains socially significant institutions and supports residents
and businesses.

(Abroad) Foreign countries are economic agents that are not included in the national economy but are in connection
with national economic agents.
 Economic processes and systems

All human activities are based on satisfying needs and wants in other words, based on taking hold of a product or
service and use it or consume it.
Needs are things that are required in order to live. Everyone needs food, water, clean air, clothing, and shelter. Other needs in
today's economy are a good education, a good job, and safety.

Wants are things that add comfort and pleasure to your life. You may believe you can't live without name brand jeans and the
latest cell phone technology, but you can, and many people do. A small apartment provides needed shelter, but many people
want a large apartment or a house.

Needs and wants can be satisfied if we produce goods.

Two types of goods:

- free goods: light, air, sea water

- economic goods (you have to pay for them):
o material goods:
 consumer goods
 investment goods
o non-material goods:
 services
 rights representing assets

Those necessary goods and services are produced through economic processes which are not free and unlimited. In
order to manufacture these resources are required.

The economic process is a purposeful human activity through which limited natural resources are transformed and
consumed. All related activities connected to this process are economic activities.

The most important economic activities:

- production
- distribution
- exchange
- consumption

Production: The processes and methods used to transform tangible inputs (raw materials) and intangible inputs (ideas,
information, knowledge) into goods or services. Resources are used in this process to create an output that is suitable
for use or has exchange value.

Distribution: the way in which produced goods are shared out among a group or spread.

Exchange: it ensures that the produced goods and services are accessible to people, this process is in connection with
trading and freight transport

Consumption: the process aimed at satisfying needs, also the last one of the economic activities

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and
prices of goods and services. This means also taking into account taxes and regulations created by governments.
Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the
economy.

Macroeconomics, on the other hand, is the field of economics that studies the behaviour of the economy as a
whole, not just of specific companies, but entire industries and economies. It looks at economy-wide phenomena,
such as Gross Domestic Product (GDP) and how it is affected by changes in unemployment, national income, rate of
growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would
affect a nation's capital account or how GDP would be affected by the unemployment rate.

We call economic processes in macroeconomics those product and money movements which are in connection to
producing, distributing, exchanging or using up goods, moreover are related to producing, distributing and using up
incomes.

The cycle of macroeconomic income

The stages of macroeconomical income process:

- generating income
- distribution of income between the owners of product factors
- redistribution of income through taxes and grants by the government
- using up available income
- transferring savings for investment purposes

The repetitive economic process cycle

The repetitive economic process cycle is called economic reproduction, a process which includes satisfying the
always reoccurring needs besides continuously producing goods and services, therefore the relationship between
economic agents is always recreated.

An economic system is a system of production and distribution of goods and services within a society.

1. Market economy
A market economy is an economic system in which the decisions about investment, production,
and distribution are guided by the price signals created by the forces of supply and demand. It features the private
ownership of the means of production (capital). Manufacturers and consumers decide freely on how to use goods
and resources, companies and households meet on the market. e.g. USA (however, most market economies are
mixed economies)

 goods, means of production are privately owned (buying and selling, inheriting, possessing are allowed freely)
 goods are sold on the market where products are bought and sold (types of markets: consumer market, capital
market, money market, labour market)
 profit-oriented
  activities of businesses aim at profits
 anyone can set up a business (entrepreneurship, limited partnership, limited liability company, public limited
company
 the basis of the system is supply and demand
 constant technological development (how to produce cheaper in order to sell for more)
 competition (many produce the same product), free price system (the price of the product is determined by
supply and demand)
 the role of money: it could be a means of payment or it could be the capital of a company that produces profits

2. Planned economy
A planned economy is a type of economic system where investment and the allocation of capital goods is
performed through economy-wide economic and production plans. Decisions are made by the government and
the means of production are mainly owned by the state. e.g. China, Cuba, the former Soviet Union

 a mennyit, hogyan kérdéséről az államhatalom dönt

 termelőeszközök többsége állami tulajdonban van
 a termelt javakat az állam összegyűjti
 az állam osztja szét a tervezők javaslata alapján = központosított újraelosztás
 az állam szabja meg a megtermelt többlet sorsát, az árat és a munkabért
 a pénzgazdálkodás szerepe alárendelt

3. Mixed economy
A mixed economy is an economic system blending elements of market economies with elements of planned
economies. The state appears as a active agent that influences the economy, however, economic issues are
managed based on the rules of the market.

TRADITIONAL ECONOMY

 goods and means of production are owned by the public

 low technological standards
  gathering, agriculture
 only produces for self-sufficiency
 goods are distributed by the leaders of the community
 nowadays can only be seen in tribal societies

Fundamental economic notions

What is economy?

An economy is an area of the production, distribution, or trade, and consumption of goods and services by different
agents.

Who are the agents of economy?

In economics, an agent is a decision maker; a person, company or organization that has influence on the economy by
producing, buying, selling or investing.

Economic agents can be individuals, businesses, organizations, or governments.

What is economics?

Economics deals with the complex analyses of the patterns of choices people make in order to satisfy their needs in
a society where resources are limited. It examines the laws of production, distribution and consumption.

The two branches of economics are macro- and microeconomics. Microeconomics is the study of smaller scale
choices made by individual consumers, households and companies. Macroeconomics deals with economic issues at
the level of society such as economic growth, money supply, government spending, inflation, employment and
unemployment.

The sectors of economy:

The three-sector theory is an economic theory which divides economies into three sectors of activity: production of
raw materials (primary), manufacturing (secondary), and services (tertiary). It was developed by Allan Fisher, Colin
Clark and Jean Fourastié.

Primary stage/degree of the economy: production of raw materials, such as corn, coal, wood and iron. (A
coal miner and a fisherman would be workers in the primary degree.)

Secondary stage/degree of the economy: the transformation of raw or intermediate materials into goods
e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in
the secondary degree.) At this stage the industrial economy is also sub-divided into several economic
sectors (also called industries).

Tertiary stage/degree of the economy: services provided to consumers and businesses, such as baby-
sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the tertiary degree.)
Quaternary stage/degree of the economy: research and development needed to produce products from
natural resources. Note that education is sometimes included in this sector.

Other sectors of the developed community include:

the Public Sector or state sector (which usually includes: parliament, law-courts and government centres,
various emergency services, public health, shelters for impoverished and threatened people, transport
facilities, air/sea ports, post-natal care, hospitals, schools, libraries, museums, preserved historical buildings,
parks/gardens, nature-reserves, some universities, national sports grounds/stadiums, national arts/concert-
halls or theatres and centres for various religions).
the Private Sector or privately-run businesses.
the Social sector or Voluntary sector.

Scarcity: certain resources are scarce or rare therefore people need to make choices to allocate those resources.

Demand: the quantity of a commodity that the public will buy at a certain price at a certain time, it is influenced by
the price, buyers income and preferences, the number of buyers and market price changes etc.

Supply: the amount of goods that will be offered for sale in a market at a certain time and price, it is influenced by
the product's price and availability, labour, inflation expectations, government regulations etc.

Equilibrium: is achieved when economic forces are balanced (the total demand is satisfied by the total supply),
suppliers are able to sell their goods at the equilibrium price, a competitive market tends towards market
equilibrium

Shortage: if demand exceeds supply

Surplus: if supply exceeds demand

economic competition: businesses try to outdo their competitors by offering lower prices and better quality
products and services in order to achieve higher market share and make more profit

free competition: when price movements are only influenced by market supply and demand, no government
interference

monopoly: a market situation where there is only one provider of a certain product or service which control market
prices and maximise profits

oligopoly: a market situation where a few providers dominate the sale of a commodity or similar brands