The Market System

1. The Market System

2. Barter vs. monetary economy • Barter – goods are traded directly for other goods • Problems: • requires double coincidence of wants • Monetary economy has lower transaction and information costs • (film)

3. Relative and nominal pricesReal value and nominalvalue • Relative price = price of a good in terms of another good • Nominal price = price expressed in terms of the monetary unit • Nominalvalue-refers to a value expressed in money terms (that is, in units of a currency) in a given year or series of years. • Real value- adjusts nominal value to remove effects of price changes over time

4. Markets • In a market economy, the price of a good is determined by the interaction of demand and supply • To sell we need a supplier • To buy we need a customer • The two blades of Marshall's scissors

5. Invisible hand • In the words of Adam Smith: • It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. (Adam Smith, Wealth of Nations, Book I, Chapter I) • [A producer,]...by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (Smith, Book IV, Chapter II)

6. Consumer sovereignty? • Customers vote using their money S Demand P profits P Q

7. Market economy • In a market economy: • profit maximization requires least-cost production (holding quantity and quality constant). • sellers of a resource have an incentive to supply the resource to its most highly valued use.

8. Search theory • buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting • Examples: • frictional unemployment resulting from job hunting by workers • consumer theory, applied to analyze purchasing decisions Whether a given job or product is acceptable depends on the searcher's beliefs about the alternatives available on the market.

9. Foursectors of economy • Household sector: This includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for consumption and undertakes consumption expenditures. It also owns all productive resources. • Business sector: This includes the institutions (especially proprietorships, partnerships, and corporations) that undertake the task of combining resources to produce goods and services. This sector does the production. It also buys capital goods with investment expenditures. • Government sector: This includes the ruling bodies of the state and local governments. Regulation is the prime function of the government sector, especially passing laws, collecting taxes, and forcing the other sectors to do what they would not do voluntarily. It buys a portion of gross domestic product as government purchases. • Foreign sector: This includes everyone and everything (households, businesses, and governments) beyond the boundaries of the domestic economy. It buys exports produced by the domestic economy and produces imports purchased by the domestic economy, which are commonly combined into net exports (exports minus imports). • Source:http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=circular+flow

10. Households • consists of one or more individuals sharing living quarters • the basic residential unit in which economic production, consumption are organized and carried out. • may be thesynonymous with family.

11. Entreprise types by owners: 1. State-owned – very inefficient 2. Municipal – owned by local government other administration units e.g. in USA States -> counties -> township in Poland province (commune)->second level of local government administration in Poland->district • Utilities companies – water supplier, sewage companies, public transportation companies, waste management companies • City driven company – technology park

12. Entreprise types by ownerscont. 3. Co-operatives - – organisation in which all the members own an equal share. Share of profit does not depend on the value of owned shares. • Housing co-operatives – non profit organisation • Service co-operatives – for barbers, shoemakers • Production co-operatives – e.g. agriculture producers of milk, cheese 4. Private – the most effective

13. Company types by legal forms Firms • Sole Entrepreneur (Am. sole proprietorship) • Partnership • SC - mutual liability • SJ - general partnership • SP – partnership (only for professions like doctor, architect, lawyer, artist) • SK - limited partnership • SK-A - limited joint-stock partnership • Corporation • Sp. z o.o. – Private limited company Ltd • S.A. – Public limited company, joint stock (am. incorporated enterprise)

14. Sole proprietorship • Single owner • Advantages: • Autonomy • Easy to establish • No starting capital • Disadvantages • difficult to acquire funds • unlimited liability • Most common form of business organization (by number of firms)

15. Partnership • Two or more individuals share ownership • Advantages: • Pooled wealth and resources • Pooled business skills • Disadvantages: • Loss in autonomy (relative to sole proprietorship) • Unlimited liability

16. Corporation • A legal entity separate from its owners • Advantages • limited liability • Disadvantages • double taxation • separation of ownership from control • required starting capital • Most output is produced by corporations

17. Advantages of running a business: • Independence: • No fixed working hours • No fixed vacation date • No direct supervision • Managementautonomy • Self-determined focus • Self-determined scale of operation • You are free to close down company at any time

18. Advantages of running a business (cont.) • No caps to your profit • The more you work the more you get • You can multiply profit by hiring people • You set your own gratification policy • Self-fulfilment • You work out your own ideas • You can put your skills to best use • direct relation between your performance and your profits

19. Advantages of running a business (cont.) • Employees • You pick your own team • You can hire your friends and relatives • You can hire a secretary • Funding • You can take out investment credit • You can find a venture capitalist

20. Boons (additional benefit) of having company: • You can get wholesale deals • You have access to trainings, conferences which are held by your business partners • Getting to know VIP’s • Access to promo programmes of your business partners

21. Other benefits: • You determine your company location • You can work from at home • You can paint your office pink with orange dots • You can do extra work • You can establish a real multi-generation family • You can build your own self-esteem • You can support charities and offer sponsor-deals

22. Disadvantages of running a business • High taxes • Compulsory social security contributions • Income tax • Indirect taxes (VAT, excise) • Responsibility • For you and your family • For your employees • For your customers • For product

23. Disadvantages of running a business • Bankruptcy risk • Mutual liability for some companies (you put your own belongings at stake) • Starting investments: • Money for your office space • Money to refurbish your office or buy equipment • Computer, software, telephone • Operation funds • Pension scheme contribution (ZUS)

24. Disadvantages of running a business • Accounting problems: • If done by yourself very time-consuming – you need to monitor the legislation (amendments to tax code have a knock-on effect on your tax policy) and you need to deal with very impressive bureaucracy, filling up forms, filling statements and providing explanatory notes • If done by accounting office or accountant – you have to pay for this service • Stress: • Unlimited working hours • You face the risk of your investments • Security: • Insuring company assets • Gangster extortions, protection racket

25. Disadvantages of running a business • „Government help”: • Bureaucracy • Audits from various agencies (tax office, social security office, control office for labour) • Competition: • Pulling no punches • Real risk of market entry from competition • Costs: • Salaries • Operating costs • Maintenance costs • And dozens of things you can not even name now

26. Disadvantages of running a business • Dishonest: • Business partners • Company partners • Employees • Bureaucrats • Bad debts: • Business partners go bankrupt • Postponements of payments • Debt collection problems • External and random factors: • Market cycles, • Poor legislation • Cataclysm, Acts of God • Macroeconomic factors

27. Registering commercial activity • Municipal Office • Company name • Scope of operation • Statistical office • Statistical ID • Tax office • determining your tax liability • Bank • Setting up an account • Social Security Office • Compulsory social insurance • Pension scheme, health care scheme and others

28. Businessman's dictionary: • Liabilities – money you owe to people • Amount Due – money your business partners owe to you • Due date – The date on which a payment to the Company is due. This date is given on the invoicewith bank account. In Polish economy due date has nothing to do with the date of real payment. • Payment notice – request for payment which was not paid until due date • Invoice – A commercial document in a form consistent with the trade identifying both buyer and seller, showing details such as: the articles sold, quantities, prices, duedate, invoicenumber, the currency used for payment, bank account number etc.

29. Businessman's dictionary: • Debt collecting agency – An organisation that specialises in collecting theiroutstanding debts off its clients, charging at commission for doing so. • Accounting office – people who can do the most unpleasant work for you • Bankruptcy– the state of the company which isn't able to pay it’sdebts and against which a bankruptcy order has been made by a court.

30. Bibliography • Wikipedia.org • Smith A., Wealth of Nations, Book I, Chapter I • Haviland, W.A. (2003). Anthropology. Wadsworth: Belmont, CA. • http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=circular+flow