Barter – goods are traded directly for other goods Problems: ◦ requires double coincidence of wants Monetary economy has lower transaction and information costs Relative price = price of a good in terms of another good Nominal price = price expressed in terms of the monetary unit Nominal value -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 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 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) Customers vote using their money Demand P profits S P Q 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. 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. Household Business sector sector Government Foreign sector sector includes everyone, all people, seeking to satisfy unlimited wants and needs. this sector is responsible for consumption and undertakes consumption expenditures. it owns all productive resources 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 the synonymous with family. 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. 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 (GDP) as government purchases. 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). 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 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 ◦ 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) 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) Two or more individuals share ownership Advantages: ◦ Pooled wealth and resources ◦ Pooled business skills Disadvantages: ◦ Loss in autonomy (relative to sole proprietorship) ◦ Unlimited liability 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 Independence: ◦ ◦ ◦ ◦ ◦ ◦ ◦ No fixed working hours No fixed vacation date No direct supervision Management autonomy Self-determined focus Self-determined scale of operation You are free to close down company at any time 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 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 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 Other benefits: You determine your company location ◦ You can work from at home You can You can You can family You can You can deals paint your office pink with orange dots do extra work establish a real multi-generation build your own self-esteem support charities and offer sponsor- High taxes ◦ Compulsory social security contributions ◦ Income tax ◦ Indirect taxes (VAT, excise) Responsibility ◦ ◦ ◦ ◦ For For For For you and your family your employees your customers product 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) Disadvantages of running a business Accounting problems: Stress: Security: ◦ 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 ◦ Unlimited working hours ◦ You face the risk of your investments ◦ Insuring company assets ◦ Gangster extortions, protection racket „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 Dishonest: Bad debts: External and random factors: ◦ ◦ ◦ ◦ Business partners Company partners Employees Bureaucrats ◦ Business partners go bankrupt ◦ Postponements of payments ◦ Debt collection problems ◦ ◦ ◦ ◦ Market cycles, Poor legislation Cataclysm, Acts of God Macroeconomic factors 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 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 invoice with 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, due date, invoice number, the currency used for payment, bank account number etc. Debt collecting agency – An organisation that specialises in collecting their outstanding 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’s debts and against which a bankruptcy order has been made by a court. Wikipedia.org Smith A., Wealth of Nations, Book I, Chapter I Haviland, W.A. (2003). Anthropology. Wadsworth: Belmont, CA. http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=circular+fl ow