For a better understanding of the materials set forth below, as well as the Concept of "New Economy of Consumption" itself, you should familiarize yourself with the definition of the term Economy (see section 13 "State and NEC2020") and the content of this article, which, unlike the previous one, can be shortened to a few paragraphs, does not seem possible. The publication is limited to General Economic Theory, which is the main section of Economic Theory. Reading this article can be postponed or divided into several tricks, but refusal from the outlined short course on this topic will mean a refusal to be able to understand what is happening.
ATTENTION the proposed text of General Economic Theory is an adapted presentation of the current Economic Theory in its part published here. The publication gives an idea of how the economy is understood today and what the majority is guided by. The authors of the NEC2020 Concept share the opinion about the loss of relevance of a part of the modern version of Economic theory, which is based on the neoclassical school of economic thought that arose in the 1870s. The ongoing, ongoing and projected changes in the economic relations of a person and society become the reason for the inevitable renewal of today's economic theory, which took shape in the middle of the twentieth century, and the construction of a new theoretical foundation that will correspond to the current period of human existence and reflect its views on its future.
Economic theory is a set of sections of economic science that studies the economic sphere of society, studies the behavior of various economic actors, their interaction, the results and systemic effects of such interaction. Economic theory does not take into account the specifics of the forms of economic relations, the conditions of economic practice, the specifics of economic legislation and traditions of different cultures, states and regions.
Economic theory studies, first of all, the principles of behavior of people who enter into economic relations as consumers, as producers or as owners of factors of production, and also studies the basic principles on which the process of making economic decisions by these people is based. Based on knowledge of the basic principles of economic behavior of market participants, economic theory builds a theory of markets for various goods, services and resources. To construct a theory of markets, the concept of competition is used, as well as the theory of pricing in these markets. Various theories of economic equilibrium have been created from the theory of the behavior of economic agents and the theory of markets, on the basis of which, in turn, economic theory builds the theory of economic dynamics (cyclicality) and economic growth. On the basis of these theories, economic theory develops the basic principles of state behavior in the economy and the principles of economic regulation by the state. The problem of social welfare and its improvement, which is also in the interests of economic theory, looks somewhat separate.
Methods used by economic theory:
1. A method of observing the economic behavior of people, etc.
2. The method of historical analysis, i.e. method of analyzing the causes and effects in the past.
3. Statistical method, which, in combination with the historical method, gives an econometric method (method of time series analysis).
4. Methods of scientific abstraction.
5. Logical and mathematical modeling methods.
6. A logical method for synthesizing results based on basic laws and axioms.
Basic sections of Economic theory:
1. General economic theory (studies the most general laws of the functioning and development of the economy).
2. Microeconomics (studies the economic life of individual economic entities, individual markets and industries).
3. Macroeconomics (studies the functioning of the state economy as a whole).
4. History of Economic Thought.
5. The theory of international economic relations.
Objectives of Economic Theory:
1. Understanding the economic behavior of people, companies and states.
2. Practical use of economic theory to predict inflation, GDP, etc.
3. Application of knowledge of Economic Theory in the study of other economic disciplines.
GENERAL ECONOMIC THEORY
SUBJECT OF GENERAL ECONOMIC THEORY
All sciences are divided into natural, which study nature, and humanities, which study man and society. Economics is referred to the humanities, since it studies the economic activity of a person and the impact of this activity on society, as well as the inverse economic relationship between society and a person, which affects its economic activity. Economics studies a person from the point of view of his relationship with the material world, the transformation of nature and the creation of an artificial habitat, interaction with natural and created nature. An important difference between economics and other humanities is its mathematics. For the most part, economic indicators are measurable, and economic laws are quantitative, for values that are immeasurable, economic science uses methods of transition from qualitative (immeasurable) indicators to indicators that can be measured.
For the most part, economic science deals with the economic relationships between people, which (relations) are associated with the production, exchange, use of objects of an artificial habitat (sale of goods and services, employment, lending, investment, provision of capital, etc.), as well as economic relations that are not directly related to production, exchange or consumption, but associated with them, through the conventions of the modern economic environment. Under the objects of artificial nature, not only material bodies are defined, but also services (labor) and information. Economic relations between people are voluntary, i.e. individual people enter them voluntarily, without any coercion, driven only by their own ideas about the benefits of these relationships. But part of economic relations, especially between a person and a state, is regulated by law, and therefore is involuntary.
The specific goals and situations of the emergence of economic relations may be different, but the entry of people into economic relations is mainly associated with the purpose of obtaining any benefit. In the economy, several types of economic relations are defined, among which the main ones are Production relations and Exchange relations. Industrial relations include: employment, the provision of capital by the shareholders of the company in order to generate income, relations between people in the process of production itself, other relations, as a result of which, income from the production of new goods may arise. An exchange relationship is the exchange of goods (goods) belonging to a person for other goods that he wishes to receive for personal consumption. At present, exchange relations are almost completely reduced to commodity-money relations.
Other economic relations include: Consumption relations - arising from the purchase of services and from joint consumption. Assignment relations are economic relations associated with the emergence of property rights. Distribution relationships are relationships that arise in the distribution of a produced product or profit. Redistribution relations - relations arising from the distribution of a product (income) in favor of persons who are not involved in production. Redistribution takes place in cases such as lending to production and consumption, insurance, etc. A special type of redistributive relations are relations associated with the redistribution of the product and income created in the economy through the fiscal system.
Scientific analysis of the economic activity of individuals and the whole society involves the discovery of general patterns manifested in the behavior of these subjects, such patterns are called economic laws, by analogy with natural science laws. Although economic laws describe precisely the behavior (activity) of people, economic laws can describe it indirectly, that is, through the relationship of economic variables. Knowledge of economic laws allows you to determine unknown economic variables through observable variables, and also allows you to build economic forecasts. Some economic laws describe the production of goods, others - their consumption, third - distribution, fourth - the financial sphere (redistribution). Together, the laws of economics constitute a system of economic laws that describes all the laws of economic development.
Economic laws are objective in nature, ie. do not depend on the will and consciousness of people. However, in the field of economics, laws are not immutable and people can violate them at will: for example, a person can choose a more expensive one out of two identical goods, guided by his own subjective reason, nevertheless, violations of economic laws are of a private nature and do not render significant impact on the economy, which is explained by the fact that the violation of economic laws is irrational. All economic laws are subdivided into specific and general economic ones: Specific economic laws are economic laws operating in specific socio-economic conditions, i.e. within a limited historical and geographical framework. General (universal) economic laws are laws characteristic of any historical epoch, any form of management.
Economics emerged in ancient times as the science of rational economic management; its subject was narrow and did not extend beyond the study and optimization of production processes in a detached economy. But in the future, the art of household management turned into the art of government, or rather its finances. The era of mercantilism came and the subject of research of economists was international economic relations and money circulation, some attention was also paid to the relations of exchange, but other relations in the economy were left without attention.
The transition from mercantilism to classical political economy was a natural stage in the development of economic thought, since, continuing the analysis of public finances, political economy turned to the production of the product, the implementation of which should bring money to the state treasury, nevertheless, this transition was accompanied by a sharp a change in the main subject of analysis in economic theory, although old questions were not left without attention. The main subject of analysis was the production process and production relations in society. And the goal of the research was recipes for maximizing production volumes and maximizing the real wealth of society.
In the course of the marginal revolution, the subject of analysis of economic theory changed again. Economics turned to the individual and began to consider the formation of his consumer choice, as well as economic relations between individuals. Further development of the marginal direction of economic theory led to the emergence of the neoclassical school, which began to study economic relations between large groups of people, incl. regular market relations. But at the same time, the neoclassical school continued to worry about the issues of consumption and production, where it turned to the problems of optimizing the choice of the consumer and the producer.
General economic theory is the methodological basis of all economic sciences and has its own subject of research and object of analysis. In modern economic science there is no clear definition of the subject of general economic theory. Therefore, you can give several definitions of it:
1. Economic theory deals with the analysis of markets and pricing.
2. Economic theory studies the economic relations that arise in various economic systems.
3. Economic theory is a universal science about the economic behavior of a person, in particular, about the formation of his rational consumer or production choice with limited resources.
4. Economic theory is a science that studies the processes and possibilities of growth of the material part of human civilization.
5. Economic theory is the science of the creation and distribution of wealth in society, which also considers the issues of optimizing production and distribution.
Based on the subject of economic theory described here, we can talk about the main problems studied by economic theory. Moreover, we note that at present, economic theory is divided into microeconomics, which considers the behavior of individual subjects, and macroeconomics, which considers the economy as a whole. Each of these sciences studies its own range of issues in each of the areas studied by economic theory. When it comes to market analysis and pricing, the following issues stand out:
1. Formation of supply and demand in the markets for certain goods. (microeconomics)
2. Determination of the scale of aggregate demand and aggregate supply in the economy. (macroeconomics)
3. Determining the equilibrium state of the markets and the mechanism that brings the markets into equilibrium. (microeconomics)
4. Determination of the global equilibrium state of the economy, including the determination of the proportions of production (microeconomics) and the scale of production (macroeconomics).
At the lowest level of abstraction and aggregation, economic theory studies the economic behavior of an individual, i.e. mechanisms of formation of economic decisions by him. At about the same level there is such an object of research as a firm, i.e. a separate enterprise that manufactures any goods for sale. At a higher level of abstraction, economics considers the markets for individual goods and services. In particular, she is interested in the mechanisms of market functioning and the effectiveness of these mechanisms. And finally, at the level of maximum abstraction and aggregation, the economy is considered as a whole: the relationship between the economy and the state, the interaction of the real sector of the economy and the financial sector is investigated.
The systems approach is not included in the list of basic basic methods of economic theory, however, the methods of systems analysis are quite applicable to economics; moreover, the theory of complex systems was developed counting on systems that may include social, including economic, elements. Since the systems approach involves the analysis of some systems, you need to understand what an economic system is.
Any system, first of all, is a collection of its elements. In the economic system, the basic element is the individual with his property, rights, obligations, expectations and needs. Note that people most often unite in some groups in which personal interests are fully or partially subordinated to group interests, such groups are, for example, families, collectives, communities, trade unions, public associations. But, as noted earlier, people can enter into economic relations not directly, but through the mediation of other subjects. These subjects can be not only various physical intermediaries, but also such "fictitious" persons as enterprises and organizations (legal entities). They are also the basic elements of the economic system, since they have their own goals, interests and means, i.e. have sufficient independence.
In addition to the elements of the economic system, the connections between these elements should also be considered. But it must be said that these connections are too numerous and varied to be able to take into account all of them. First of all, between the elements of the economic system of communication (one might say, interaction) arise as soon as they enter into economic relations. It is easy to guess that since economic relations are most often spontaneous and short-term in nature, then most of the connections in the economic system turn out to be spontaneous and short-term. The number of long-term relationships in economic systems is less significant, but these relationships are more important for understanding the development of systems. These links arise when economic actors have long-term obligations, and are one of the causes of inertia in economic systems.
METHOD OF GENERAL ECONOMIC THEORY
Economics, as expected, has its own paradigm. A paradigm is a strictly scientific (basic) theory, embodied in a system of concepts that express the essential features of reality, as well as scientific achievements recognized by the entire scientific community, giving this community a model for posing problems and solving them during a certain historical period, and axioms should also be included in the paradigm , on the basis of which the entire scientific theory is built.
If in the natural sciences the paradigm changes extremely rarely, and evolutionary changes usually occur, then in the social sciences any change in the dominant school leads to revolutionary changes in the paradigm. At the same time, as a rule, the new school at the initial stage completely rejects the old paradigm, and then the two paradigms are combined and a fundamentally new paradigm is synthesized on their basis.
In the history of economics, there has also been a repeated paradigm shift. Moreover, it is possible to talk about the existing paradigm only starting with the classical school of economic theory, because before that, economic theory did not exist, and therefore, the basic principles were not singled out. The paradigm of classical political economy can be briefly described as follows:
1. The subject of political economy is the study of ways to increase the wealth of nations.
2. Wealth is the aggregate of goods produced.
3. Wealth is created exclusively by labor. The amount of labor expended is a measure of value.
4. Each individual strives for his own benefit, which is understood as the maximum profit. The striving for the profit of everyone due to the action of the "invisible hand" leads to social benefit, ie. the growth of the wealth of the nation.
5. Say's law operates not only at the macro level, but also at the micro level.
6. Distribution is based on the iron law of wages.
Marginalists have completely changed the paradigm of economics. First of all, they abandoned the understanding of economic science as a science of national economics and public finance, and proclaimed their goal to study the economic behavior of a person. There was a rejection of the labor theory of value, which was replaced by the theory of utility. Say's Law has been challenged, but only at the micro level. The transition to the neoclassical economic school was accompanied by the addition of the paradigm of marginalism with general provisions that allowed the neoclassicists to use some of the methods and achievements of political economy. The Keynesian revolution was accompanied by the rejection of Say's law, the expansion of the functions of money, and the recognition of the disequilibrium of markets at the global level.
The basic conceptual apparatus of economic theory includes the following categories:
1. Consumer (economic person), which is understood as a rational subject striving to maximize the satisfaction of needs.
2. The firm, i.e. an abstract manufacturer of goods and services seeking to maximize profits.
3. The market, not only as a place for the exchange of goods, but rather as an economic structure that brings the seller and the buyer together, ensures equality of supply and demand, forms the price of goods and provides all economic entities with information.
4. Competition, i.e. a struggle between sellers for the right to sell a product and a struggle between buyers for the right to purchase it.
5. The state (public authorities) that enters into legislation, issues money, provides public goods.
6. Money, as an equivalent of value, as monetary assets issued by the state, as everything that performs the functions of money.
Basic economic laws.
1. The consumer behaves rationally.
2. The consumer is subjective.
3. An objective assessment of the value is the market price.
4. Consumer behavior in general is objective.
5. All firms maximize their profits.
6. All participants in market relations are free in their behavior.
7. All markets come to equilibrium.
8. In general, the economy is competitive.
9. The economy is limited.
In macroeconomic and microeconomic types of analysis, slightly different basic assumptions are made about the behavior of economic agents, in particular, about the availability of all the information they need and the ability to process it. As a rule, in microeconomics, it is believed that economic actors have all the completeness of information and can fully analyze it. In macroeconomics, imperfection of information is possible, at least in the short term.
Economic theory, like any specialized science, has its own system of methods for studying the surrounding world, based on a certain methodology (general system of methods of cognition). Currently, economic science is dominated by a rationalistic methodology, which presupposes the discovery of the objective laws of economic relations and economic development. The rationalistic methodology of economic theory is based on the Positive and Normative methods.
The positive method involves the formulation of knowledge about the economy based on the description and systematization of facts, observations, experience, etc. The positive research method in modern economic science is represented by the following private methods: detection of clear economic relationships, for which more complex methods do not need to be applied. Econometric (economic and statistical) method, i.e. identification of quantitative relationships in the economy using mathematical and statistical tools. With the help of the econometric method, quantitative relationships in the economy are found that cannot be detected during observation. By the historical method, i.e. analysis of economic development in a historical perspective. An experiment.
The normative method involves the construction of a system of economic knowledge based on general concepts and basic laws. The normative method is presented in economic science by methods: Scientific abstraction, i.e. a method that allows you to discard the insignificant aspects of economic phenomena. In the course of abstraction, basic phenomena, phenomena and relationships are discovered, on the basis of which models of the economic system are built, i.e. the method of mathematical modeling is used. In the course of applying the mathematical model, there is a transition from the abstract to the concrete, that is, the explanation of the observed economic phenomena using the model.
One of the basic economic categories is Consumption as consumption carried out by consumers, i.e. individuals acting to meet the needs, families or other groups of individuals. Moreover, there is no single definition for what is consumption. The productive consumption of goods is considered separately and is considered not consumption, but the use of resources in production. Non-productive consumption by persons other than consumers also does not fall under the category of "consumption" and is considered separately, for example, the purchase of food by the state to create state reserves or by a public organization to help starving people or animals is not consumption. Below are the correct definitions of Consumption, which is related to Demand.
1. Consumption is synonymous with the purchase of goods and services by consumers. It is in this sense that consumption is always viewed in macroeconomics.
2. Consumption is the satisfaction of consumers with their needs with the help of purchased goods and services.
3. Consumption is a conscious rational process of satisfying needs, carried out with the help of public goods, resources and goods belonging to the consumer, as well as the acquisition of new goods and services.
Need is an internal state of a conscious psychological or functional sensation of inadequacy of something. Moreover, awareness of sensation is important for the economy. Needs exist both for the individual and for various groups of people, as well as for society as a whole. But economic science proceeds from the selfishness of consumers and assumes the satisfaction of social needs, through the political mechanism and the state, as well as, in areas where the state does not act, through public associations.
The theory of consumer behavior considers the individual needs of a person. But a person has many needs of a very different plan. How do all these needs complement each other, whether they compete with each other or peacefully coexist. There are two opposite views on this issue: First, all human needs are equal to each other and a person simultaneously takes into account all of them when making consumer decisions. Second, needs fall into several groups, based on their importance to a person; when making decisions, a person takes into account only the most significant of those needs that have not yet been satisfied. Within each group, the needs are equal. In neoclassical economic theory, the equality of needs is usually assumed, but in marketing theory, needs are grouped. And this is a more correct approach, since the consumer often makes his choice quite spontaneously, in the face of a lack of time to analyze all his current and potential needs. In the latter case, a hierarchy of needs arises. There are several options for the hierarchy of needs, more or less detailed. The five-level hierarchy of needs proposed by A. Maslow is well-developed, fairly detailed and widely known.
Diversity of needs creates a wide range of diverse problems of consumer choice, which the consumer can solve all together, but often solves them separately, traditional for the theory of consumer choice is the problem of choosing a set of goods in the best way that satisfies current needs (mainly needs physiological plan) with a fixed budget. An example of such a consumer choice problem is the problem of choosing the optimal set of products purchased in a store for the amount of money that is in the consumer's wallet. It is easy to guess that this type of consumer choice determines the demand in the markets for non-durable goods and services. The second most important choice is to divide your time between work and play. Moreover, it should be noted that this choice is quite autonomous. This kind of consumer choice is set by the labor market offers. Economically important consumer choices generate different security needs. In particular, the need to secure future incomes generates a consumer choice between current consumption and savings. Another choice for satisfying the need for security is the classic choice: insurance or saving money, which can either become a reserve or can be spent on current consumption. And finally, the desire to own property, not to depend on other people and to have prestigious things gives rise to the consumer's choice between consumer credit or refusal from it. This choice is not entirely autonomous, since it is associated with several other choices, in particular, the choice in relation to saving, i.e. if a consumer has liquid savings, then he does not need consumer credit, thus, in economics, a whole system of consumer choice problems arises, the methods of solving which are similar in fundamentals, but differ significantly in details.
The basic laws on which the theory of consumer choice is based, in which the consumer is considered rational, which implies his ability to assess needs, compare sets of goods and services, and rationality of choice means the stability of this choice, i.e. a consumer who repeatedly finds himself in a completely identical situation must choose the same set of goods as the first time.
1. All goods and services sold in the consumer market satisfy some need.
2. Each need is satisfied by at least one product, service, resource or public good (a free service provided by the state).
3. There may be many goods and services that satisfy the same need.
4. The consumption of individual goods and services can not only lead to the satisfaction of individual needs, but also create other needs.
5. It is impossible to achieve complete customer satisfaction.
6. Each act of consumption reduces unmet needs and the overall level of consumer dissatisfaction.
7. As individual needs are satisfied, the measure of consumer dissatisfaction decreases, but more and more slowly.
8. With the possibility of partial satisfaction of the need, the remaining part of the need becomes less significant.
9. Each new unit of goods consumed brings less satisfaction.
10. The consumer evaluates all his needs as a single set of needs and selects for this set of needs a single set of goods and services that will best satisfy him.
If the consumer is able to measure his needs and is able to understand to what extent the goods satisfy his needs, then he, accordingly, is able to understand how great his satisfaction will be from the consumption of each unit of each good, thus, in economic theory, in fact it is believed that the consumer is able to measure his satisfaction from the consumption of goods. Moreover, it is believed that the consumer measures his satisfaction not only for individual goods, but also for their sets, since satisfaction from a set of goods is not equal to the sum of satisfaction from individual goods.
In this regard, the concept of utility should be used, which is understood as the measure of consumer satisfaction from the consumption of goods. Mathematically, utility is a real function of a large number of variables, which are the amounts of goods consumed. The existence of the utility function makes it possible to assert that the consumer is able to assess his satisfaction from each good, is able to determine how much his satisfaction will increase if he receives an additional unit of any of the goods.
A person is not able to give an accurate numerical assessment of his satisfaction, but at the same time he can compare the sets of goods, thus, the utility of goods exists, but it is not quantitative, but ordinal, that is, a consumer can say whether one good is more useful than another, but cannot say how much, such a mechanism better describes the consumer choice of an individual consumer, when a multitude of consumers is considered, the ability to measure satisfaction becomes unimportant, only consumer choice is important, but it turns out to be objective.
Let us consider how the consumer chooses the optimal set of goods from his point of view. Moreover, for all the goods included in the set, their quantity should be determined, which the consumer considers optimal for himself. To simplify the situation, let us define that the consumption of goods occurs at the same moment when they are purchased.
To begin with, let us consider an extremely simplified problem, when the consumer acquires only one good and has the ability to choose only the amount of this good. In this situation, the consumer is faced with a choice between money and the considered good. And since money is a potential good, it has some kind of utility for the consumer. Let the consumer decide whether or not to buy one unit of the good. If the utility of this unit turns out to be greater than the utility of the money that needs to be paid for it, then the consumer will buy it, now he must decide whether he needs another unit of the good. To do this, he will again compare the utility of the second unit of good with the utility of the sum of money. But, if the utility of the sum of money we can consider unchanged, then the utility of the second unit of good will necessarily be less than the utility of the first.
Continuing this line of reasoning, we can come to the conclusion that in order for the consumer to buy the nth unit of the good, the utility of this unit must be greater than the utility of the money spent on it, and for the consumer to buy exactly n units of the good it is necessary that the utility of n + 1-th unit is less than the utility of its price. If the good is divided into small units, then it turns out that the utility of the last acquired unit of the good coincides with the utility of the money spent on it. In this case, the utility of all other units turns out to be higher than the utility of the last unit, which means that the total utility of the purchased good is always higher than the utility of the money spent on it, thus there is a consumer surplus. The utility of the last unit purchased is called marginal utility. This consideration demonstrates the basic principle of consumer choice: Equality of the marginal utilities of the good and the funds spent on its purchase.
Now let's move on to considering the issue of consumer choice from a large set of goods, when a set of goods is selected that will fully satisfy the needs of the consumer. We consider only the current needs of the consumer, but the consumer, with some modifications, applies this method of choice in any tasks of consumer choice. It is important to note that when it comes to the full satisfaction of needs, money ceases to have its own value, since there are no needs left to satisfy them, so it will be impossible to compare the utility of goods with the potential utility of money.
When a consumer makes his global choice, he is faced with many restrictions. First, he cannot consume a negative amount of goods, i.e. cannot be the manufacturer. Secondly, when making current consumer decisions, the consumer is faced with a limited amount of funds that he can spend on consumption. This restriction is called the budget restriction. Due to the limited choice in solving the problem of optimizing consumer choice, the consumer must decide which of his needs he will have to give up. And this decision will also depend on the complexity of meeting the needs.
In the modern economy, the consumer has the widest choice of goods; comparing all these benefits to each other would be an overwhelming task for the consumer. But the consumer does not need to compare all the goods. The goods are divided into homogeneous groups, and all goods from one group will satisfy the same need. Consequently, benefits from one group will be substitutes (substitutes) for each other. And the consumer is first determined with which of the substitute goods he will choose to satisfy his needs, and only then he will make a decision on the distribution of the money he has between these goods.
Some goods are additional (complementary) in relation to other goods, thus, the consumer's task becomes quite simple: he needs to choose goods to satisfy his needs, choose complementary goods to them, add the cost of complementary goods to the cost of basic and then allocate resources.
Since the Consumer must use all the money for consumption, he has to choose only that set of goods, the value of which is equal to the amount of money he has, and not less, as it was in the case of one good.
The mechanism of consumer choice in this case can be described as follows: the consumer starts with a set of goods that has the value he needs. Then he makes a decision as to which benefits in this set to refuse, and the share of which to increase. Suppose that the consumer decided to abandon good A. If there were only one good, then the last unit of this good is less valuable than money. But in the case of many goods, the consumer compares the usefulness of different goods. In our case, the utility of the last unit of good A turns out to be less than the utility of additional units of other goods. Most likely, the consumer will direct the money saved by partially rejecting good A for the good (denote it B), which will bring him the greatest utility in terms of one monetary unit. Replacing good A for good B is possible until the utility of the last unit of good A becomes equal to the utility of good B acquired by abandoning the unit of good A.
Let us consider the option of how the consumer makes his choice, who cannot measure the value of the marginal utility of the good. Since this consumer can determine the equivalence of two sets of goods in terms of utility, he can say how many units of good B need to be given to him to compensate for the abandonment of one unit of good A, provided that the total utility of consumption is preserved. Therefore, the criterion of optimal consumer choice is as follows: "The choice of the consumer is optimal if for any two goods the marginal rate of replacement of the first good for the second is equal to the ratio of the price of the first good and the price of the second good."
Being free in his choice, the consumer will choose the only set of goods in which the ratio of prices and marginal utilities is the same for all goods. However, the problem of consumer choice is not always solved so easily. And now we will discuss some cases in which the choice of the consumer is difficult or ambiguous, even if he is trying to behave rationally.
The first case to stop at is the limited amount of goods that can be purchased. This limitation may arise due to the general rarity of the good or due to the presence of a "rationing" distribution system. In both of these cases, some consumers will not be able to receive the desired amount of the good and will be limited to the maximum available amount, redistributing their money for the consumption of other goods, so that for these goods the ratio of marginal utilities and prices would be the same for all remaining goods.
The next reason for the impossibility of obtaining an optimal set of goods is their indivisibility, ie. the inability to buy a fraction of the good. In this case, the consumer is forced to either under-consume the goods, or over-consume them. At the same time, he may receive much less satisfaction, will be faced with a more difficult task of choice and in some cases will be unable to make his choice rationally, since several sets of goods are of equal utility.
Another reason that can cause the impossibility of rational choice is the volatility of prices for goods. For example, traditionally retail prices are lower than small wholesalers, and those, in turn, are lower than in large wholesalers. Due to the volatility of prices, a situation may arise that several sets of goods at once have the same utility, and in some, some goods will be purchased at wholesale prices, and in others at retail prices.
So, consumer choice depends on the subjective preferences of the consumer and on the objective prices of goods. The prices of goods and their changes are easily observable. Therefore, a theoretical problem arises about the relationship between the prices of goods and consumer choice. But this task also has practical significance.
Suppose that the consumer has chosen a set of goods and the price ratio for the goods he buys has changed, but the cost of the set has not changed. However, the set has ceased to be optimal, and the consumer will have to choose a different set of goods. Moreover, if the price of good A in relation to the prices of other goods has increased, then the marginal utility of this good in the new set must also increase in order to maintain the ratio of price and marginal utility of good A, which was derived above. And since the marginal utility increases with a decrease in consumption, the relative increase in the price of one of the goods will necessarily lead to a decrease in the consumption of this good. This effect is called the swap effect.
But when the prices of goods change, the value of the set of goods changes. This set either becomes unavailable to the consumer at a price, or its price becomes less than income (as if the income had increased). Changes in consumer behavior when the prices of goods change, not associated with changes in the relative prices of goods, is called the income effect. Note that the effect of income can be different in direction: for some goods, the effect of income with an increase in price will be positive for some, negative. Let's consider what happens when income changes in more detail and this will help us understand why the income effect can be multidirectional.
Due to the fact that some needs are met earlier than others; and there are benefits that replace each other; with a low income, the consumer seeks to satisfy basic needs, so he buys goods that satisfy only these needs. And with an increase in income, he can satisfy his needs, which are at a higher level. As a rule, goods that satisfy the needs of a higher order are more expensive, but they seem to be of higher quality from the point of view of the consumer, thus, the consumption of quality goods grows with an increase in income, and low-quality goods, respectively, decreases. Hence, for quality goods, the income effect will be negative with an increase in price, and with a decrease, it will be positive; and for goods of poor quality, on the contrary.
From the considered general problem of consumer choice, one should move on to particular cases of consumer choice, where the problem of intertemporal preferences of the consumer and his choice between current consumption and saving is especially important for the economy. Simplifying the problem of intertemporal choice, we restrict ourselves to analyzing the situation of choosing between two periods of time. Suppose that both we and the consumer himself know his total income in these two periods, and we ask ourselves how he will distribute this income between the two periods. In fact, the problem of intertemporal choice is much more complicated and the consumer makes his choice in the face of critical uncertainty of income and expenses in many future periods.
Suppose that the prices of goods in both periods are the same and the consumer knows that the composition and quality of goods will not change. In this case, the choice problems for the consumer in the two periods are identical and the consumer must choose the same sets of goods in both periods. But actually it is not. Most people psychologically prefer consumption in the current period to consumption in the future, thus, it turns out that consumers' future and current consumption are unequal, one brings more satisfaction, and the other less. The consumer refuses what brings him less utility, increasing the volume of current consumption. But some consumers will do exactly the opposite, reducing their current consumption for the sake of the future.
Consumer preferences between current and future consumption are called intertemporal preferences. In the situation described above, we observe pure intertemporal preferences, but in the real economy they cannot be observed, since there will be more borrowers in the credit market than lenders. The consequence of this imbalance will be the emergence of an interest rate that will shift the intertemporal preferences of consumers. The existence of the interest rate in our example means that part of the consumer's income from the first period will bring additional income in the second period. This means that the amount of money set aside in the first period has a greater value than the same amount spent on consumption, because of this, a person becomes a creditor, despite the fact that he prefers current consumption.
Due to the fact that saving is associated with intertemporal preferences of consumers, which are influenced by the interest rate, factors should be considered as additional modifiers of intertemporal preferences. The very first factor influencing savings is the distribution of consumer income over time. Note that earlier we did not talk about when the income comes to the consumer, but focused on the differences in the volume and utility of consumption. Once we get to the analysis of savings, it turns out that the timing of income is critical. If the consumer receives income in the first period, then the amount of his savings is equal to half of this income.
Note that the consumer reliably knows his current income, and only estimates future income, or, as they say, the consumer has expectations of future income based on personal experience and information available to the consumer. Let's pay attention to the fact that expectations are a changeable thing. Expectations are strongly linked to both the personal plans and perspectives of the consumer, as well as the perspectives of the entire society and economy. And changes in expectations, under which there may not be any other basis than vague premonitions (after all, expectations do not have to be rational from the point of view of an external observer), can increase savings by about half of the expected decrease in consumer income. In addition to income, the ratio of consumption and savings is influenced by such parameters as changes in the prices of consumed goods, changes in the range of these goods, changes in the consumer qualities of goods, as well as changes in consumer needs for these goods. But, as in the case of future income, a person does not know, but only assumes future changes in all these values, which means a strong relationship between savings and expectations. Massive changes in this feeling, and the associated changes in expectations, can dramatically alter the consumption-saving relationship across the economy. For example, the economic crisis often forces the consumer to lower their income expectations, lower expectations of price increases. All this can dramatically increase savings, deepening the economic crisis and provoking the development of the so-called economic cycle.
The theory of consumer behavior boils down to the fact that the consumer makes a rational choice based on the usefulness of the good and its price. But it is clear that there are many exceptions to this law. The main situations in which consumer behavior deviates from theory:
1. Lack of information about benefits. Making decisions in conditions of insufficient information on the qualities of the goods, the consumer can give both overestimated estimates of its usefulness, and underestimates. In fact, uncertainty and risk arising from the lack of information become an additional factor influencing consumer choice, without which it is impossible to see the rationality of choice.
2. Unequal planning horizon. Different people plan their actions in different ways, some consider the long-term consequences of their actions, others do not. And some benefits are able to bring satisfaction to consumers for a short time, others - for a long time, and still others, in general, over time begin to cause harm. Therefore, it turns out that from the point of view of a person accustomed to taking into account long-term effects, the behavior of someone who prefers short-term benefits looks irrational.
3. Multiple prices. Often the consumer does not have complete information about the prices of goods or does not remember this information, so the choice is made based on what he sees from his favorite seller.
4. The irrationality of the actual selection procedure, i.e. the consumer does not compare the prices and utility of goods with each other, but acts on some other basis. We will talk about the types of irrational consumer behavior below.
The situation of routine choice of goods belongs to the irrational behavior of the consumer; choice of goods out of habit, without thinking about changing the prices of goods. The conservatism of consumer behavior should not be confused with routine choice, which means the desire (including the unconscious one) to acquire goods that have long been known to the consumer. Conservatism of behavior is explained by the fear of everything new, the fear of negative changes, etc. The flip side of conservatism is unreasonable innovation in consumption, when the consumer seeks to acquire any new good that appears on the market. Often, the consumer does not even think about buying goods, acquiring them under the influence of a momentary desire, whim or whim ...
Often human behavior is based on the herd instinct, which some people follow and others resist. As a result, the following two effects appear:
The effect of joining the majority is the acquisition of a certain product only for the reason that other people acquire it. This effect manifests itself, for example, in the form of hobbies for fashion trends, especially among young people. As a result, this effect creates a short-term fashion for the product and an unreasonable increase in prices for it. The effect of joining the majority is manifested not only in the form of following fashion. It can be one of the foundations of the routine acquisition of goods according to the principle: "I buy what my friends, my acquaintances or all people do."
The snob effect is the refusal to purchase those goods that are purchased by others, or rather the majority. The snob tries to stand out among, as he believes, the gray mass, but at the same time behaves irrationally. On the other hand, snobbery is a very easy way to attract attention, so snobbery can be rational if the snob seeks to satisfy the need for recognition in this way.
A kind of synthesis of the two effects described above is the Veblen Effect - the acquisition of those goods that are not available to most, prestigious goods, etc. In this case, the consumer is trying to show his belonging to a higher society and to distance himself from the lower classes. All these effects act on a subconscious level rather than a conscious one, therefore their manifestation is contrary to economic theory. This is especially true of the Veblen effect.
We have to admit that if consumers made decisions about the purchase of goods completely rationally, then there would be no such sphere of activity as advertising; for it would be replaced by the simple dissemination of information to consumers. But in the real world, advertising exists. Let's see what types of advertising exist and how these types are effective.
1. Information advertising, i.e. advertising that should simply inform the consumer about a product or service, its quality and price. Another common promotion option is the manufacturer's various advice to consumers of his goods. For example, a car manufacturer can recommend certain grades of oil, fuel, rubber, etc. to its consumer. The consumer is forced to trust this information and attach more importance to it than information from other sources. Therefore, he is likely to lean towards the choice imposed on him. Information advertising makes the consumer's choice even more irrational, since it constantly informs the consumer about one of the benefits.
2. Reminiscent advertising. An analogue of informational advertising, but for benefits that the consumer already knows about. Reminiscent advertising is aimed at ensuring that the consumer does not forget about the good and take into account its characteristics when making decisions.
3. Incentive advertising, i.e. advertising that seeks to entice the consumer to make a purchase. First of all, this is an advertisement that seeks to induce an unconscious desire in the consumer to buy a product.
4. Image advertising, i.e. advertising trying to give and preserve some kind of image for the product, for example, to show the orientation of the product to young people or to show its elitism. This ad is focused on the joining the majority effect, or the Veblen effect.
5. Misleading and misleading advertising (anti-advertising). This type of advertising is aimed at creating a negative image of certain products or entire groups of products for the consumer, and stimulating consumer conservatism.
The process of making goods is defined as production. Modern production (as a whole) is the process of human influence on the substance of nature (object of labor) with the help of tools in order to create goods that satisfy the needs of individual consumers and society as a whole.
It is precisely the trinity of the substance of nature, human labor and instruments of labor that is important in production. Modern manufacturing is impossible without any of these components. Production as a whole (social production) is a complex self-reproducing, self-regulating and developing system aimed at meeting needs. At the same time, signals about the appearance or change of the needs of society enter the production system either through the market mechanism or through the state. Self-reproduction of the system of social production means that this system not only produces goods that are consumed by society, but also reproduces everything that is needed for production: it produces tools of labor that replace those that wear out and become obsolete, prepares qualified labor force, discovers new sources of natural resources, increases soil fertility, etc.
In the system of social production, material production is distinguished, which creates material goods and provides related services, and non-material production. All resources used in production are limited, i.e. the amount of resources available in the economy is insufficient to meet all the existing needs of individual consumers and society. Therefore, the problem arises of distributing resources between individual types of production. Historically, production has existed in various forms. If we take the level of development of productive forces as signs of classification, then we can distinguish:
1. Pre-industrial production, dominated by agriculture and handicraft industries.
2. Early industrial production.
3. Industrial production dominated by the mechanized production of material goods.
4. Post-industrial production, in which the service sector plays an increasing role.
Depending on what structure of society is formed on the basis of the production system, one can distinguish: primitive production, slave-owning, feudal, capitalist, socialist.
Let us consider what the main parameters depend on the volume of production, for this, we will give a definition of the factor of production. Factors of production are especially important elements and objects that have a decisive impact on the possibility and result of production. Each type of production has its own set of factors, therefore, a classification and grouping of factors of production is necessary.
In modern economic science there is a classification of factors of production, which is of a class nature and based on the class structure of society at the end of the 19th century. The main factors of production are recognized as: land (belonging to the class of landowners), capital (class of rentier), entrepreneurial activity (class of entrepreneurs) and labor (supplied by the class of hired workers), such a classification of factors of production and the assumption of the class structure of society make it easy to justify the existence of hired labor and bypass the question of the existence of exploitation of employees.
Under the land, as a factor of production, it is understood:
1, territory for production location;
2. fertile land that can be used for agriculture;
3. all the gifts of nature that are on earth and in the earth.
Capital, as a factor of production, is understood not as financial capital, but as real capital, i.e. production facilities, retail space, offices, technologies, rights and patents, stocks of goods and raw materials. In the production process, capital is constantly spent: equipment wears out, buildings age, raw materials turn into a product ... Therefore, capital must be constantly replenished in the course of production, and entire sectors of the economy work to replenish the losses of real capital.
Labor, if considered as a factor of production, represents the time that workers spend in production, i.e. the time for which the manufacturer rents labor.
Entrepreneurial activity is a specific factor of production, which presupposes the use of initiative, ingenuity, organizational skills, the entrepreneur's willingness to take risks and his willingness to take responsibility for the results of his activities.
Production is possible only in the presence of all factors of production, and in this sense, all factors are equal. However, two production factors are passive matter, and the other two are active human activity. It immediately follows from this that the factors of production are unequal.
A person who wants to produce something must pay for the right to use other production factors, and at the same time must agree to the price that will be demanded of him, thus, it turns out that the owners of material factors of production receive unearned income, and hence, they exploit workers, as landowners and rentiers of the 17th-19th centuries led a parasitic lifestyle, simply receiving rent from their property. The presence of entire classes in society, leading an unproductive lifestyle, reduces the productive potential of society and must be suppressed by society. However, 20th century economic theory denies the existence of labor exploitation. It assumes that workers voluntarily agree to pay a specified price for the factors of production. And if they do not agree to pay this price, then they could have accumulated in the past the funds necessary to buy land, raw materials, tools, etc.
This approach quite well describes the current situation, when capital is accumulated and spent during the life of one generation, and labor income is enough to create a small start-up capital. But if labor income is sufficient only to satisfy physiological needs, and the workers are forced to work by banal hunger, then there is no question of any voluntary consent to the price of material production factors, just as there is no talk of the possibility of independently accumulating start-up capital, thus, in In a limited time frame, the exploitation of labor by the owners of land and capital is possible, as, for example, it was in the era of the initial accumulation of capital, when a narrow group of individuals monopolized the right to own land and almost completely controlled capital.
To carry out production activities, all factors of production are necessary, in the absence of at least one of the factors, production becomes impossible. However, if all factors of production are available, then one factor can (within certain limits) be replaced by another, that is, you can use slightly different production technologies, reducing the use of some factors and increasing the use of others. The interchangeability of factors of production is explained by the flexibility of modern technology, and the practical use of interchangeability is caused by the limited resources, more precisely, by changes in the degree of limitedness.
Entrepreneurs are constantly striving to reduce the use of the most scarce factors of production, replacing them with less scarce ones, which should lead to lower costs. Using some factors, entrepreneurs can neither increase nor decrease. These factors of production are called constant (fixed), all others are called variables. To reduce costs and at the same time increase profits, entrepreneurs change the scale of the use of variable factors of production. At the same time, a rational entrepreneur must choose such a combination of factors that the marginal productivity of each factor was equal to its price. But the marginal productivity of factors of production does not say how profitable the production is for its owner and the economy as a whole. By the limiting characteristics, nothing can be said about the efficiency of production as a whole.
For the analysis of efficiency, the average values of the productivity of factors of production and profitability are used. As a measure of efficiency, the indicators of Average productivity and Profitability are taken, but production efficiency can be understood not only the existence of the effect of production, but also the maximum of this effect, that is, production can be considered efficient if the product is produced with the lowest possible costs with the current development of technology. Capitalist production is almost always efficient in a broad sense. Production always strives for maximum efficiency, but it never achieves it.
The above law of optimality of the choice of a manufacturer is applicable only in the short term and only for an individual firm. Globally, a change in the consumption of resources by production leads to a change in the prices of resources and products. Therefore, to determine global efficiency and to optimize production globally, a global criterion is needed that will compare social production and consumption in society. First, production must use all the resources available in the economy. Therefore, the choice of production will not depend on the amount of resources available in the economy, but the scale of production will depend on the available resources, i.e. many possible production plans. Second, it can be assumed that the economy produces any set of goods at the lowest cost. As a result of the full and efficient use of resources, only those combinations of goods will be produced that will lie on the border of the set of all possible combinations of goods for production. If only two benefits can be produced, then in the case of full and efficient use of resources, a set of benefits will be produced that lies on the curve of production possibilities (the graph is not published, but is available on the Internet).
The production possibilities curve displays all the possible sets of two goods that can be produced with the full use of all available resources. The curve of production possibilities shows how much good 2 can be produced with the full expenditure of all resources, efficient production and a fixed amount of produced good 1.
So, production choices are made on the production possibilities curve. But which point on this curve should be chosen? Theoretically, a point should be chosen at which the utility of a set of goods is maximized; graphically, this is the point of tangency of the production possibilities curve and the line of the level of the utility function. If there is only one consumer in the economy, this will be so, but in the case of a plurality of consumers, there is no mechanism to build a utility function for society.
The relationship between the output and the consumed volumes of factors is traditionally described by the production function. The production function shows the maximum possible output in physical terms, depending on the volume of use of production factors, which also have natural expression. For example, the production function shows the output of, say, bricks in pieces, depending on the labor used in man-hours, fuel for baking bricks in tons, and production capital (in monetary terms, but on a cost basis).
A production function can be built for an individual enterprise, for an industry or for the economy as a whole. If a production function is built for an enterprise, then it reflects the production technologies that this enterprise is capable of using for production at the current time. In the case of an industry production function, it is reflected in the range of technologies that exist in the industry. And finally, in the general economic production function, which links the social product in value terms and the cost of resources, the whole variety of technologies in society is reflected.
The production function can be built both for very short periods of time and for longer ones. In the latter case, the production function will reflect not only the currently available technologies, but also those technologies that can be switched to when the scale (restructuring) of production changes.
The production function does not remain constant over time. As mentioned above, it is able to adapt to the required scale of production, and in addition, the production function changes with the development of technology. This increases the productivity of all factors of production, but, as a rule, to varying degrees. And first of all, the productivity of the most scarce factors is growing.
The production function for a separate enterprise, as a rule, is not built. Instead, technological ratios are used for different technologies. Based on these ratios, the currently optimal technology and production volume are determined. But in a posteriori analysis of production, the construction of a production function on the basis of statistical data turns out to be very useful.
Already on the basis of the constructed production function, it is possible to estimate the average and marginal productivity of production factors. As with the utility function, level lines are drawn in the graphical analysis of the production function. These lines are called isoquants.
At each level of total production costs, it is possible to determine the optimal combination of resources and the corresponding optimal production volume. As a result, there will be a relationship between optimal costs and optimal output. What happens to the output if the production costs are increased by exactly k times: will the output increase by exactly the same number of times, or will it increase less.
Here it is necessary to move on to a historical analysis of the situation in the economy. It is easy to understand, studying the history of the economy, that the optimal method of production for very small volumes of output is handicraft production, and for larger ones, factory production. But factory production as a whole is more efficient than artisanal production, therefore, when switching to factory production, an increase in costs by a factor of k leads to a stronger increase in output, that is, with a small scale of production, economies of scale will be positive (economies of scale).
At a certain point, an increase in the scale of production ceases to bear fruit. A giant enterprise is becoming less efficient than a smaller enterprise, technologically this is associated with an increase in management costs, transportation of raw materials, energy and products, as well as with limitations on human and environmental resources. There are also internal economic reasons that impede the growth of enterprises. This means that with a very large scale of production, the scale effect becomes negative.
Statistical studies of the relationship between production and resource costs, as a rule, do not reveal economies of scale. Therefore, in theoretical economic studies, production functions are most often taken that imply the absence of economies of scale of production, but also the absence of an increase in additional costs with an increase in scale. These are production functions with a degree of homogeneity of 1.
It was indicated above that for the implementation of production it is necessary to combine all the required factors of production, but it was hardly said about who and how should implement the combination of factors of production, who and how uses its result, etc. it was indicated in what (organizational) forms the production is carried out, which is very important for the real economy.
Historically, the first mode of production was the combination of all factors of production in the hands of a direct producer. But such production could only be handicraft, not involving the division of labor and complex technologies. Several private producers could form a partnership, but they immediately face the problem of a fair distribution of income. This is due to the fact that it is difficult for the participants of the partnership to assess the labor and property contribution of each other to the result of common production.
The further development of society followed the path of separating production factors from the direct producer. First of all, there was an alienation of land, and then of production capital. As a result, a situation has arisen where labor resources belong to one person, capital to another, and land to a third. In this situation, someone must take the initiative and combine all the factors of production together, such a person turns out to be an entrepreneur who acts as a buyer of resources and is the owner of the resulting product. The entrepreneur does not have the problem of distributing the product between the owners of the resources, since he pays each of the sellers of the resource its market (or contractual) price; and the rest of the income received from the sale of the product goes to the entrepreneur.
So, the production is carried out under the guidance of an entrepreneur. That there is an enterprise that is run by an entrepreneur is the totality of all factors of production used by the entrepreneur to produce a product. Enterprises in the economy can be independent from each other, and can be bound by various types of obligations. From the point of view of economic theory, enterprises will be independent if the economic decisions they make are autonomous, for example, enterprises themselves set a price for a product, determine the volume of output and the amount of resources used. From a legal point of view, enterprises are independent if they exist as separate legal entities, belong to different persons, none of them owns more than a quarter of the capital of the other, and these enterprises do not have agreements with each other that limit their economic freedom. An enterprise that is economically independent is called a firm in economic theory.
Market economic relations are based on property rights, the term property has several meanings:
1. At the household level, property most often refers to the property of a person.
2. Legally, when it comes to ownership, we mean a person's right to own something, as well as additional rights and obligations associated with the right of ownership and arising legal relations.
3. Economically, property is the relationship between people about the use of goods and production factors.
The existence of property rights and its respect are part of the social contract, and the protection of property rights is one of the most important functions of the state. Law and legal property relations function effectively in a society where the overwhelming majority of members accept the existence of such a right and agree to respect the property rights of others. And the dissenting minority is forced to respect the property rights of other members of society through the use of criminal law, implemented through the law enforcement system. If none of the parties to economic relations would recognize the property rights of the other party, then voluntary and equal economic relations would be impossible.
Property has several forms. The main forms of ownership are private and common (family, collective, corporate). The ultimate form of common property is public property, which exists in the form of state property. In the case of private property, the property object is wholly owned by one person, and in the case of a common property, by the entire set of people who have rights to it, and decisions regarding this property are made by consensus of the owners' opinions. It is clear that when there are a lot of owners, reaching their consensus is difficult. As a result of the agreement between the owners of the enterprise, corporate property arises when the right to dispose and use the property of the enterprise is transferred into the hands of hired managers.
The form of ownership of most objects can change. The main way to change the form of ownership is to sell an object of ownership, however, for some objects, the form of ownership cannot be changed; for example, this applies to those objects that can only be in state ownership.
Property relations cannot arise by themselves. In order for a thing to become someone's property, it must be appropriated, that is, someone must declare this thing his own, and society must agree with this. The process by which a thing gets an owner is called appropriation. In the course of the appropriation process, the structure of the forms of ownership is formed, which is characteristic of the society in question. Consequently, the structure of forms of ownership in a society is determined by the specifics of the process of appropriation in this society.
The appropriation of the product created in the economy occurs as a result of a rather complex process, including the primary appropriation of production results, as well as the distribution and redistribution of the product. Initially, people appropriated the gifts of nature, which they used for consumption, this type of appropriation still exists and the law of appropriation is as follows: the Good is appropriated by the first who discovered it.
With the development of the producing economy, another law of appropriation arose: the Good is appropriated by its direct producer, and labor is the initial method of appropriation. Moreover, if the economy is natural, then the process of appropriation ends there, and if the economy is a commodity and assumes the presence of a division of labor, then there is a second stage of appropriation - appropriation through exchange.
With the development of the capitalist mode of production, both voluntary and forced separation of the worker from the means of production took place. The figure of an entrepreneur who buys factors of production has entered the economy. Therefore, ownership of the product of someone else's labor arose, where initially the good is appropriated by the entrepreneur, and the further appropriation of the product occurs through commodity exchange, and commodity exchange is the main method of appropriating the goods by the end consumer.
For the sake of simplicity, we will assume that the producer of goods and their original owner is an entrepreneur who possesses only entrepreneurial abilities. The entrepreneur leases all other factors of production. Each period, the entrepreneur pays for the factors of production at the expense of his income.
All factors of production (more precisely, the right to lease them) are sold and bought in special markets for factors of production, therefore they have their own price, which is paid by the entrepreneur at the end of the production cycle, but the price of factors of production is determined at the time of their purchase.
The price of factors of production is determined only by the balance of supply and demand in the markets of factors of production, therefore, prices for factors can be any, including those that do not ensure the reproduction of factors. For example, at some point in time, the interest rate for the use of capital may be lower than the inflation rate; and the wages of wage earners can make them starve. But if the factor of production is not reproduced, then it very quickly becomes scarce and its price rises, therefore, in the longer term, the income of the owners of each of the factors of production ensures their reproduction.
When all production factors are acquired for one production cycle, one factor can be substituted by the manufacturer for another. Therefore, equality of the marginal productivity of factors of production and their prices will be optimal both for an individual producer and for the economy as a whole. At the same time, the performance of factors is not the only criterion that determines the choice of a manufacturer. On the scale of the economy, prices and the ratio of the volumes of factors of production used will also be determined by their scarcity.
Such a specific factor of production as entrepreneurial activity receives remuneration on a residual basis. In terms of productivity, this means that the entrepreneur gets the difference between the average and marginal productivity of other factors.
But in reality, some factors of production are acquired for several periods, i.e. their volumes are fixed. For fixed factors of production, the rule of equality of marginal productivity and price does not apply, since this price is fixed. As a result, some factors appear to be rewarded less than they could; some more.
It has already been said above that there are many forms of ownership: private, collective, public, etc. Many forms of ownership can exist in the economy at the same time; the relationships between these forms of ownership determine how the economic system will be organized. If in the economy there is only private ownership (of factors and means of production), then the economic system that is taking shape in society will be called pure capitalism. Production will be carried out by a huge number of independent small producers. Each of the producers is too weak to dictate their will to other economic actors, so no one has economic power. Only the element of the market directs the behavior of producers, so we can assume that the economic power belongs to the market.
If in the economy, along with private property, there is collective property in a corporate form, then monopoly capitalism will gradually develop in the economy. A distinctive feature of this economic system will be the existence of large corporations that monopolize individual markets and entire sectors of the economy. In the hands of these corporations, economic power is concentrated, and they begin to dictate their will to society.
If in the economy there is only a state form of ownership, then a command economy arises. In this case, there is only one producer - the state monopoly, which dictates prices and production volumes, practically ignoring market signals.
With the simultaneous existence of various forms of ownership - private, collective, state, municipal, etc., a mixed economy arises. Ideally, a mixed economy should combine the positive aspects of the market and command economies, but unfortunately, situations often arise when the market economy penetrates into those areas where the state should work, and the state - into those areas where the market is effective.
To create a production, an entrepreneur acquires production factors: land, production capital, labor, raw materials, etc. Some of these factors are acquired by him at a time, while others - at the beginning of the production cycle. The costs of acquiring production factors, reduced to a certain period, are called production costs, so when we talk about costs, we must remember that costs take into account both the volumes of used production factors and their prices. Costs are necessarily calculated for a certain period, and although the length of the period itself does not affect the value of costs, firstly, it determines the volumes of factors consumed in production, and secondly, it determines the constancy or variability of factors.
In economic theory, there are several types of costs. Depending on the potential variability of factors of production, costs are divided into fixed and variable (labor and raw materials). The main indicators used in the cost analysis are:
1. Gross costs - the total value of production costs for the period;
2. Average costs (per unit of product) - the amount of gross costs divided by the volume of output for the period.
3. Marginal cost - the increment in gross costs with an increase in output per unit.
It is worth noting that fixed costs are taken into account in such indicators as gross costs and average costs, but do not affect the value of marginal costs at all. The entrepreneur, organizing production, expects that this production will bring him income, which will be the payment for the entrepreneurial abilities he uses. Since the entrepreneur's income is formed according to the residual principle, then his income will be the difference between the value of the product and the cost of production. This value is called the entrepreneur's profit. The rational entrepreneur should strive to increase his income. Since the entrepreneur's profit is the difference between the cost of the product and the costs, the entrepreneur has only three ways to increase profits:
1. Product price change;
2. Changing the scale of production;
3. Cost minimization.
Since an entrepreneur can change only variable factors, the minimization of costs is carried out by changing the combination of variable factors of production. Although minimizing costs is not analogous to maximizing entrepreneurial income, minimizing costs is the first step in the process of maximizing profits. Moreover, if the price of the product and the volume of output cannot be changed, then maximizing costs is the only way to increase profits.
Maximization of entrepreneurial income (economic profit) in each period, including the current one, is the main goal of an entrepreneur. Of course, the entrepreneur is simultaneously a consumer, and, in theory, the entrepreneur should maximize the utility of his consumption. But we can assume that decisions regarding the entrepreneur's income are very weakly dependent on his consumer decisions, therefore, profit maximization is considered in economic theory the main goal of the entrepreneur. But it will be shown later that profit is not necessarily the main goal of an entrepreneur.
Since an entrepreneur seeks to increase profits, he will increase production as long as the marginal profit, i.e. profit from the production and sale of an additional unit of the product will be positive; and accordingly, when the marginal profit is negative, the entrepreneur will reduce production. Therefore, the equality of marginal profit to zero is a criterion for the optimal choice of an entrepreneur. But in the case of a constant product price, the criterion can be simplified. Since the price does not depend on the output, the marginal profit will be equal to the difference between the proceeds from the sale of an additional unit of the product and the costs of its production. Note that the equality of marginal costs and the price of the product does not yet guarantee that the entrepreneur will receive a profit and not a loss. For an entrepreneur to make a profit, it is necessary that the manufacturer's total revenue be greater than its total costs. Or, which is the same, the average cost of the producer must be less than the market price of the product.
The shorter the time interval, the fewer types of costs are variable, for example, at very short intervals even labor costs can be considered constant (since the number of employees is constant), only the costs of raw materials are variable. Conversely, the longer the period of time, the more types of costs move from the category of fixed to variables (primarily because the lease term of certain factors of production or the term of their use expires). For example, production equipment wears out and the entrepreneur is forced to make a decision on its replacement or abandonment. But it must be remembered that this transition of costs from constant to variable occurs gradually and always part of the costs is permanent.
If part of the costs becomes variable, then part of the production factors begins to have a variable character, which means that more and more arguments of the production function become variable and it is possible to achieve the same volume of production with lower total costs. Consequently, and with lower average costs, that is, with a constant volume of output, the producer's profit increases. But when some of the factors move into the category of variables, there is a change not only in average costs, but also in marginal costs. As a rule, the minimum of marginal costs increases, but the rate of growth of marginal costs decreases with an increase in production. As a result, such a situation arises. If in the short term the producer had a loss, then in the longer term he will reduce his loss by using a more profitable combination of factors and by reducing the scale of production. If, in the short run, the manufacturer makes a profit, then he will increase his profit in the long run by optimizing the combination of factors of production, as well as by increasing output.
Consider an industry in which many similar manufacturers compete with each other. Moreover, each of them determines the volume of the optimal output, focusing on the market price of the product. Let's see what happens in this industry over time. Let the entrepreneurs make a profit at the initial moment. This profit in the long term means an increase in production from old producers (by increasing those costs that were constant at the beginning), and it also means an influx of new producers who are interested in the possibility of making a profit. As a result, after a while the price of the product and the profit of producers will begin to decline, and along with them the volume of production for each producer will also decline, approaching the point at which the minimum average costs are reached. As profits decrease, the inflow of new producers also decreases, and old producers, as already mentioned, reduce production. Consequently, the industry will come to equilibrium with such a volume of production, when the profit of the producers is equal to zero, since in this state the inflow of new producers is impossible, and the old producers have no reason to expand production.
Thus, the volume of output at which the (long-term) minimum of average costs is reached is a stable optimal state for manufacturers of any product. But the mechanism described above for the transition of production to the optimal value of output allows us to draw several other conclusions:
1. If, with high profits, manufacturers increase production too much and too many new manufacturers appear, then after a while all enterprises in the industry will most likely become unprofitable. Consequently, instead of moving smoothly to the optimum point, there will be cyclical fluctuations in the industry.
2. Continuing the previous point. It may turn out that the oscillations will not be damped. In particular, if the turnover of producers is very high, then the output in the industry will never come to equilibrium.
3. In reality, states close to equilibrium are almost unattainable due to random factors that shift cost functions.
4. In reality, the achievement of a state of equilibrium by the entire industry does not mean that every manufacturer has reached equilibrium.
Maximization of profit by the manufacturer (more precisely, by the entrepreneur who organized the production) of profit is traditionally accepted in economic theory as the only goal of the manufacturer in determining the parameters of production and the price of the product. It is believed that the entrepreneur will strive for this goal, both in the long and in the short period. There is even a proof of the validity of this statement, which has (briefly) the following form: Since the entrepreneur knows the future prices (he can calculate them quite accurately, knowing that new manufacturers will enter the market in a long period), he can determine the price of the product, the optimal output and your profit in each period. And since the total income of an entrepreneur consists of his income in different periods, in each period he must maximize profit. In general, the statement is correct, but there are special cases when the validity of this statement is questionable. And this is due to the fact that an entrepreneur is a person, not a machine for earning income.
First, an entrepreneur may have a pronounced preference for rest before work. Secondly, pronounced intertemporal preferences can prevent an entrepreneur from maximizing profits in future periods. Thirdly, the entrepreneur, as a consumer, has a preference for risk versus income; he maximizes not just his entrepreneurial income, but risk utility, which is a function of both income and risk. And finally, it cannot be argued that the entrepreneur does not have goals imposed from outside that conflict with the goal of maximizing profits.
In accounting, everything is simple and clear - all costs are estimated according to the cost principle, in other words, all things cost as much as paid for them. But it is impossible to evaluate such factors of production as capital, land and (partly) labor, because often they are given to the entrepreneur free of charge. In addition, over time, the price of factors of production changes and it is not clear how it would be more correct to evaluate factors with a changed price. Therefore, in economic theory, the principle of opportunity costs is introduced, according to which each factor of production costs as much as it can be sold for, or as much as can be obtained by alternatively using this factor in production. For example, the capital owned by an entrepreneur does not have a cost estimate, but this capital can be put in a bank at%. This will be the opportunity cost of capital.
A similar method of assessment is applied to those factors of production that are acquired by an entrepreneur. For example, if an entrepreneur hired workers, then the value of their labor is not equal to wages, but to the income that can be obtained by using these workers in alternative production. The opportunity cost principle is one of the basic principles of economic theory and allows one to argue the differences in the optimal level of output among enterprises operating under the same conditions and having similar technology. It's just that these enterprises, for example, may have different opportunity cost of working capital; or, for example, some of the enterprises may have an alternative way of using the equipment (for the production of alternative goods).
MARKET and MARKET RELATIONS
In the modern market economy, the meeting of the producer and the consumer takes place on the market. The market originally meant the physical meeting place of the seller and the buyer. In the modern economy, there is no simultaneous contact between sellers and buyers; more often they do not even come all in one place. Therefore, the market began to be understood as the territory within which the movement of sellers and buyers, the movement of their goods and the transfer of information are possible. This definition of the market can be called geographic.
However, when we say the market, we often mean not so much the territory as the aggregate of goods sold in this market, that is, to the above geographical definition of the market, one must add the phrase that sellers and buyers of the same goods. But the market is not only about producers and consumers, but also intermediaries, regulators, rules and infrastructure that facilitate contacts between producers and consumers. As well as the accumulated information about goods, supply and demand in the market. The essence of the market is manifested through its functions, below are the main functions of the market:
1. Pricing function. It lies in the fact that the market determines the price of a specific product and at the same time the ratio of prices of various goods, services and resources (production factors).
2. Equalization function of supply and demand. The market, by changing prices, reconciles the interests of producers and consumers, that is, it allows you to find a price for a product at which demand and supply are equal to each other.
3. Self-regulation function of production.
4. The function of choosing the optimal production plan for society.
5. The function of establishing the social significance of the produced product and costs.
6. Regulatory function. The market makes it possible to determine not only the proportions of production and consumption, but also the scale of these phenomena, that is, it allows society to answer the question of how much to produce and how much to use resources.
7. Stimulating function.
The market arises as a way to simplify and streamline exchange. And therefore, differentiated production or differentiated consumption is necessary for its occurrence. Under these conditions, a barter market emerges.
For the emergence of an efficient market, the existence of money in the economy, recognized by all economic entities, is necessary, commodity production, division of labor and the rejection of a subsistence economy are not the reasons for the emergence of a market. The existence of separate markets and a market economy is based on the following principles:
1. The limiting nature of pricing, as well as supply and demand, i.e. formation of the price of the goods in such a way that the offer price of the last of the sellers agreeing to a deal at this price coincides with the demand price of the last (marginal) buyer who had enough of the goods.
2. Alternative choice. In a market economy, each subject has alternative methods of production, sale of a product or resources, as well as alternative consumption options. In a particular market, the buyer has alternate choices for the seller and the seller has alternate choices for the customer.
3. The rationality of the behavior of economic agents.
4. The principle of rarity.
Market elements identified for analysis by economic theory:
1. Producers and consumers.
2. Supply and demand.
5. Market infrastructure.
The market has a complex structure and its influence covers all spheres of the economy. The market structure is determined by:
1. Existing and prevailing forms of ownership in the economy. The prevailing forms of ownership determine who is the predominant seller and buyer in the market: if the private form of ownership of the means of production prevails, then the sellers in the market will be small private producers.
2. The structure of producers by ownership and scale of production. The structure of producers determines several market parameters at once: first, it sets the level of competition in the market; second, it determines whether there are dominant sellers in the market who have economic power or are simply leading; third, the structure of producers determines what types of intermediaries exist in the market.
3. Features of the sphere of commodity circulation, i.e. traditions, norms and laws existing in the considered state in the field of trade and exchange.
4. State participation in distribution and state regulation of distribution.
5. The types of trade used in the economy.
6. Market information dissemination system.
On the basis of structural features, the following types of markets are distinguished:
1. According to the economic purpose of the goods and services in circulation, the following are distinguished:
- Markets of goods;
- Markets of means of production;
- Markets for information, technology, etc.
- Financial markets;
- Labor market;
- Markets for land and water resources.
2. By product groups:
- Markets for industrial goods;
- Markets of consumer goods;
- Markets of raw materials and materials.
Note that these are only the largest product groups.
3. On a spatial and geographical basis, markets can be distinguished:
4. By the volume of transactions and the nature of buyers, one can distinguish:
- Retail markets with small volumes of transactions;
- Wholesale markets, where transactions between enterprises are usually carried out;
- Markets for centralized purchases.
The market is a single whole only from the point of view of economic theory. In fact, it is heterogeneous and consists of many component parts (segments), and each segment is a separate market, which has its own supply and demand, and sometimes its own price of goods. Since the functions of supply and demand in different market segments are different, then the elasticities of demand and supply in these segments will necessarily differ, for example, the national market for a homogeneous product, say bread, consists of many geographic segments, allocated on the principle of inaccessibility to consumers from one product segment. from another segment.
Often, different market segments differ in the level of competition. Moreover, some of them may even be monopolized. However, the differences between individual market segments appear only when the analysis is more detailed. Several methods of market segmentation are applied according to various factors:
1. Geographic segmentation;
2. Demographic segmentation;
3. Psychographic segmentation, which is a replacement for demographic;
4. Behavioral segmentation based on the nature and motives of consumer behavior in the market.
Note that buyers can also segment sellers, but this is very rare.
The market is a universal means of distribution of goods and resources in the economy, spontaneously emerging in society as it develops. However, the market does not necessarily cover all areas of production and consumption, and the market is not always the optimal mode of distribution. There are two reasons for this:
1. The limits to the spread of the market are set by the underdevelopment of production and the lack of money circulation in the market.
2. The development of market relations is hindered by the time, effort and resources of the buyer and the seller, which in economic theory are called transaction costs. And only if the transaction costs for both parties to the transaction are less than the benefit from its implementation, the transaction will take place.
Transaction costs are the costs of exchange and distribution, the main types of which are:
1. The costs of finding information about markets and products, as well as the costs of disseminating this information;
2. The costs of finding a partner, determining the terms of the deal and its actual conclusion;
3. Costs of moving goods from seller to buyer and money in the opposite direction;
4. The costs of determining the quality of goods, as well as the costs of developing quality standards;
5. Costs of registration of ownership of purchased goods;
6. Costs for the protection of property rights, primarily intellectual property rights: patents, licenses, trademarks, copyrights.
Market development is expressed not only in an increase in the volume of transactions in the market or in an increase in the geographic scale of the market, but also in a decrease in transaction costs. It should be noted that this is a process with positive feedback: as a rule, market development leads to a decrease in transaction costs, and their decrease, in turn, leads to further market development.
But even if all costs of circulation were equal to zero, there would be areas of the economic life of society in which the market would not operate. Because in some cases, not only the direct participants in the transaction, but also other members of society receive benefits from the exchange operations. For example, the treatment of infectious patients is beneficial not only for them, but also for all other people. In this situation, society as a whole is interested in providing such a service and agreeing to pay for this service to its poor members. In such a situation, one speaks either of the external effects of a market transaction, i.e. the occurrence of harm and benefit to other members of society from the transaction. Or that the product being sold has the character of a public good, i.e. the use of this good by one member of society is equivalent to the fact that other members of society are consumers of this good. But in principle, externalities cannot serve as an obstacle to market relations if all property rights are clearly defined. In this case, according to R. Coase's theorem, market participants will be able to determine the cost of externalities without government intervention.
But, alas, first of all, property rights for many objects are not defined (for example, this refers to environmental resources), ie. the objects are in public ownership. And secondly, there can be a lot of owners facing external effects, as, for example, in the case of external effects from educational and medical services. And reaching agreement with them will require huge transaction costs from the participants in the trade exchange.
In the considered situations, the market turns out to be unable to provide an efficient distribution of benefits, that is, such a distribution in which the benefits of any economic entity can be increased only by reducing the benefits for other entities. Therefore, they talk about a market fiasco. A market fiasco is an extreme situation from the point of view of the efficiency of the market distribution of goods. Another extreme situation is the perfect market, which is the most efficient way of distribution. A perfect market is a market with a large number of participants in which the same commodity is exchanged at zero distribution costs under equal conditions for all participants with equal and full access to all information.
Market economy is impossible without competition. Competition is a competition of economic entities among themselves, conducted by purely economic means, in order to achieve maximum benefits for themselves. Both sellers and buyers are involved in the competition among themselves. Manufacturers compete to increase their profits.
At the same time, competition is the most important element of the market mechanism, which determines the behavior of economic agents in the market, as well as in the production and consumption of goods. For example, prices set by producers, like production volumes, depend on how much competition they face in the market. Competition, as an element of the market, is one of the main forces that determine the movement of prices, as well as supply and demand. Ultimately, it is the competition between producers and between consumers that brings the economy to an optimal state in which the maximum social utility (maximum welfare) is achieved.
Competition permeates the entire market economy, since in the economy there is almost always a relative scarcity of goods, services and resources, i.e. their lack at some prices. The first and main form of competition is price competition, which implies a decrease in the price (relative to the price of other sellers) of a good by the seller in the market of the goods in question or the appointment of a higher price of a good by its buyer. The second form of competition is non-price competition, which consists in creating differentiated goods, promoting one's own goods, creating preferences for buyers, etc.
Studying commodity markets, economists of the neoclassical school drew attention to the fact that the invisible hand of the market works best if the market has a large number of small producers and a large number of consumers of the product. In this case, none of the producers will be able to dictate their will to the market, and consumers will receive the goods at the same minimum prices. For the fact that the market fully controls all decisions of producers and consumers (in their aggregate), this situation has received the name of perfect competition. Perfect competition is a type of market organization that involves:
1. A large number of manufacturers.
2. Therefore, a change in the volume of production by any manufacturer cannot influence the volume of the market and the price prevailing in the market. Basically, this means that producers operate in conditions of certainty of prices.
3. The product sold on the market is homogeneous.
4. There are many buyers in the market, and buyers have all the information about producer prices.
5. Producers and consumers are free to enter the market
6. Neither producers nor consumers enter into price fixing.
Perfect competition is characteristic of small-scale production, in particular for agricultural markets. At a certain stage of economic development, perfect competition is the dominant form of market organization. However, as production is concentrated, perfect competition is supplanted by various types of imperfect competition. This process is objective and inevitable, because perfect competition is defenseless against the displacement of some sellers from the market or the desire of sellers to cooperate; therefore, in the modern world, perfect competition is just a theoretical abstraction.
In addition, since perfect competition allows achieving optimal distribution of resources and achieving maximum welfare in society, it becomes the standard with which any market is compared. And therefore, although perfect competition is almost never encountered today, studying it is important, if only because it helps to assess the imperfection of other types of markets. Perfect competition has its advantages:
1. Promotes more efficient use of resources in the economy.
2. Forces manufacturers to react as flexibly as possible to changes in the market.
3. Encourages the introduction of advanced technologies.
4. Provides maximum freedom of choice for both consumers and manufacturers.
With perfect competition, consumers know exactly about the prices of the product in question from different manufacturers, therefore, as soon as a manufacturer increases the price, he cannot sell anything. On the other hand, as soon as any manufacturer lowers the price, consumers immediately react and purchase their product. As a result, regardless of how the demand in the market as a whole depends on the price of the product, the demand for each individual seller is absolutely elastic, i.e. at the current price in the market, each seller can sell any volume of goods, and at a higher price, he will not sell anything, thus, the manufacturer in a completely competitive market has no incentive to either reduce the price of the goods or increase it.
A similar situation arises on the buyer's side. Each individual buyer will also not be able to buy anything at a lower price, since manufacturers will sell their goods to those buyers who offer a higher price. And he has no incentive to set a higher price, because even at the current market price, he can fully satisfy his needs.
From the absolute elasticity of demand for the manufacturer it follows that the marginal revenue from sales, i.e. the increment in revenue with an increase in sales per unit is always equal to the price of the product. Therefore, in order to maximize profits or minimize losses, it is enough for a manufacturer to select a production volume at which marginal costs are equal to the price of the product. This rule only applies in perfect competition, but, in principle, it is believed that it can be extended to other types of markets. The manufacturer can thus make a profit or loss, depending on the magnitude of the average costs. And he cannot do anything to increase profits or reduce losses, since the volume of production chosen by him is optimal.
The equilibrium state in the long term for the market of perfect competition is the state of zero profit, when the price of a product must be equal to both average and marginal costs, which is achieved with a minimum of average costs, and production is carried out in the most optimal way.
Any restriction of freedom of competition, whether it is a restriction on the number of market participants, the presence of sellers or buyers with a significant market share, product differentiation or restriction of freedom of entry / exit in the market leads to imperfect competition in the market.
If there is a differentiation of goods on the market, but a large number of producers remain, then they talk about monopolistic competition, such a situation arises in almost every market in modern conditions.
The degree of competition in a market with monopolistic competition depends on two indicators. First, this opportunity is influenced by the degree of product differentiation. If the goods of different manufacturers differ slightly, then we are in a state close to perfect competition, if it is strong, then to a monopoly. Secondly, the degree of competition is influenced by the number of market participants.
In principle, for economic theory, monopolistic competition differs little from monopoly, the main difference is that the demand for the goods of an individual producer in conditions of monopolistic competition reacts sharply to price changes by the producer, much more sharply than in the case of a monopoly on same commodity. In other words, with monopolistic competition, demand is much more elastic. Otherwise, the theory of monopoly is quite applicable to monopolistic competition.
If the product is the same for all manufacturers, then when the number of sellers or buyers is limited, several forms of imperfect competition may arise, which can be reduced to the following formulas:
Many sellers + Many buyers = Perfect competition
Several sellers + Many buyers = Oligopoly
One seller + Many buyers = Monopoly
Many sellers + Several buyers = Oligopsony
Multiple Sellers + Multiple Buyers = Bilateral Oligopoly
One Seller + Multiple Buyers = Limited Monopoly
Many sellers + One buyer = Monopsony
Multiple Sellers + One Buyer = Limited Monopsony
One seller + One buyer = Bilateral Monopsony
These forms will be pure only if the product is undifferentiated, full information is available, and so on. As a rule, when analyzing the types of imperfect competition, they are limited to two of its pure forms: monopoly and oligopoly, which will be discussed in the following paragraphs.
So, monopoly is a type of market organization in which there is one producer and many consumers. At the same time, none of the consumers has a significant market share, and consumers act independently of each other. The insignificance of consumers' capabilities leads to the fact that the manufacturer ignores the interests and actions of individual consumers, and takes into account only their mass behavior, expressed in the function of market demand. It is clear that under a monopoly, the manufacturer has no direct competitors, so he can manipulate prices the way he wants. Still, the monopolist is not completely free from competition. This is due to the fact that the consumer properties of all goods are interrelated, and therefore, if one product can be partially replaced by another, then the monopolist becomes dependent on the actions of firms that produce substitutes for his product.
For a monopolist, the individual demand for his product coincides with the demand for the entire market. And this is a very important difference, because market demand is always less elastic than individual demand in a perfectly competitive environment. Therefore, the conclusion about the equality of price and marginal costs in a monopoly is not true.
Under a monopoly, marginal revenue, which, along with marginal costs, is the basis of marginal profit, consists of two components:
1. Increase in revenue due to the sale of an additional unit of production;
2. A drop in revenue due to the fact that n + 1 unit of production can be sold at a lower price than n units.
It follows from this:
1. A monopolist at any price of a commodity will choose a smaller volume of production than a similar firm in conditions of perfect competition;
2. For the same volume of production, the monopolist will set a higher price. Consequently, the monopolist will receive a greater profit at any volume of production due to the higher price of production.
Monopoly is a much less efficient way of organizing the market than perfect competition:
1. Each of the consumers pays more for the goods of the monopolist than in the presence of competition.
2. A monopolist spends resources less efficiently.
3. The monopolist is not interested in the introduction of advanced technologies.
4. The monopolist reacts weakly to changes in the market, does not seek to offer new goods and services.
Therefore, there is an antimonopoly policy of states aimed both at preventing the emergence of monopolies and at the destruction of previously existing monopolies. Unfortunately, the latter is not always possible, because there are natural monopolies arising from the characteristics of the goods and services they provide.
Oligopoly is defined as a market with a large number of buyers and a small number of sellers. But for the existence of a classical oligopoly, it is necessary that sellers sell similar goods; so that buyers and sellers have accurate data on the current values of prices and sales of all market participants; so that neither sellers nor buyers collude.
Oligopoly is the most difficult type of market in comparison with the monopoly market and perfect competition discussed above. This is due to the fact that, in an oligopoly, the behavior of producers is influenced by three factors:
1. Own production costs;
2. Market demand, which an oligopolist cannot ignore, because a large volume of own release can lead to market overflow;
3. Assumptions about the behavior of other manufacturers that have multiple responses to the actions of the firm in question.
Depending on the last point, several different models of oligopoly have been created. The most important thing is that in conditions of oligopoly, individual demand for a producer is not absolutely elastic, but at the same time it is more elastic than the general demand in the market. Therefore, oligopoly producers are able to influence prices, but on a very limited scale. It is especially difficult for them to raise prices. Even two oligopolists compete strongly with each other, therefore, splitting a monopoly into three or more companies leads to a manifold increase in competition in the market and brings the market sufficiently closer to a state of perfect competition. However, a sharp increase in competition during the transition from monopoly to oligopoly and the futility of price competition make oligopolists look for workarounds. The first is product differentiation. The second way to circumvent price competition is price collusion of producers or their production quotas.
If the price in the market is high, there will be not enough buyers in the market. Consequently, sellers will have surplus goods, or they will have to lower the price in order to sell it. If there is a low price for a product in the market, then some consumers will not be able to meet their demand, and these consumers will tend to increase the price. This means that as long as demand exceeds supply, the price of the product must rise, and otherwise, it must fall. Therefore, if supply and demand are equal, then the price will be fixed, i.e. constant. It is this state that is called market equilibrium.
Market equilibrium is a state of the market in which supply and demand are equal to each other. In this state, the equilibrium price of the commodity is established, which satisfies both sellers and buyers. The equilibrium price of a product is one of the main characteristics of the market, which is guided in their behavior by all subjects of the economy.
Since the equilibrium of the market satisfies both sellers and buyers, the market itself will not go out of equilibrium. A change in conditions can be a change in demand or a change in supply. After imbalance, the market should return to equilibrium.
Only one state of equilibrium is possible on the market, because only with one value of the price of a product, supply and demand can be equal to each other. However, economics considers a whole variety of equilibrium market conditions. At the very least, it is necessary to distinguish between long-term market equilibrium, in which the demand and supply of a product over a long period coincide, and the current equilibrium in the market.
The question of how exactly the market comes to a state of equilibrium did not go unnoticed by economists. First of all, it was noticed that although the market strives to achieve equilibrium, this process proceeds spontaneously, and not purposefully. As a result, it almost always turns out that the path from one equilibrium to another is not direct and takes a relatively long time. Secondly, it was noted that since the price on the market and the volume of sales are determined by the ratio of supply and demand, then the process of searching for a new market equilibrium occurs when supply and demand interact.
How exactly can an equilibrium be established in the market. Let us first note that supply and demand react differently to a shortage or surplus of goods. As a rule, demand adapts more quickly to changed market conditions. Let's assume, for a start, that the supply in the ultrashort run is completely inelastic. Consequently, if there is a shortage of goods in the market, then equilibrium will be established by increasing prices and reducing demand. Similarly, if there is a surplus of goods in the market, then a short equilibrium will be established by lowering prices and increasing demand. After an ultra-short equilibrium is established, it turns out that the prevailing price forces producers to increase or decrease production, which will again lead the market out of a state of short equilibrium, which will again be found by changing prices and adapting demand, for example, if the primary short equilibrium developed in As a result of the price increase, production will increase in a longer period, after which sellers will react with a decrease in production. As a result, if sellers manage to react to price changes faster than buyers to a deficit, then graphically the trajectory of the transition to a new equilibrium state can be represented as a spiral broken line gradually converging to a new equilibrium in the market. But a situation is also possible when supply reacts slowly to price changes, slower than demand reacts to a shortage of goods. In this case, the market will move towards equilibrium along the demand curve, possibly deviating somewhat from it. Note that in the ultrashort perspective, the proposal can be elastic. As a result, a short market equilibrium can be established not by a simple change in prices, which is represented by a vertical fall of the market on the demand curve, but by a simultaneous change in supply.
There can be only two types of non-equilibrium states on the market:
1. Scarcity - a condition in which demand significantly exceeds supply
2. Overproduction - a condition characterized by oversupply
Theoretically, in both of these states, the demand should adjust to the supply, i.e. in the first case, an increase in the price of goods and a decrease in demand should occur, and in the second, the opposite process. However, demand cannot match supply if the price of the product is fixed. Price fixation can occur as a result of the action of the economic mechanism, and in this case it is of a short-term nature, and price fixation can also occur as a result of the action of the political mechanism, i.e. the state. In the latter case, the price of the goods is determined by legislative acts and is not revised for a long time. In a modern economy, examples of such markets are the markets for alcohol, tobacco, and goods and services of social importance. And in a centralized economy, this situation exists in all markets.
Under the conditions of a fixed price, the market mechanism of product distribution continues to function, but much worse. Consider the case of a shortage of goods. If the price is fixed, then all consumers for whom the utility of a unit of a commodity is higher than its price are ready to purchase the commodity, and the distribution of the commodity between them is random, and does not occur according to the principle of the greatest utility. However, the distribution is not random, just the price of goods is replaced by distribution costs, including alternative ones. A shortage of goods always leads to the emergence of queues and a black market, and, consequently, the buyers of the goods are those persons for whom the sum of the price of the goods and the acquisition costs are lower than the utility of the goods.
A similar situation arises in the case of constant overproduction of goods. But here sellers are not competing with each other.
Now let's consider the non-equilibrium states of the economy caused by economic reasons. First, it must be said why prices are fixed. Consider first the case of a shortage of goods. Here, when faced with a deficit, buyers must offer a higher price, but this does not happen if buyers do not have information about the prices and supply of all sellers in the market and consider the resulting deficit to be an accident.
A similar situation arises when overproduction of goods, but the situation there is aggravated by the fact that the initial price of the goods is dictated by the seller, and he is usually not ready to reduce the price if he thinks that he can get a big profit by working for the warehouse ...
If the market is slowly coming to a state of equilibrium, then one speaks of the inflexibility or lack of flexibility of the market and market prices. In conditions of insufficient market flexibility, the mechanism of transition to equilibrium differs from the mechanism that operates in a completely flexible market.
If the market is not flexible, then there is a long-term shortage of goods or their overproduction. A long-term shortage of goods leads to the formation of queues, and a long-term overproduction necessarily leads to the emergence of stocks of goods. It is these indicators, as well as their changes, that drive prices in an insufficiently flexible market. Let's see how this mechanism can work in the presence of commodity stocks. It is worth noting that in almost any commodity market in a modern market economy there are always stocks of goods, but queues from buyers are very rare. In this case, due to the increase and decrease in inventories, demand is almost constantly equal to supply, therefore, buyers do not change prices, depending on the shortage or surplus of goods. But manufacturers of a product may well increase or decrease its price, focusing on commodity stocks. If the manufacturer sees that the stock of unsold products is growing, then he lowers the price of the goods, and in the opposite case - increases. It also takes into account how large the current inventory is.
It is noteworthy that the opposite picture is observed in the service markets. Here, for the manufacturer, the main indicator of market imbalance is the queue. If the queue is lengthened, then the manufacturer will increase the price of the product. And if it shrinks - to lower it.
Despite the fact that in the modern economy most of the product is distributed through the market, and not through government structures, the market is still controlled by the state, and therefore it is more correct to consider the modern system of product distribution not purely market, but mixed. Moreover, in some markets, for example, in the markets of some financial services, although the state does not replace them with itself, the influence of the state is so great that it makes no sense to talk about a free market.
Let us assume that the market ideally distributes benefits if it is a perfect market with perfect competition, and the product being sold does not create any external effects. Since the economic system is not able to increase the competitiveness of markets, and is not always able to make markets more perfect, society is forced to instruct the state to improve the efficiency of the market distribution system. At the same time, the state intervenes both in the work of individual markets and the entire market system.
There are other reasons for the state's interference in the work of markets, but they already lie outside the economic sphere. First, the state acts as a spokesman for the interests of society and seeks to restore social justice. Secondly, the state intervenes in the work of the markets in order to fill its budget.
When regulating markets, the state uses the following instruments:
1. Antimonopoly policy and competition support instruments: crushing monopolies; avoidance of mergers and acquisitions that can reduce competition; penalties for monopolists, etc.
2. Market efficiency tools. These include product standardization and certification; licensing of manufacturers.
3. To redistribute external effects, if the state does not dare to replace the market with itself, a tax and subsidy mechanism is used.
4. To establish social justice, the state directly dictates to manufacturers the specifics of pricing for certain groups of people.
5. To replenish the budget, the state uses taxes, fees, payments for licenses, etc. at the same time, the tax burden is unevenly distributed.
6. You can also list such market control measures as price fixing, as well as fixing minimum and maximum prices in the market.
So, there are only two non-equilibrium states of the market: deficit and overproduction, but the reasons for the emergence of disequilibrium can be different, and there can be different options for returning the economy to an equilibrium state, and the time of existence of an imbalance in the market can also be different. And taking these factors into account, it is possible to construct a more detailed classification of non-equilibrium market conditions.
Deficiency can be caused by:
1. Inability to meet demand with existing production facilities and (or) inventory. Moreover, if demand is absolutely inelastic, then the market is not able to find equilibrium on its own, this kind of disequilibrium can be caused by the loss of production capacity, the disappearance of part of the reserves, but it can also be caused by a steady increase in demand.
2. A sharp increase in demand in the market, to which manufacturers do not have time to respond with either an increase in supply or an increase in prices.
3. Monopoly restriction of supply to create excitement in the market, on which it will be possible to earn money in the future (for example, to play on the irrationality of consumer behavior with the manifestation of the Veblen effect).
4. By fixing prices too low on the part of buyers who are monopsony or oligopsonists.
5. By fixing prices at a low level by the state, which leads to the longest and largest deficit in the market.
Overproduction can be caused by:
1. The impossibility for producers to quickly reduce production volumes when demand decreases.
2. A sharp increase in supply on the market, for example, when a new large manufacturer or importer appears.
3. Artificial limitation of demand from large buyers who seek to achieve for themselves exclusive terms of delivery of the product in question.
4. The monopolist or oligopolist-leader fixes prices at too high a level.
5. The state fixing prices at too high a level, this rarely happens, but to protect domestic producers; to cut off manufacturers of a low-quality product; to reduce demand, the state can take such a step.
Capital, together with labor, is one of the two main factors of production. Two concepts are distinguished: the capital of a private person and the capital of an enterprise.
The capital of a private person is synonymous with the term savings. However, savings are not yet capital, although in neoclassical economic theory it is assumed that savings are automatically converted into capital during the investment process, nevertheless, you need to understand that a private person's capital is only that part of his savings that works, i.e. .e. these are only those savings that participate in production, so the consumer's income saved for consumption in the near future cannot be capital, since these incomes are stored in the form of money and are not transferred to producers.
The capital of an enterprise (firm) - for it there are many ways of defining and calculating. Firstly, the capital of a firm is the aggregate of the means of production, raw materials, etc. acquired by it or received for temporary use, which, in combination with other production factors, is necessary for the production of new products. In other words, capital is a collection of material factors of production. Note that a firm can own many objects that are not involved in the production process. For example, such items are stocks of goods, office buildings and their equipment, money, financial assets, etc. According to the theoretical and economic definition of capital, these objects are not taken into account in the definition of capital, but this is somewhat strange. Secondly, there is an accounting definition of capital: capital is the difference between the value of all assets of a firm and the value of its liabilities. However, in this case, the amount of capital falls out of the funds received by the company in debt for a long time, which the company directs to production needs. But still, since the determination of the amount of capital is based on the value of assets, then when calculating capital, the method on the basis of which the value of assets is calculated is important.
We define productive capital as follows: The capital of a firm is a set of material factors of production that are in use or property of a firm, plus a set of non-productive assets necessary for production.
The capitalist method of commodity production is based on the division of labor and means of production. Under the capitalist mode of production, production capital belongs to some individuals, but others use it in their work, that is, for the existence of the capitalist mode of production, it is necessary that all social production capital be concentrated in the hands of a limited group of individuals. However, during the transition to the capitalist mode of production from the pre-capitalist mode of production, such concentration is not observed. Therefore, as a rule, an integral part of the transition to the capitalist mode of production is the initial accumulation of capital, i.e. the process of redistribution and concentration of productive capital in the hands of entrepreneurs.
In some cases, the initial accumulation of capital took place peacefully, through the gradual transformation of income from land and trade-usurious capital into productive capital. Of course, in this case, too, there was a gradual collapse of small-scale commodity production, accompanied by the ruin of small producers and rather high unemployment in their ranks, but on the whole the process was of a natural nature and occupied a significant time interval. Historically, natural capital accumulation has been rare. However, much more often the process of initial capital accumulation was more intensive and was stimulated by the state, for example, in the form of monopolies granted to some entrepreneurs. The accelerated accumulation of capital has always resulted in massive impoverishment of the population, unemployment and socio-economic upheavals. At the same time, it often turned out that as a result of the intensified transition to capitalism, it was not possible to build an effective economy, because capitalism itself is not a guarantor of production efficiency, such an initial accumulation of capital was possible only if persons seeking to accumulate capital possessed political power and use it in their own interests, and not in the interests of society.
Among the methods used during the initial accumulation of capital, it should be noted:
1. Expropriation of peasants.
2. Compulsion to hired labor.
3. Robbery of colonies.
4. The slave trade.
5. Taxation that gave advantages to the possessing classes.
6. Monopoly in foreign trade.
Be that as it may, the times of initial capital accumulation have passed, and in the modern economy the concentration of capital in the hands of entrepreneurs is ensured by mobilizing capital from consumers (the main source according to statistics), the state and firms through the financial market. At the same time, the attraction of capital, in the main, does not take place in the form of real production capital, i.e. means of production, but in monetary form. And the capital attracted in financial form is already directed to the purchase of means of production from their manufacturers.
There are many reasons forcing the consumer not to direct part of his income to consumption, i.e. to save income, which means to behave differently from the theory of consumption. Among these reasons, the following should be noted:
1. Instability of income over time, i.e. if in the future the consumer assumes a decrease in his income, then in order to maintain his living standards, he must set aside part of his current income.
2. Instability of spending over time.
3. Difficulty in forecasting income and expenses. Consumer income and expenses are not only not stable over time, they tend to change unexpectedly.
4. Savings preference. If the consumer prefers future consumption to current consumption, then the consumer will save part of the income even with a stable level of income and expenses.
5. Lack of needs.
6. Unexpected income. If the consumer's income unexpectedly turns out to be more than he expected, then it is likely that the consumer will not spend part of the income.
Based on the above, we can conclude that the main factors influencing savings will be consumer income, expenses, interest rate, as well as the presence or absence of uncertainty and the measure of this uncertainty.
Consider the transformation of savings into capital. Savings are the portion of consumer income that originally exists in cash and is intended for consumption in future periods. In economic theory, it is believed that as soon as the act of saving is carried out, the savings turn into consumer property, which also initially exists in monetary form.
The consumer can dispose of his property as he pleases, however, first of all, he seeks to ensure the safety of this property. Then the consumer seeks to ensure the possibility of spending the property at the right time, i.e. strives to ensure the liquidity of the property; and finally, he seeks to obtain income from the use of his property.
A rational consumer, always striving to find a compromise between liquidity, profitability and the safety of his property, refuses to keep his savings in cash. In this case, property can be converted into the form of real property or into the form of financial capital, or into the form of long-term money, i.e. in the form of loans or bank deposits.
In modern conditions, the financial sector of the economy absorbs most of the savings of consumers. This primarily applies to long-term savings (in particular, retirement savings) and perpetual savings, i.e. to savings in respect of which the consumer cannot indicate the term, such savings partially directly go to the financial market, where they are exchanged for securities, turning into financial capital; or they end up in investment and pension funds, where they are exchanged for shares and other obligations of the funds, also becoming financial capital.
Shorter savings go either through investment funds or through the banking system. At the same time, the shorter the savings, the greater the share of savings that go to banks. Finally, the shortest savings made for less than a year (if they do not remain in the form of cash) almost entirely fall into the banking system. But it is very important for the economy that even from short savings, the financial sector of the economy manages to separate, albeit a small part, that will go to the financial market and become capital.
Having entered the financial market, savings turn into financial capital of consumers. Financial capital is a source of additional income for its owners, but it is always a source of additional risk for them. Depending on his preferences, a buyer in the financial market can choose one or another instrument. At the same time, one of the functions of the financial market is to equalize the risk and illiquidity fees for different financial instruments. And since the financial market seeks to equalize the profitability of instruments, the prices of financial instruments are constantly changing. As a result, it turns out that almost always the cost of financial instruments differs from the original price. Consequently, the amount of the consumer's financial capital differs from the amount of savings invested by him.
Similarly, when buying securities in the secondary market, the buyer acquires a volume of productive capital that is different from that which he invests in the financial market. Firms, or one might say - their owners and managers, i.e. entrepreneurs receive money in the financial market for which they exchanged the securities issued by them. Here, entrepreneurs are faced with several problems at once, which they must solve in order to optimize their income and risks:
1. The entrepreneur does not want to share his income with the capital suppliers, therefore he wants to sell them debt securities.
2. But at the same time, in order to avoid liquidity problems, the entrepreneur tries to sell securities with a very long term to the suppliers of capital.
Still, the attracted funds are not yet production capital. To become capital, most of these funds must go to the purchase of capital goods and stocks of raw materials. From this it should be concluded that if the markets for production equipment and raw materials deviate from the long-term equilibrium state, it will turn out that the invested money capital differs from the value of the received production capital.
Industrial capital is the means of production that are actively used in the production process. And since the means of production are used, they wear out. At the same time, both the productivity of capital and its value decrease. By itself, a decrease in the cost of productive capital means that the value of the firm's assets decreases. In other words, the entrepreneur suffers a loss, but he will increase the price of his products by the amount of this loss. Therefore, the decline in the cost of productive capital is offset by income from the sale of products. In other words, the cost of capital is gradually transferred to the product being produced. The amount by which the cost of productive capital decreases is called depreciation. On the other hand, depreciation deductions form a fund from which the replacement of productive capital is paid. Since the amortization fund has a monetary form, in the course of the productive use of capital, the latter transforms into monetary form. At the same time, the depreciation fund is also a source of funds for the redemption (or redemption) of securities issued by the entrepreneur on behalf of the company, that is, if the entrepreneur does not want to restore his production capital, then he can channel the resources of the depreciation fund to the financial market, where, depending on the situation , can either acquire financial instruments from other companies, or can acquire instruments issued by the company itself. But since the firm cannot be the owner of its own obligations, these obligations cease to be valid after the buyout.
Capital should bring income to the persons who provided it to entrepreneurs. The amount of annual income per unit of capital is called the interest rate. And since the initial savings of consumers enter the capital market in cash, it is not surprising that the interest rate for the use of capital is roughly the same as the interest rate for the use of money. For the entrepreneur, the interest rate is as much a loss as the decrease in the value of productive capital. Therefore, the fee for the use of capital must be taken into account by the entrepreneur when determining the price of the product. And since all entrepreneurs will be forced to include it in the value of the product, then not only the depreciation of the productive capital, but also the payment for the use of it, is transferred to the value of the product.
When we talk about the capital of a company, they mean primarily the sources of funds for which the means of production, raw materials, etc. are purchased, and not the production capital itself, that is, we are talking about the company's liabilities, and not about all. Among the liabilities of the company, liabilities and own funds are distinguished, which are its capital. Among the liabilities of a financial nature, borrowed funds are distinguished, among which there are long and short loans with a maturity of more and less than a year. Long loans, together with own funds, are referred to as the capital of the company, calling it borrowed capital.
The company's own funds are also heterogeneous and consist of several components: First, the initial capital of the entrepreneur who created the company and controls it. Secondly, these are the initial contributions of the ordinary shareholders of the company who have the right to manage and share the risks with the entrepreneur. Thirdly, it is the retained earnings of the company; its mandatory and voluntary reserves; as well as funds contributed by the owners of preferred shares of the company. Holders of ordinary shares receive income in proportion to the company's profits and their participation in the capital; and preferred shareholders and lenders receive a fixed income. Therefore, the greater the share of borrowed capital and preferred capital, as well as the higher the profit, the greater the income of shareholders. This effect is called financial leverage. Since the entrepreneur receives additional income, we can talk about the emergence of a leverage effect, and in this case, the more capital attracted by the entrepreneur, the greater his own income.
Considering the capital of a company, it should be understood by it not only attracted funds, but also the ways of their placement, thus, we can say that the company has money capital, financial capital, production capital and other types of capital. The financial capital of a company is a complete analogue of the financial capital of a consumer, however, it exists not so much for earning income, but for gaining control over other firms.
Productive capital is the main part of a firm's capital (if we do not consider firms from the financial sector, etc.), consisting of all types of property necessary to support production.
Traditionally, production capital is divided into fixed and working capital. Fixed capital includes buildings (and structures) necessary for production, as well as slowly wearing out and obsolete means of production, such as machine tools, assembly lines, etc. Working capital includes raw materials, wear and tear tools, stocks of finished products, and a certain amount of money needed to organize turnover (i.e., to purchase raw materials instead of used ones, to pay for labor, production services, make tax payments, etc.)
The volume and composition of the required fixed capital is determined by the volume of production planned by the company and the technology chosen by the company. A firm may choose different technologies and change technology from time to time. She may choose a more capital-intensive or less capital-intensive technology based on the entrepreneur's predictions of the future cost of labor and capital.
In addition to the fixed capital, the company has working capital, which, in contrast to the fixed capital, depends on the current issue; as well as from the organization of the procurement of raw materials and sales. If a company buys raw materials in large quantities and rarely, then it needs a large working capital. Likewise, if its sales are seasonally dependent, then it needs a lot of working capital to ensure the purchase of raw materials and wages during sales downturns; etc. For example, a very large working capital is needed by enterprises that process agricultural products purchased after the harvest.
Karl Marx in his fundamental work "Capital" introduced a formula describing the movement of the productive capital of a firm under the conditions of the capitalist mode of production: Money - Production - Commodity - Big money. This formula reflects the main stages of the movement of capital, and this formula also reflects the fact that capital is circulated for the purpose of making a profit, which means that the circulation of capital is possible only if it makes a profit. If there is no profit, there is no production either. Marx's formula fully describes the capital circulation of an entrepreneur, but it does not take into account many aspects of real production and real business organization:
First, the formula does not reflect the fact that different parts of capital circulate at different rates. And since the entrepreneur is not interested in stopping production before the complete turnover of capital is completed, then within the cycle of capital turnover a situation of temporary loss of capital may arise.
Secondly, a modern firm carries out many projects at the same time; the entire capital of the firm is never in one of the pure forms. And it is practically impossible for an outside observer to detect the end and beginning of full cycles of capital turnover and production cycles. Therefore, an outside observer cannot track the emergence of economic profit and cannot say exactly where it arose; he sees only a stream of accounting profits and believes that the firm is successful if this stream grows.
Thirdly, since a modern entrepreneur cannot exist without attracted capital, the cycle of circulation of the capital of the entire firm begins with the issue of securities, and ends with their redemption or redemption.
Fourthly, each separate production cycle ends with the distribution of the received income between the firm and the suppliers of its capital.
Fifthly, if at the end of the production cycle there is retained income, then it partly goes to the income of the entrepreneur, and partly to the development of production.
We state that production capital tends to wear out; partially lose the ability to produce a product. This can be reflected in a shorter life of production equipment, an increased likelihood of failure, an increase in the failure rate, or simply a decrease in productivity. In addition, production capital is aging, that is, its productivity turns out to be less than the productivity of new equipment of the same cost.
From the point of view of economic theory, the real characteristics of the depreciation of production capital are the most important, but for the company it is important not only the real depreciation, but also how quickly it can write off (amortize) the cost of production capital. This will affect its tax payments, accounting profits, accounting costs of production, and, to some extent, its ability to raise additional capital and restore depreciating capital.
The main method of depreciation of industrial capital is linear depreciation, implying a decrease in the value of assets by the same amount in each period. At the same time, for each type of real assets, there are depreciation rates and a full write-off period.
In addition to linear depreciation, there is accelerated depreciation applied to those types of firm property, the value of which decreases faster than according to the linear law. These traditionally include cars, household appliances, computers, etc., as well as equipment based on new technologies. With accelerated depreciation, the enterprise, as a rule, determines the depreciation scheme itself, in which the largest drop in the cost of productive capital falls on the first and second years of its operation. With accelerated depreciation, enterprises themselves determine the depreciation scheme, but certain restrictions are imposed on this scheme. First, a list of asset types is defined. Second, a minimum depreciation period and a maximum depreciation rate are determined.
The productivity of capital is a value equal to the ratio of the value of products produced and the value of capital used in production. As usual, in economic theory, the average productivity of capital and marginal productivity are distinguished, which is equal to the increment in production with an increase in capital per unit. In addition to capital productivity, the efficiency of capital use in the economy is reflected by the ratio between the cost of productive capital and the volume of output. Since capital costs are approximately equal to the amount of depreciation, the excess productivity ratio can be considered equal to the ratio of the cost of production and depreciation. Below are the indicators of capital efficiency from the point of view of an entrepreneur.
1. Return on (production) assets = the ratio of the profit and the value of the firm's assets (more precisely, its production assets, which are production capital.)
2. Return on assets for current operations = ratio of profit + depreciation and asset value.
3. Net profitability = the ratio of profit minus the cost of capital to the value of assets.
Taking into account the capital structure of the company, when calculating profitability, only the amount of fixed capital, the amount of equity capital or the sum of equity and debt capital can be taken into account. For example, to analyze the stability of a firm, both equity and debt are taken into account when calculating profitability; and when determining profitability for investors - only shareholder. In the latter case, not production capital is taken for calculations, but capital in the accounting sense.
Starting the production cycle (fixed capital cycle), the entrepreneur takes capital in monetary form for use, for which he acquires means of production, raw materials and hires workers. At the same time, the prices of raw materials and labor during one production cycle can be considered unchanged. But the value of the means of production, as well as the value of the capital used in their acquisition, can change during the cycle of their circulation.
At the beginning of the production, as well as the investment, cycle, the entrepreneur acquires factors of production in such proportions as to ensure for them the same ratio of marginal productivity and price. We can assume that the supplier of each of these factors gets a share proportional to the marginal productivity of the factor and the volume of its use in production.
However, the price of constant factors of production changes and may deviate from the value that the entrepreneur expected when starting production. As a result, it turns out that the distribution of income between the owners of constant factors does not occur in accordance with their current productivity, but in accordance with the values of productivity in the distant past, thus, in a short period, these factors receive a constant income that does not depend on their changes. productivity. For example, if an employee has a long-term employment contract that stipulates a fixed wage, then if the employee's qualifications have increased, he will receive a wage lower than his productivity.
The same situation arises with capital. Working capital, attracted for a short time or easily converted into the financial capital of the company, has a value that coincides with the marginal productivity of capital, this is because with an increase in the cost of capital, the company can reduce the amount of working capital to such an extent that the effect of reducing capital will be match its price. Long-term borrowed capital and capital provided in exchange for preferred shares has a predetermined value, therefore the income attributable to this capital is constant and does not depend on the productivity of capital. But at the same time, the income from the share (authorized) capital is formed, like the income of the entrepreneur, according to the residual principle, i.e. on the basis of income from the sale of products, from which absolutely all costs were deducted.
The production of any goods requires the application of human labor. Therefore, labor is an even more necessary factor of production than capital. However, it is necessary to define more precisely what labor is.
First, labor is any human activity of a production nature. Note that any labor necessary to create goods should be considered a production factor, even if it is not associated with direct production. The only exception is the labor of an entrepreneur, which is considered a special production factor.
Secondly, labor is the expenditure of a person's time, which he could use in a more interesting way for himself, that is, labor is the time spent on the production of goods. In addition, a person spends his physical and mental strength. With this approach, it becomes possible to compare labor costs for the production of various goods: the comparison is made in terms of the time required to produce a unit of each good.
We would like to draw your attention to the fact that the specific labor of an employee that creates benefits can be acquired only in the form of the benefits themselves, or, at least, semi-finished products. When a good is created, we know exactly what types of labor are reified in it, but until it is created, it is impossible to say exactly what kind of labor is needed, although it is possible to roughly list the types of labor necessary to create it. For example, it is possible to list exactly what operations the manufacture of a boot will require, but it is impossible to say in advance what quality of boots will be obtained, or it is impossible to say whether an employee will have to spend extra time due to insufficient quality raw materials. Therefore, abstract labor is sold on the labor market, i.e. working time of workers and their labor efforts.
It should be noted that the employer does not at all intend to inform the potential employee of all data on the working conditions existing at his enterprise, thus, the employee makes decisions on the labor market without full information about how much and what kind of labor he sells ... But on the other hand, the employer cannot say for sure what the quality of work that the employee offers him. Therefore, the labor market is an imperfect market.
Since labor is bought and sold in the labor market, it has a price. And since labor is primarily the time that an employee spends at the workplace, then wages should be measured in monetary units per unit of time, traditionally, wages are called wages. But it is important that wages are not only the price of labor, but the total income of an employee over a period of time. When wages are the price of labor, the base unit of measurement is monetary units per hour. But if we are talking more about the income of workers, then wages are measured in monetary units over a long period of time.
When it comes to wages as the market price of labor, only the guaranteed part of wages is taken, i.e. does not include bonuses, bonuses and other payments not guaranteed by an employment contract. This is due to the fact that in the labor market an employee cannot assess what his bonuses will be. And vice versa, when it comes to statistics on employee income for a period, wages must include all income received by employees from the sale of their labor. To calculate wages, as the price of labor for past periods, it is enough to know the size of the wage fund in these periods and the total working time for these periods. But this is not enough for calculating wages in the current and future periods. It should be noted that the function of wages is not only self-regulation of the labor market, but also to stimulate the productivity of workers. Therefore, the wages offered in the labor market are likely to differ from the wages set for workers in enterprises.
1. Expressed in monetary units per unit of time, the price of labor that forms in the labor market and regulates this market;
2. The part of the payment for the work of a specific employee guaranteed by an employment contract, also expressed in monetary units per unit of time, but, as a rule, longer;
3. The total income of an employee (or all hired workers in the economy) from the sale of their labor for the period.
It can be considered that labor is the main factor of production. But for the production of a product in modern conditions, not only labor is needed, but also other production factors. Therefore, it is easy to guess that labor productivity (volume or cost of production per unit of labor expended), first of all, depends on what other production factors are used in production and in what volume. Of the other factors, the value of production capital is of the greatest importance for labor productivity. But labor differs from other factors of production in that it is a personal factor. Therefore, it cannot be argued that labor productivity will be the same at two identical enterprises.
Since labor productivity depends on the mood of the employee and his desire to work, it is possible to raise labor productivity by influencing the employee. At the same time, as long as the employee does not believe that he is forced to work beyond measure, he will not demand an increase in wages, thus, increasing labor productivity by influencing the employee's personality can be one of the least costly ways to increase the efficiency of the enterprise, because it requires minimal investment. In addition, productivity gains can be achieved simply by organizing them properly.
Measures for the organization of labor:
1. Optimization of working time and rational alternation of work and rest;
2. Selection of tools of labor;
3. Organization of the workplace.
In addition to the scientific organization of labor, the purpose of which is to create comfortable working conditions, there are also measures that stimulate a person's desire to work and create emotional comfort for him in the workplace. The main method of stimulating labor productivity is, of course, the introduction of a relationship between productivity and wages. But, firstly, this is not possible in all cases, because it is not always possible to measure productivity, and secondly, this is not always enough, since in the conditions of satisfying the material needs of an employee, stimulation by an increase in wages is not effective. And this is where other incentive methods come into play. There is also a more effective means of increasing labor productivity, namely training of workers and raising their qualifications, but we will talk about this in the paragraph on human capital and related problems.
When it comes to the demand for labor on the scale of the entire economy, then we are talking, as a rule, about labor in general, without geographical or professional segmentation of labor. This means that the demand for labor depends (directly) on labor productivity (labor in general, without segmentation) and payment for this labor. Therefore, the demand for labor, as a function of wages, is set by the equality of the marginal productivity of labor and wages. At the same time, the calculation of wages, as wages for labor, is not an easy matter and involves an analysis of the incomes of the population, i.e. wages as income and conditions of employment, i.e. total working time and employment of the population.
When it comes to the demand for labor from an individual enterprise, an entrepreneur can easily calculate the marginal labor productivity and determine how much labor resources are needed at the current market price of labor. But everything is much more complicated, since the enterprise needs workers of different professions, and they can partially replace each other, but more often workers must complement each other in the chain of labor operations. Therefore, the task of selecting the optimal structure and number of personnel in the company will not be so simple at all.
In addition, an entrepreneur is faced with the fact that in the labor market there is no single salary for employees of one profession, i.e. more qualified and more experienced workers demand higher wages, and, accordingly, unskilled workers agree to much less. Under these conditions, the entrepreneur must solve a rather difficult problem: can more qualified workers ensure higher labor productivity, and also, importantly, higher quality products, to the same extent as they require higher wages.
Making the selection task even more difficult is that a less qualified employee can be trained, but this requires investment of time and money, and as his qualifications grow, his salary will also need to be increased.
The demand for labor for a particular profession of a particular skill level in a particular region will depend not only on the level of wages, but also on the technologies of enterprises in this region, on the interconnectedness of professions, as well as in the growth of labor productivity inherent in technologies with growth employee qualifications and salary levels for other qualifications. Moreover, it should be noted that the demand for labor of workers with higher qualifications grows with a decrease in wages much faster than the demand for labor of workers with low qualifications.
The issue of labor supply is not at all as simple as it seems. Typically, neoclassical economics postulates that the supply of labor increases with wages. But it is worth talking in more detail about the behavior of people in the labor market.
First, for the majority of people of working age, wages are the main source of income, and for many - and the only one. Therefore, potential hired workers are forced to look for work and sell their labor in order to at least not die of hunger. Even if starvation does not threaten the unemployed, unemployment benefits cannot provide the same standard of living as employment. Therefore, an unemployed person can agree to work for a low salary. Moreover, the lower the salary, the more a person needs to work to maintain a constant level of consumption.
Secondly, workers are still not faced with a tough choice to work or die, so their choice between work and rest is a free choice, which means that they choose what is more useful for them, relying on the principle of maximum usefulness. When the choice of the consumer is free, he will give preference to work when wages rise.
Thirdly, it can be assumed that a very high income does not have a special value for the consumer, since the amount of goods that he can consume is limited. This means that if you offer him a wage that is much higher than his current consumption standards, then he will simply reduce the supply of labor to a level at which the usual consumption standard for him is achieved.
So, the first effect works at the lowest wages, and the third - at the highest, therefore, at low and high wages, the supply of labor decreases with an increase in wages, and at intermediate values, it grows. But note that at low wages, the supply of labor falls rapidly; and at high - slowly.
Thus, above we have described the dependence of the supply of labor by an individual person or by all employees together. But now we note that an employee can offer his work in several (geographically) places, and the choice of a place of work will be influenced not only by wages, but also by transport costs arising when the place of work is far from the place of residence. Transport costs also include the loss of time in transport, which leads to a decrease in rest time, thus raising the required salary.
In modern production, it is not enough to hire workers and put them on the machine (as it was 150 years ago), it is necessary that these workers have sufficient qualifications to perform their duties. This can be done by hiring skilled workers or training unskilled workers. In any case, the entrepreneur will incur additional costs, and the qualifications of workers will affect the volume of output and the quality of products, thus, the qualifications of workers can be considered one of the factors of production.
So, human capital is a combination of knowledge, skills, experience and other qualities of a person, allowing him to have a higher productivity. Since one person can own several professions, he, accordingly, can possess several types of human capital at the same time. But at the same time, since he works in one place, then a person can use only one type of capital. Therefore, when choosing a place of work, a person must take into account where his human capital will be most fully used. A person can gain and lose his human capital. The acquisition of human capital occurs in two main ways: during training and as a result of the accumulation of work experience. The greatest benefit for a person, as an employee, is the human capital obtained in the course of vocational training. Often, training takes place in the course of a person's work in a certain enterprise. In this case, a person receives both wages and human capital. Therefore, a rational job seeker will agree to a lower salary if he knows that he will receive valuable professional skills.
As already mentioned, human capital tends to disappear. And this mostly happens with professional skills. First, the loss of human capital occurs naturally. Secondly, a person loses his human capital if he does not work by profession. Third, there is a moral aging of human capital; with the change of technology, those professional skills that were used exclusively with the old technology lose their value.
The question of the exploitation of labor, i.e. on the appropriation of part of the product of labor by other participants in the production process, has many facets. In normal economic conditions, a person makes a decision on the volume of labor supply voluntarily and freely, therefore, the labor supply decreases with a decrease in wages. At the same time, the demand for labor is determined by the equality of wages and marginal productivity of labor, so the demand for labor increases with a decrease in wages. In this situation, wages are set fairly. And if the employee freely agreed to a wage, then there is no exploitation. But on the other hand, since the marginal productivity of labor is always less than the average, the worker produces more than he receives in the form of wages, that is, the exploitation of hired labor exists. In this sense, the classics of Marxism are right. But despite the existence of exploitation, this exploitation is voluntary. In principle, in a free market of all factors of production, hired workers can organize, acquire the other factors they need and create their own production. But since this does not happen, we can say that employees are willing to lose part of their income in order to work quietly for hire.
Who is the exploiter. Karl Marx said that capitalists exploit workers, i.e. capital providers. But in reality, they simply sell their capital, receiving rather small incomes for it, which compensate for their refusal to consume. Therefore, the real exploiters of labor at the enterprise are the persons who distribute among themselves the economic profit from the activities of the enterprise, that is, entrepreneurs.
From the point of view of society and the state, a fall in wages below a certain level can, firstly, lead to social tension in society; secondly, to lead to the degradation of the labor force, that is, with low wages, workers are unable to provide their children with sufficient education. At even lower wages, workers will refuse to have children altogether. Finally, a fall in wages below the subsistence level will lead to the extinction of workers.
To prevent such situations, the state sets the size of the minimum wage. The minimum wage is the amount of remuneration below which an enterprise cannot set wages for its employees. The minimum wage is a tool for maintaining the stability of society, a tool for redistributing the income of society in favor of the poorest strata of society.
The labor market is a market in which consumers act as sellers of labor and buyers of labor, which are mainly firms. At the same time, the number of sellers in the labor market significantly exceeds the number of buyers, so labor buyers can dictate their will to sellers.
The labor market is segmented geographically and by occupational principle, i.e. in the labor market, one can distinguish niches corresponding to various professions, as well as geographical niches. Note that sometimes it turns out that for workers of a certain profession in a certain locality there is a single buyer of their labor.
To respond to the pressure of firms on the labor market, workers are organized into trade unions. But because trade unions constrain consumers' freedom in the labor market and are costly to establish, they arise when firms dictate prices and deal terms in the labor market. Trade unions turn out to be the third force in the labor market, and a very influential one. Even if the union does not cover all employees, it has the opportunity to dictate its terms to employers.
Since there are a lot of sellers and a lot of buyers in the labor market, there is a need for intermediaries who will take on part of the work of selecting suitable jobs for job seekers and finding suitable candidates for employers. There are several types of intermediaries in terms of the range of services provided and their price.
The first group of intermediaries, least actively influencing the labor market, are information agents, whose functions include informing market participants about current demand, supply and prices.
The second group is labor exchanges. These intermediaries not only inform, but also organize contact between the job seeker and the employer.
The third group is recruiting agencies, i.e. commercial structures that take on most of the work of finding candidates for employers and finding jobs for job seekers.
There are also intermediaries in the labor market that provide consulting and marketing services, as well as companies that train and retrain workers.
The labor market is a socially significant market, therefore the state actively interferes in its work.
First, the state controls working conditions and makes sure that labor legislation is not violated.
Secondly, the state sets the minimum wage.
Third, the state controls employment by registering the unemployed, providing them with financial assistance, organizing retraining or helping to move to regions where there is a shortage of labor.
The first goal of the state is to protect the life and health of workers. For this purpose, labor legislation is being created, including the limitation of working hours, as well as regulating the conditions for performing hazardous work.
The second goal is to guarantee the quality of work and protect others (for example, from defective products and industrial accidents). For this, the same methods are used as above, as well as requirements for the qualifications and health of applicants for certain positions are introduced. Measures to limit working hours and strict requirements for workers lead to a weakening of competition between job seekers, thus, the state has a negative impact on the labor market, but this negative is compensated by the benefits for society from the safety and quality of the product, etc.
The third goal of the state in the labor market is the organization of the reproduction of the labor force. For this, the state limits working hours and sets a minimum wage. The purpose of the reproduction of the labor force is also the prohibition of child labor, which makes it possible to improve conditions for the education of children, i.e. to train a quality workforce.
The fourth goal is to prevent discrimination in the labor market, which is achieved through the introduction of various anti-discrimination norms in labor legislation.
The fifth goal is social protection of the completely and temporarily disabled. To this end, the state introduces old age and disability pensions, as well as sickness benefits.
The sixth goal is social protection of the unemployed and prevention of their marginalization and criminalization. For this, there are unemployment benefits, as well as other measures to help the unemployed, including retraining.
The seventh goal is to protect the labor market from migrants; for this, both a simple non-admission of migrants to the labor market and quotas for places given to migrants are used.
So, in order to combat the prevalence of employers in the labor market, workers are united in trade unions, which can be professional, geographical, or simply unite the workers of the enterprise. Trade unions perform the following functions:
First, they represent the interests of employees in negotiations with entrepreneurs.
Secondly, trade unions control the fulfillment by entrepreneurs of the obligations they have given to their employees.
Thirdly, trade unions play the role of an aggregator of workers' interests; allow them to form a common position in negotiations with employers or a common position in the fight against employers.
Fourth, trade unions restrict competition in the labor market. Finally, trade unions play the role of organizers of workers' protests against employers.
Trade union activity has both positive and negative impact on the labor market. The positive effect is that trade unions facilitate negotiations between workers and employers. Moreover, the terms of labor contracts developed by trade unions become the basis for such contracts for other persons.
But at the same time there is also a negative effect from the existence of the trade union, expressed in the monopolization of certain segments of the labor market by it. As a result, in these segments there is an increased cost of labor, and at the same time unemployment increases. Employees have less incentives to improve the quality of work and improve their professional level. And the resulting monopoly rent is paid by consumers of goods that are produced by workers who are members of the trade union.
And finally, since contracts between trade unions and employers are of a long-term nature, the wages established by these contracts are fixed and employers cannot lower it at the moment when they need it.
Since people act as sellers in the labor market, the characteristics describing the labor market are associated with the population and its economic activity. The entire population is divided into able-bodied and disabled, which includes persons who are incapable of work due to age or state of health. Persons who cannot enter the labor market are excluded from the working-age population due to the fact that they are prohibited by law or they are obliged to work for state structures. This population is called institutional. From among the able-bodied non-institutional population, individuals who are and are not part of the labor force are distinguished. The latter include persons who are not employed and do not want to work.
The labor force consists of employed and unemployed, and the latter group includes persons without a job, but looking for it, also temporarily laid off and persons awaiting a new job are included in this category. Hence, we define unemployment as the ratio of the number of unemployed and the size of the labor force.
The unemployment rate is not the only indicator that characterizes the labor market. In addition to it, the level of employment, which shows the share of the working population among the non-institutional, as well as the level of involvement of the population in the labor force, i.e. the ratio of the size of the labor force and the size of the non-institutional population, however, unemployment and the unemployment rate are considered the main indicators of the state of the labor market, and the analysis of the work of this market revolves around these concepts. Secondly, after the unemployment rate, economists are interested in the duration of unemployment, i.e. the average time an unemployed person spends looking for a job. By term, unemployment is divided into short-term and long-term.
Unemployment is normal in a capitalist economy in which there is free movement of labor. As will be shown below, the very freedom of movement of workers from enterprise to enterprise is one of the reasons for the existence of unemployment. Since the existence of unemployment is an objective reality, there is a normal level for each economy, which depends on the specifics of the labor market in this economy.
Natural (frictional) unemployment. Let the economy maintain a constant volume of production, but at the same time enterprises appear and close. The laid-off workers can easily find a job, but they need some time to:
1. Get information about available vacancies,
2. Rate this information;
3. Contact selected employers and negotiate with them;
4. Make the final choice and conclude an employment contract;
5. Get to work.
Thus, while there is a job search, a person remains unemployed. And this part of unemployment exists in the absence of any changes in the economy, simply because people change jobs.
Natural (structural) unemployment. Structural unemployment occurs when the structure of labor demand and the structure of labor supply does not match, and this discrepancy can be of both professional qualification and geographic nature. First of all, this situation arises during the period of structural changes in the economy. Structural unemployment is of a longer duration than frictional unemployment, since the unemployed cannot find a new job without retraining or changing their place of residence.
Seasonal unemployment. It arises in countries and regions with a predominance of agriculture and forestry, as well as the extractive industry due to the fact that the demand for labor in these industries is of a pronounced seasonal nature.
Cyclical unemployment. This type of unemployment arises due to general economic fluctuations in the conjuncture, i.e. due to global fluctuations in the economy. During periods of economic recession, unemployment rises, since a decrease in production leads to a decrease in the demand for labor, and during periods of economic recovery, it decreases. The rise and fall in unemployment during the cyclical fluctuations of the economy is directly proportional to the growth and decline in output. This relationship is described by Okun's law, which we will consider in the course of macroeconomics.
Unemployment is harmful to the state both from a political point of view and from an economic point of view. Therefore, a rational government has among its goals the fight against unemployment and economic assistance to the unemployed. State policy in the field of employment consists of two components: First, social protection of workers and unemployed, plus economic assistance to the latter; Secondly, one of the measures aimed at reducing unemployment.
The first part of the employment policy includes:
1. Guaranteeing hired workers the fulfillment of the terms of labor contracts.
2. Guarantees of decent wages and minimization of exploitation, i.e. guaranteeing a minimum wage.
3. Guarantee of the maximum possible work safety.
4. Guarantees of preserving jobs for the temporarily disabled, as well as social and medical insurance for the temporarily disabled and unemployed.
5. Protection against unjustified dismissal.
6. Economic assistance to the unemployed: cash unemployment benefits, severance pay for those dismissed by the employer's decision, and in-kind assistance to the unemployed (food, social services, deferral of various payments).
The second part of the state employment policy consists of the following measures:
1. Creation of a state employment service, which assumes the function of informing the unemployed about vacancies, and employers - about available jobseekers. In addition, the employment service assumes the organization of contacts between jobseekers and employers, and the functions of the employment service are registration and statistics of the unemployed, as well as providing them with economic assistance.
2. Organization of retraining of the unemployed, including both raising their qualifications and mastering new professions. Promotion of labor migration, which implies guarantees of employment for migrants.
3. Creation of temporary jobs in state-owned enterprises and government agencies, as well as the organization of public works.
4. Assistance in organizing their own business by the unemployed, including training in running a business, assistance in drawing up a business plan, concessional loans, etc.
In addition to the above measures, the state can indirectly influence the level of employment by influencing the size of the labor force. To do this, it can change the boundaries of the working age (by raising or lowering the minimum age of employees and the retirement age), and can also change the list of categories of the population belonging to the working age, for example, it can reduce or increase the period of compulsory parental leave or change a list of diseases that signify disability. And finally, the state has tools to indirectly influence the employment of the population by influencing the economic activity of society.
Modern economic theory, speaking of land, understands by this term the totality of all natural factors of production, for which:
1. Ownership rights determined;
2. That are limited;
3. Or they have a price set without the participation of an economic mechanism.
Thus, if capital is a material factor of production, labor is personal, then land is a natural factor of production.
Initially, the basis of the economy was agricultural production. And for agricultural production, the basis was precisely the land, and not just land, but fertile soil. Therefore, the land, as a factor of production, was understood only as the fertility of the soil, which determined the result of production. Further, with the development of commercial agricultural production, it turned out that it was not enough just to produce a product, it was necessary to deliver it to the consumer and quickly. As a result, land plots conveniently located in relation to sales markets turned out to be more productive.
In cities, land also has its own value, and the cost does not depend at all on the fertility of the plots, but depends on the development of infrastructure, which includes the road network, energy networks, water supply, etc .; as well as from the accessibility of the site for workers and buyers of products, thus, a special theory of land valuation in urban settlements arises in the economy, based on the infrastructural characteristics of the sites.
Simultaneously with urbanization, there was a process of development of industrial production that consumes natural resources. But since natural resources are inseparable from the land on which they are located, it was natural to include natural resources in the land factor. Accordingly, the value of land plots is determined not only by soil and infrastructural characteristics, but also by the presence of natural resources on these plots.
And finally, recently, when assessing the land, it began to have the presence or absence of pollution. Therefore, the factor "land" included the ecological component: cleanliness of air and water, soil pollution, the ability of the site to store (preserve) waste generated by the economy, as well as the ability to naturally recycle this waste.
Since land is a factor of production, and at the same time does not belong to producers, but to consumers and the state, there is a demand for land, as well as a supply of land from landowners, thus a market for land lease for production needs arises.
The land lease market cannot be unified, since, for example, the owners of agricultural land hardly compete with the owners of land in cities. Therefore, the land market is segmented according to the purpose of the land; the main segments are:
1. Agricultural land market;
2. The market for industrial land within settlements, as well as in other places provided with infrastructure;
3. Residential land market;
4. Coastal land market;
5. Forestry market;
6. Mineral deposits markets.
Each of these segments includes many segments of the second and third level, and so on. The land lease market cannot be geographically uniform either.
But there is also another land market, where land owners act as sellers, and other consumers and the state are buyers. In this market, it is not the transfer of land to lease that takes place, but the transfer of ownership of land plots. Land sellers enter this market when they run into budget deficits. And buyers enter the land market for a variety of purposes.
Since the land market is highly segmented, it cannot be a perfect market. It turns out that the land market is an imperfect market with a lack of information and high transaction costs. In such a market, there will certainly be intermediaries who inform market participants, appraise land plots, bring sellers and buyers together, and help in the execution of transactions. These intermediaries are real estate companies that are professional intermediaries of the real estate market.
Consider the market for renting land plots for industrial needs. First of all, the cost of a land plot will be determined by the direction of its use. For example, an area set aside for agriculture will be valued very differently from a site where minerals are developed. Secondly, the cost of renting a land plot will largely be determined by its rarity; the fewer such sites are available on the market, the higher the price their owners will demand. Thirdly, the rental price is determined by the quality of the land plot, as well as by how much the quality of the plot will change during the lease period. The fourth factor that strongly influences the cost of land lease is the lease term. For example, the longer the lease period, the longer the landowner will not be able to use his land in an alternative way, and therefore the higher the rental rate he will have to charge. Another example, the longer the lease term, the lower the tenant's risks, and the more profitable it is for him to improve the quality of the land plot.
Now let's look at the pricing in the market, where the owners of land plots are changing. In this market, the price of land is formed. Moreover, some of the principles of pricing from the rental market are in effect, and some are not, for example, the principle of determining the value by the method of using a land plot ceases to operate. Instead, when determining the price of land, all possible uses are taken into account, but the most profitable way of use makes the largest contribution to the price. The factors of the rarity and quality of the land plot retain their importance, while the factor of the cost of money takes the place of the factor of time.
The next consideration is agricultural production - which is a set of types of production that require land, or rather fertile soil, which converts the energy of the Sun, water and minerals into biomass of plants and animals.
It is in agricultural production that land has a special meaning, ie. is a key factor of production, which almost completely determines the productivity of labor and capital. In modern agricultural production, the value of land is gradually decreasing, but still remains high. Of course, the influence of the land factor is just as great in the extractive industry, but there capital and technology are traditionally more important than in agricultural production.
In agrarian production, the influence of the laws of scarcity was revealed early and very sharply, that is, historically, very early, there was a shortage of fertile land necessary to provide the population with food, and industry with raw materials. But it was precisely in agricultural production that the relativity of the restrictions imposed by the scarcity of land resources was manifested, that is, the fact that the limited area under crops does not establish a hard limit for the volume of production in agriculture, and the fact that the scarcity of land resources can be circumvented. Farmers
Since the consumption of agricultural products is compulsory, the demand for it has a very low elasticity. And this means large fluctuations in prices that occur in lean years. But at the same time, the low elasticity of demand also means that with a low yield, agricultural producers receive high profits, and with a high yield, they may suffer losses.
In agricultural production, there are two types of application of labor and capital. Firstly, the actual production of an agricultural product, and secondly, an increase in the fertility of the land. At times, these types of labor complement each other, but sometimes they can replace each other. The latter happens when there is an overproduction of agricultural products in the economy. It should be noted that seasonal employment is a distinctive characteristic of agricultural production. Moreover, seasonal employment is expressed both in a seasonal increase in the number of workers, for example, when harvesting crops, and in a seasonal increase in the workload of permanent workers.
The next consideration is the specifics of the extractive industry. In general, the extractive industry should be understood as the totality of branches of the national economy involved in extracting natural material from the earth and turning it into raw materials for the manufacturing industry.
The importance of the land factor in the extractive industry is as great as in agricultural production. This is due to the fact that the extractive industry needs strictly defined land plots that contain in themselves or on their surface those resources that are required by the economy. However, compared to the agricultural sector, the extractive sector is much more capital intensive and requires more sophisticated technologies.
The problem of depletion of resources and the insufficiency of existing deposits arose before the extractive industry much later than before the agro-industrial complex. However, this problem turned out to be extremely acute and the main direction of development of the extractive industry was the creation of technologies that would allow the use of lower-quality resources, and the creation of technologies for deeper processing of the extracted raw materials.
Note that although the problem of resource depletion has always been acute for the extractive industry, it has never been critical for the economy as a whole, and in those few cases when this problem led to the collapse of the economy, it was created artificially. The most striking example of this is the economic crisis of the 1970s, when oil prices rose sharply and fuel shortages arose. But this crisis would not have been so acute if it were not for the decrease in fuel exports by the countries of the Persian Gulf for political reasons.
As primary raw materials take a smaller share in the cost of final products, the demand for raw materials is becoming less elastic. Therefore, cyclical fluctuations in primary raw material prices are gradually increasing. As a result, in the extractive sector, as well as in agriculture, there are prerequisites for monopolization.
Considering the difference between the extractive industries and the agricultural ones, we see that the extractive industry necessarily depletes the resources of the land plots that it uses. Therefore, the right to develop minerals has a price comparable to the value of the minerals that will be extracted. And since in modern conditions only large deposits are effectively developed, the mining company must necessarily be large.
Due to the fact that after the extraction of minerals, the value of land decreases sharply, and the value of land containing minerals is constantly growing due to the depletion of resources in other deposits, puts the landowner before the choice whether to extract them now or to wait. In practice, the decision to extract minerals is made in conditions of uncertainty about the value of the resources in the ground.
The next consideration concerns the land valuation procedure. In principle, each land plot is unique, but it is impossible to evaluate it on the basis of its inherent properties, since many of these properties do not have an objective assessment. Therefore, a comparative assessment of land plots takes place by selecting plots similar to the considered one, which would have been sold in the recent past.
We consider separately those characteristics of the land that are taken into account in its assessment. First, the location, everything is taken into account: the region, the district, the proximity of transport and waterways, the proximity of large settlements, proximity to the sea, proximity to sources of pollution, etc. Here the assessment is based on the method of direct and indirect analogies.
Soils and grounds are then taken into account. Here, in the assessment, both the analogy method and the cost method are used. For example, the price of a plot can be reduced by the estimated cost of drainage (if the plot is swampy).
The availability of infrastructure on and near the site is also taken into account. At the same time, the infrastructure on the site can be estimated based on the costs of its creation and indicators of its wear, and the infrastructure near the site, which indirectly increases its cost, is taken into account by the method of indirect analogies.
Buildings with structures located on the site are also taken into account. In general, they increase the price of the site by their residual value. However, if they cannot be used for their intended purpose, they reduce the price of the site by the cost of demolition and reclamation.
Permitted uses of the site are also taken into account. If a site is allowed to be used only in one specific way, then when searching for analogies, only sites with this way of use are taken.
So, the land, being a factor of production, affecting the productivity of other factors by its fertility, location and resources contained in it. And therefore, the use of land in production implies a periodic payment for the use of land, which entrepreneurs pay to landowners.
Rent (more precisely, land rent) in economic theory refers to the annual amount of payments for the use of a specific land plot. Rent is the landowner's income, but unlike wages and interest, it is not the price of land. The latter is determined on the basis of the rent and the profitability of the property of consumers, i.e. on the basis of an interest rate, thus the land market turns out to be strongly linked to the capital market, since land is an alternative option in relation to securities to investing the consumer's savings.
Unlike the interest rate and (to some extent) wages, the rent is individual, i.e. is determined by the characteristics of a particular land plot. However, there is a common land market for similar plots, and therefore the landowner determines the rent on the offer based on the rent and the price of land on similar plots. The demand rent is formed on the basis of the productivity of the land plot. But at the same time, since the market is individual, it is difficult to talk about pricing based on marginal performance.
But the rent on the worst of the land plots is determined precisely by the marginal productivity (land in general), i.e. inclusion of the worst land plot in circulation should bring zero profit to entrepreneurs. This implies zero rent if there are unused plots and positive rent if there are none.
But on other plots of land, the long-term equilibrium rent will be such that the profit from their use will be zero. This is due to the fact that the level of rent is assigned individually for each land plot. Therefore, an entrepreneur in agricultural production can obtain long-term profit only through the use of advanced technologies for the use of land.
Now let us consider the constituent parts of land rent and begin our analysis with land rent for land used exclusively in agricultural production. We need to limit the areas of land use so that there is no excessive complication of the task due to the components of rent associated with the potential and real possibility of other types of land use.
If all land plots were exactly the same, then the rent would be the same. Moreover, it is easy to guess that rent in this case can arise only due to a shortage of land plots, since in the event of an excess of land, land owners would quickly reduce rent to zero, competing with each other for the right to provide land to entrepreneurs. This annuity component is called absolute annuity.
Absolute rent directly depends on the profitability of agricultural production: the more profit agricultural production can bring, the higher the absolute rent will be. It would seem that an increase in productivity in agricultural production should lead to an increase in the profits of entrepreneurs in this sector, and hence to an increase in rent. However, this is not quite true.
Population growth is an important global parameter for changes in rent. Population growth in itself leads to an increase in demand for agricultural products, which means that it leads to a gradual rise in prices and to an increase in the profitability of agricultural production. But this is not all, since the rent is established for a long time, the forecasts of population growth are included in the rent.
But land plots differ among themselves. And it is clear that differences between land plots should give rise to differences in rent. The difference between the rent for a specific plot and the absolute rent calculated for the worst plot of land with the same area is called differential rent.
As already noted, differential rent is determined by the fertility of the site, in other words, by its productivity. But in the conditions of an imperfect land market observed in reality, differential rent also depends on the opinion of the tenants and the owner of the land plot about its quality.
Long-term land relations lead to the fact that the lessee pays differential rent to the owner of the land on the basis of the quality of the plot at the time of the conclusion of the lease agreement. And that part of the differential rent, which corresponds to the increase in the fertility of the land and the improvement of the surrounding infrastructure during the term of the lease, becomes the tenant's profit. But after the completion of this contract, the owner of the land will establish a new rent, taking into account the increment in the quality of the land, i.e. all investments of the lessee in the quality of the land are appropriated by the landowner, which makes it unprofitable for the lessee to improve the land plot.
If other use of a land plot is possible, except for agricultural production, then other types of rent arise. For example, if a given land plot lies within an urban settlement, then urban land rent arises. Like land rent in agriculture, it consists of an absolute component and a differential one. The first of them arises from the limited lands of settlements. The emergence of a differential rent component in settlements is associated with differences in the location of land plots, differences in infrastructure, as well as differences in their purpose.
But the land plot can also be used for the extraction of renewable and non-renewable natural resources. The first case is no different from ordinary agricultural production, i.e. rent is determined by the productivity of the land, i.e. the amount of renewable resource that can be mined in this area; as well as the scarcity of the extracted resource and the scarcity of land on which this resource can be extracted.
If there is an opportunity to extract non-renewable natural resources on the site, then the rent turns into a payment for the exploitation of the deposit, which, even if calculated annually, is determined by the total profit that can be obtained from the extraction of the resource. In turn, this profit is determined by the scarcity of the resource, the size of the field, the complexity of production and the technology used. Therefore, with the depletion of natural resources and with the development of mining technologies, there is an increase in the value of deposits, and hence the rent given by the land plot used for the extraction of non-renewable resources. An important component of the rent in the extraction of minerals is the payment for pollution and land degradation, which, as one can easily understand, is determined by the amount of agricultural rent, as well as the interest rate.
Now it remains to understand the question of how land rent is determined in conditions when land can be used in several ways. Here, in general, everything is very simple. The landlord compares the options for using the land and prioritizes the option that will generate the most income. At the same time, it is important to note the significant uncertainty that arises when making such a decision. But in reality, the situation is somewhat different. The possibility of several options for the use of land leads to the fact that the price of land and rent increase.
Neoclassical economic theory argues that the reward of each factor of production is determined by its marginal productivity. However, the rule of equality of the price of a factor and its marginal productivity is derived under the condition that for each producer the price of a factor does not depend on the volume of his demand.
However, firstly, some production factors are fixed. And secondly, the supply of some production factors or the demand for them may be inelastic.
Let's consider the first case. In this case, with an increase in demand for a production factor caused by an increase in demand for the final product or an increase in prices for other factors of production, a temporary deficit of the considered production factor arises. The scarcity of the production factor leads to an increase in prices for it. This means that in a short time the owner receives an income that exceeds the productivity of this factor.
In the longer term, three processes take place simultaneously: 1) the supply of this factor of production is growing; 2) the productivity of the considered production factor grows due to the increased use of other production factors; 3) alternative technologies are used. As a result, the productivity of the scarce factor will have to equal its price. Short-term rent arising from a temporary shortage of factors of production is called quasi rent.
But let us pay attention that practically all natural factors of production, combined into the factor of land, always remain in short supply, therefore rent for them exists constantly. In neoclassical economic theory, it is believed that the price of a factor is determined by the opportunity cost for the owner of this factor. But in the case of a deficit of a production factor, it turns out that its price is higher than the opportunity costs for the owner of the factor. Therefore, neoclassical theory considers the difference between the price of the production factor and the opportunity cost to be rent.
Now let us turn to another situation in which demand for each seller of factors of production is not absolutely elastic, i.e. with a larger supply of a factor, the price for it falls. In this case, a situation arises in which the seller's rational choice will be a higher price and a lower supply than in the case of absolute elasticity of demand. This is a monopoly rent, which is discussed below.
The number of sellers of goods is limited under the conditions of monopoly or oligopoly; and the number of buyers is limited in conditions of monopsony and oligopsony. The greatest opportunities for a seller to restrict the supply of goods arise in a monopoly, that is, when there is only one seller on the market, so we will consider in this chapter monopoly rent. For a buyer, the best conditions for limiting demand for a product arise in monopsony conditions, when there is only one buyer on the market - he.
The monopolist is interested in limiting the supply because it behaves rationally and optimizes its profit rationally. To optimize profits, the monopolist seeks to find such a volume of output at which its marginal profit (derivative of profit by sales volume) is equal to zero. But unlike a competitive market, the marginal profit turns out to be zero, not when the price of the goods and marginal costs are equal, but earlier.
The revenue, production and profit of a monopolist depend on the elasticity of demand, and the less elastic the demand, the less the volume of production optimal for the monopoly and the greater the profit. The amount of additional profit arising from the inelasticity of demand, i.e. the difference between the profit of the monopolist and the profit with perfectly elastic demand is called monopoly rent.
MONETARY AND CREDIT SYSTEM
The previous consideration concerned commodity markets and markets for factors of production, now it is necessary to include in the consideration the main component of the economy - money, for which all goods and services are exchanged.
The very development of market relations required the emergence of a single value equivalent, acting as an intermediary in commodity exchange. It was this intermediary that began to be called money. Now let us note that since money is nothing more than an intermediary in exchange, then we can assume that money is everything that performs the functions of money.
Historically, money was a variety of goods from sheep and cocoa to precious metals. Gradually, it was to precious metals that the function of money passed, since it was convenient to use them both for circulation and for storage. But precious metals had to be accurately weighed and tested, in other words, minted. This is where the capabilities of the state apparatus came in handy: the state turned out to be the most capable of both minting a coin and guaranteeing its quality.
The main function of money is the function of a medium of circulation, i.e. participation in commodity and factor transactions, which facilitates the circulation of goods, services and factors of production.
The second function of money is the function of the measure and the equivalent of value (goods), i.e. money can fulfill the function of a medium of exchange only if all market participants agree to accept money in exchange for goods.
These two functions of money are their main functions and were originally the only ones. But the existence of money convenient for settlements and storage has led to the fact that money has a function of saving value, or the function of an instrument of saving.
The emergence of the function of saving value in money led to the emergence of savings. And the desire to profitably use savings has led to the emergence of monetary relations. But when the loan appeared, the loan payment also appeared. And since the loan is calculated in money and the payment on the loan is charged in monetary form, then money receives another function - the function of a means of payment.
Money is supplied to the economy by the state; as a rule, this function of the state is delegated to the Central Bank. The central bank issues cash, which is the basis for all money circulation in the economy. Cash can participate in circulation, or it can be stored in commercial banks, and so, when analyzing the amount of money in circulation, economists do not take into account the money that is in banks. And the amount of money outside the banks is called the money supply.
There are several ways to measure the money supply, and, accordingly, several indicators reflecting its size. These indicators are called monetary aggregates and differ in the breadth of coverage of the varieties of money. The first such indicator is the amount of cash outside the banking system. This indicator is called the monetary aggregate M0. The next aggregate is aggregate M1, which includes cash and the volume of demand deposits in commercial banks. This aggregate is the main one for the analysis of money circulation, and when they talk about the money supply, they most often mean it. Wider than the M1 aggregate will be the M2 aggregates (M1 plus short deposits) and the M3 aggregate, which also includes long bank deposits.
The money supply is required by the economy to organize the circulation of goods and services, as well as to save. Moreover, the economy requires all the money supply outside the banks. All this money supply is the amount of money offered to the economy by the banking system, and this is what they mean when they talk about the supply of money. The magnitude of the demand for money is the amount of money that is necessary for the money to carry out its functions in full. If there is a supply and demand for money, then the price of money must arise. And it really appears, since the surplus money in the economy turns into bank deposits and securities, the money supply is a function of the interest rate. On the other hand, the unmet need of the economy for money is covered by lending, which means that it also depends on the interest rate. Consequently, the interest rate is the price of money, and not only the price of capital, because its changes are able to equalize the demand and supply of money.
The concept of credit is closely related to the concept of money, which in the first approximation can be defined as a set of relations for the transfer of money for temporary use to another person. First, a loan provides for the voluntary transfer (alienation) of money (but a non-cash loan is also possible, for example, a loan in the form of a bill of exchange, a commodity loan, a loan with securities, etc.). Secondly, the loan is issued for a certain period, established when the loan is issued. Thirdly, the loan implies the repayment of the issued funds, and the lender expects to return his capital in (liquid) cash form or in the same form in which the loan was issued; Fourthly, the credit relationship is voluntary and is built on the basis of trust between the lender and the borrower.
Commercial loan - a transaction on the commodity market with a deferred payment. Although in this case there is no cash flow from the borrower to the lender, but it can be assumed that the lender allows the borrower to use his working capital in commodity form, nevertheless, this is a real loan, because a commercial loan provides for the urgency and repayment of the lender's capital, and in cash. A commercial loan agreement can be an integral part of a sale and purchase agreement, or it can be drawn up in the form of a bill of exchange or a bill of exchange, which is issued by the recipient of the commercial loan to the seller. The bill of exchange can be used by the creditor as collateral for the loans received by him or as a means of payment.
Bank loan is a more flexible instrument, which is different in terms of maturity and terms of repayment options for loans issued by the bank to various borrowers. The lender is the bank, which is at the same time the borrower from clients who have placed their funds in bank accounts. A bank loan can be short-term or long-term, but businesses generally prefer to use short-term bank loans.
Thus, a loan is a set of trust-based relations between a lender and a borrower regarding the movement (including receipt, use and repayment with interest) of the lender's temporarily free funds.
The main function of credit in the economy is the redistribution and efficient use of free funds. At the same time, credit relations ensure the flow of funds to those industries that need them most.
But at the same time, credit performs other functions in the economy. First, the credit system as a whole increases the amount of money in circulation. Secondly, the existence of credit significantly reduces the need for working capital for producers. Third, credit allows manufacturers to build up inventories.
So, credit is good for the economy and beneficial for borrowers. Large borrowers who want to get money for a long term benefit from a public loan, when the borrower directly attracts free funds from the population and enterprises by issuing bonds. But if money is needed either by a small company, or for a very short time, or very quickly, then it is more profitable for the borrower to apply to the bank for a bank loan, since the bank has enough short money that it can give out literally at the moment of applying for a loan.
Let's list the functions of the banking system, which can be reduced to the global functions of organizing monetary circulation and organizing credit. In expanded form, these functions can be represented as follows:
The function of organizing monetary circulation is divided into functions:
1. Issue of cash;
2. Emission of non-cash money;
3. Withdrawal from the economy of cash (collection) and withdrawal of non-cash money;
4. Maintaining accounts of economic entities.
The function of organizing a loan consists of the following functions:
1. Mobilization of free funds in the economy;
2. Issuance of a loan and organization of loan payments, including maintaining credit accounts of borrowers;
3. Organization of loan repayment, including forced repayment;
4. Aggregating cash flows and converting short money of creditors of the banking system into long loans.
Commercial banks that provide loans are the basis of the banking (credit system). Banks are divided into wholesale and retail, focused on working with the population. But the credit system also includes:
1. Central bank.
2. Investment banks.
3. Leasing companies.
4. Bank deposit insurance companies.
5. Non-bank credit institutions.
First of all, the central bank is the regulator of cash circulation. He not only issues cash at the request of the government or commercial banks, but also monitors the adequacy of the number of banknotes.
Secondly, the central bank is a bank for banks. He not only lends to commercial banks, but also accepts deposits from them, and also maintains settlement accounts, with the help of which commercial banks can conduct non-cash transactions among themselves.
Thirdly, the central bank regulates the amount of non-cash money in the economy and determines its price. To regulate the amount of non-cash money, the central bank determines the rules for lending and raising money by commercial banks, the central bank can also buy and sell various assets to commercial banks, the purchase of assets by the central bank leads to an increase in the amount of money in circulation, and the sale leads to a decrease. To regulate the price of money, the central bank can change the interest rate on loans issued to commercial banks, as well as the interest rate at which it attracts deposits.
In addition, the central bank controls commercial banks and competition in the banking sector. For this, the central bank determines the rules for licensing commercial banks and the minimum amount of their capital. He monitors the compliance of commercial banks with liquidity and solvency standards. If these standards are not met, the central bank has the right to revoke or suspend a license from a commercial bank.
But at the same time, the central bank monitors the stability of the entire banking system. Therefore, if the loss of liquidity by one of the commercial banks threatens the stability of other banks, then instead of revoking the license and bankruptcy, which should have happened if the Central Bank had always strictly acted in accordance with its regulations, this bank can receive a preferential loan secured by own shares or other assistance from the Central Bank.
The interest rate, as already mentioned, is both the price of money and the price of capital in the economy. Therefore, it is clear that the value of the interest rate is influenced by the demand for money and capital, as well as the supply of money and capital. But what are the deeper factors that determine this value?
Since the central bank sets interest rates for attracting funds from commercial banks and for lending to commercial banks, these interest rates significantly affect the market interest rate. As a rule, a central bank increase in base rates leads to an increase in the market interest rate, and a decrease in rates also causes a decrease in the market interest rate. For example, if the central bank raises the interest rate on loans for commercial banks, this will lead to the fact that banks will reduce the demand for loans from the central bank, but will begin to more actively attract money from the population and companies, for this they will increase the interest rate on deposits, and the increase in the rate on deposits will reduce the profits of banks, to which they will respond by raising interest rates on loans.
However, this dependence is not so direct: if the central bank sharply increases rates, this will lead to banks' refusal to attract loans from the central bank, but will not necessarily lead to an increase in the volume of deposits in the central bank, because in the economy may have a shortage of free money. Consequently, the central bank is excluded from the money market, and the market interest rate will be detached from the central bank rates.
In addition to the base interest rates, the central bank can influence the market interest rate by changing the reserve ratios. If the standards are raised, then banks can direct more financial resources to the credit market, the money supply in the economy falls, and the interest rate rises.
If the central bank does not take any action, then potentially the money supply in the economy should be constant. But in reality this is not the case.
Now we turn to the factors influencing the demand for money. Accelerating economic growth leads to an increase in the volume of transactions in the commodity and factor markets, and this leads to an increase in the interest rate. With an economic downturn, the opposite picture is observed: the demand for money for transactions decreases, and with it the interest rate falls.
The demand for money as a store of value depends primarily on the interest rate, increasing as it decreases. But at the same time, the demand for money for saving is also influenced by the consumer activity of the population, the higher it is, the less savings and the lower the demand for money and the disposable income of consumers. Increasing consumer income increases savings and the money supply they need.
Let's consider the connection between the monetary and credit market and the securities market. The securities market is understood as a set of markets in which securities are traded (documents that are obligations to pay income to their holders and personify the rights of holders to these incomes) issued by enterprises and the state.
Let us draw your attention to the close connection of securities with the credit market, just as when obtaining a loan, during the initial placement of securities, the issuer of these securities receives at its full disposal temporarily free funds from other economic entities. At the same time, as in obtaining a loan, he undertakes to return this money and pay interest income to the holder of the security (the existence of formally perpetual securities is not considered here). The buyer of the security, just like the lender, transfers his money to the issuer, based only on confidence in the latter, and in return receives the right to interest income on the security and return of the money invested in the future. In addition, he receives the right to claim unpaid income and principal debt from the issuer, as well as the right to foreclose on the property of the securities issuer.
Consequently, securities can be considered a lending instrument for the issuer, but an important difference between a security and an ordinary loan is its potential liquidity, i.e. the ability to sell it on the securities market at the current market rate, thus, the buyer of the security can finance the long-term debt of the issuer at the expense of his short free money.
The resale value of securities is determined not so much by the amount received by the issuer when selling the security, but by the amount of its future obligations, interest rate, and potential risks of default by the issuer. Therefore, the income of the holder of the security between the time of purchase in the secondary market and the time of its resale turns out to be practically independent of the income that will be paid to him by the issuer during this time.
This independence of income from the source of real income makes securities an excellent tool for speculation. And speculation often becomes the main source of profit for professional participants in the securities market.
Thus, the credit market and the securities market are closely linked, both monetary resources and demand for them can flow from one of these markets to another. As a result, the profitability of instruments in these markets is closely related to each other. An increase in the interest rate in the credit market leads to an increase in the yield of issued securities, as well as to a fall in prices for securities in the secondary market; an increase in the profitability of transactions in the secondary securities market leads to an increase in demand for credit, and hence to an increase in the interest rate.
An obligatory attribute of a market economy is inflation, as a complex and multifaceted process that has many manifestations. It is on the basis of the observed manifestations that inflation is usually defined. The most frequent manifestation of inflation is the rise in the price level in the economy. This process is called explicit inflation, and this is what is meant when they talk about inflation. But it should be noted that manifestations of inflationary processes in the economy are not limited to explicit inflation. There is so-called hidden inflation, which manifests itself in the form of depletion of inventories and the emergence of a shortage of goods. As a rule, in a free market economy, latent inflation quickly turns into explicit inflation.
So, inflation is a set of processes occurring in the economy with a persistent excess of demand (in nominal, ie monetary terms) of the supply of goods and factors of production. The excess of demand over supply always results in inflationary processes, since supply cannot balance demand without rising prices, since an increase in supply is always associated with an increase in costs. There are several types of inflation, depending on the rate of price growth:
1. Creeping inflation occurs when prices rise by no more than 10% - 20% per year.
2. Galloping inflation is observed at an inflation rate of over 20% per year.
3. When prices rise more than 50% per month, hyperinflation begins.
4. If prices go down, then one speaks of deflation, which is the inverse process of inflation.
It is also important to distinguish between accelerating inflation and decelerating inflation (disinflation). By the way, in order to understand whether inflation is actually accelerating, it is necessary to exclude the seasonal component of inflation. It is equally important to understand whether the inflationary process is controlled by the state or not. In a controlled inflation environment, the government and central bank can speed up or slow down inflation at will. As a rule, acceleration of inflation is accompanied by economic growth. But sometimes the opposite picture arises, i.e. inflation accompanies recession. In this case, the economy is said to be stagflationary.
Let us consider the effect of the inflationary mechanism in the economy, namely, the mechanism of inflation development in the most common case, when continuous inflation is caused by the continuous infusion of money into the economy by the state.
So, let the central bank start pumping money into the economy, but at the same time the central bank itself does not direct money to the commodity markets and does not give it to the government for this purpose. At first, this will lead to an imbalance between supply and demand in the money market, which will cause the interest rate to fall, both in the money market and in the capital market. In response to a decrease in the interest rate, enterprises will increase their investments, which will lead to an increase in demand for investment goods, an increase in their value and an increase in their output, and a decrease in the interest rate will also cause an increase in consumer activity, financed by loans, in the consumer goods market. It will also lead to higher output of consumer goods and higher prices for them, thus increasing the scale of the economy as well as GDP.
But GDP growth will spur consumption of factors of production and cause an increase in their prices, while an increase in prices in the markets of factors of production will lead to a further rise in prices in commodity markets. At the same time, if the prices of factors of production grow at a faster pace than the prices of final products, then the growth of GDP will be replaced by its decline. At the same time, the continuing decline in the interest rate will accelerate the rise in prices in the commodity markets.
But in any case, GDP will eventually stabilize (when the rate of growth in prices for factors of production equals the rate of growth in prices of final goods), and the rate of inflation will be equal to the rate of growth of the money supply. In the money market at this time, the interest rate will stabilize at a new level, which will be approximately equal to the sum of the initial interest rate and the inflation rate.
An imbalance in the money market can be caused not only by emission, but also by the acceleration of money circulation, which can be caused, among other things, by a decrease in the monetary reserves of consumers and firms. In this case, the inflation mechanism will be approximately the same as above. The only difference is that in the latter case the inflationary process will be short and the economy will gradually stabilize at zero inflation and a higher price level. The slow and gradual acceleration of money turnover associated with the development of technologies in the banking sector will maintain a very low rate, but constant inflation.
The inflationary process differs from other processes in the economy not only by its transience, but also by the huge role of the expectations of economic entities regarding future inflation. Inflationary expectations - expectations of economic entities regarding the development of inflationary processes in the future. Inflationary expectations consist of the growth rate of the price level for final products, the rate of growth of prices for factors of production, resources, etc., expected by economic entities. As a rule, inflationary expectations differ for different groups of economic agents. Manufacturers have better information on price changes and therefore their inflation forecasts are more accurate than consumers. The state has even more accurate forecasts than manufacturers, and most importantly, it is able to influence inflation, so it can predict future inflation even more accurately. Note that many producers and consumers do not make their own inflation forecasts, since they do not have the necessary data for this, but use the forecasts offered by the state.
Inflationary expectations have a direct impact on the interest rate and the demand for money: if the interest rate is lower than the expected inflation, then reasonable consumers will refuse to invest in money and will keep their savings in the form of real assets, also inflationary the expectations of economic agents determine prices in commodity markets and markets for factors of production.
Inflationary expectations of consumers affect the markets for factors of production, and primarily the labor market. Expecting an inflationary rise in prices in the economy, hired workers begin to demand a wage increase in advance, and not on the fact of a rise in prices, as would have happened in the absence of inflationary expectations. And an increase in wages leads to an increase in production costs, which, even in a competitive economy, leads to an increase in prices for the final product.
It turns out that when all economic actors expect a higher inflation than observed in practice, then the economy begins to decline, since there is not enough money in the economy for circulation, and entrepreneurs are faced with too high prices for factors of production. If inflation expectations are less than inflation, the opposite picture is observed.
If you observe the cyclical changes in the economy, you will find that the acceleration of economic growth is accompanied by a decrease in unemployment and an acceleration in inflation. From this, it can be concluded that the dynamics of inflation and unemployment are opposite. This conclusion will seem to us even more fair if we turn to the data on inflation and unemployment during periods of active government intervention in the economy. During these periods, if the state stimulated the development of the economy, there was also an acceleration in economic growth, a decrease in unemployment and an acceleration in inflation.
In this way, a conclusion was drawn about the relationship between inflation and employment: Acceleration of inflation leads to an increase in employment. Graphically, this relationship is reflected using the Phillips curve, which in its original version set an empirical functional relationship between unemployment and inflation. Still, it should be understood that the direct relationship between employment and inflation is not a fundamental economic law.
The existence of the Phillips curve, and hence the existence of a positive relationship between employment and inflation, led economists (and with them the monetary authorities of different countries) to the idea of the possibility of managing unemployment through money emission. As a result, experiments began in various countries aimed at accelerating economic growth and reducing unemployment through rising inflation. At first, these experiments were successful, but very quickly, despite persisting inflation, unemployment returned to its previous values.
But at the same time, the direct relationship between employment and inflation remained, however, this relationship was modified, now an increase in employment could be achieved only by accelerating inflation compared to the previous level.
After that, inflation began to be perceived by society as a greater evil in comparison with unemployment. And most of the world's states began to pursue anti-inflationary policies. And it immediately turned out that employment, which reacted very weakly to the rise in inflation, strongly reacted to its decline.
High rates of inflation and its unpredictability are harmful to the economy, as they lead to disruption of the monetary system. But inflation also creates excessive social tension in society. Therefore, one of the goals of the state in the field of economics is to stabilize money circulation and fight inflation.
To combat cyclical inflation, it is usually enough to adjust the money supply. To do this, the central bank can raise base interest rates and reserve rates, and this is usually enough. If lower interest rates and higher reserve rates are not enough, then the central bank and government can directly reduce the amount of money in the economy by selling government securities in the financial market or by decreasing foreign exchange reserves.
The money market in the fight against cyclical inflation is sensitive to government actions, as banks seek to actively borrow money from the central bank during periods of economic recovery and, conversely, try to avoid depositing funds with the central bank whenever possible. Real sector enterprises and consumers agree to borrow money from banks at current interest rates, since they believe that income growth will allow them to pay interest in the future.
The opposite situation arises in the money market under conditions of high inflation generated by the constant emission of money. Loans become unprofitable for producers and consumers, so only trade organizations continue to use loans. At the same time, the interest rate on the loan turns out to be very close to the inflation rate or even lower than the inflation rate. Due to low lending volumes, commercial banks are reluctant to borrow money from the central bank.
In such conditions, the increase in the interest rate by the central bank cannot force the banking system to reduce the supply of money. Raising reserve rates can slow inflation, but it is dangerous for the economy, because it increases the flight from money to consumers and producers.
The main means of combating inflation caused by the emission of money is the stabilization of the budget, which is carried out by reducing government spending, increasing taxes and foreign loans.
In a broad sense, a financial system is understood as a system of financial funds, which includes monetary funds of various levels and a set of institutions that organize the movement of these funds.
In a narrower sense, the system of public finance is a system of monetary funds owned by the state and public organizations, as well as a set of institutions that ensure the replenishment and expenditure of these funds. The system of public finance includes: funds of public organizations (from choral singing circles to political parties), funds from municipal budgets, as well as funds from state budgets of various levels and state non-budgetary funds (targeted funds).
The inflow of funds into the public finance system is provided by various fiscal organizations: tax and customs services, law enforcement agencies, state treasury, various state institutions that receive payments for their services. The movement of financial resources within the financial system is carried out and controlled by the treasury and the central bank.
The system of public finance exists for the uninterrupted performance of its functions by the state and public organizations. Therefore, its functions are:
1. Organization of the receipt of financial resources in various funds, as well as control of the inflow of resources.
2. Distribution of collected revenues between different levels of the financial system and its individual funds.
3. Keeping the collected financial resources in order to use them at the right time.
4. Organization of cash flow from funds to their final recipients.
5. Control over the expenditure of financial resources. In particular, control over the execution of the state budget.
It is worth noting that the public finance system does not have a single common center, and its individual subsystems are autonomous, for example, in many federal states, the financial systems of the federation and its subjects are autonomous in all phases, except for the revenue collection phase
The public finance system operates in accordance with the plan adopted by the representative authorities, directing financial resources to those consumers and to the extent that are prescribed in this plan. This plan is called a budget and is a list of state revenues and expenditures during (usually) a year.
Just like the system of state power, the budget consists of several levels. The highest level of the budgetary system is the central budget. This budget reflects the cost of the government performing its main functions during the year. The second level of the budgetary system is regional budgets. These budgets have partial independence, since they are formed mainly from their own sources, but this independence is incomplete, because subsidies from the federal budget are one of the sources of funds for regional budgets; and in some regions (called subsidized) subsidies from the center are the basis of the budget.
There is also a third level of the state budget - the municipal one. Municipal budgets are replenished through taxes established at the federal level, as well as through subsidies from budgets of higher levels. At the same time, some functions of state power, including preschool and school education, have also been transferred to the municipal level.
A separate hierarchy of budgets is formed by the budgets of state funds, among which are the pension fund, social and health insurance funds. The system of budgets of these funds also has a three-tier character, consisting of federal, regional and territorial levels.
Budget - there is a list of income and expenses (of the state or another person) for the period with the resulting deficit or surplus. (Methods for covering the deficit and using the surplus are also approved when the budget is adopted.)
The tax system is a part of the financial system. Tax is the money that the state enforces from citizens and enterprises, intended to finance the execution of its functions by the state. It is important to note the obligatory nature of taxes, the irrevocability and gratuitousness of tax payments.
For every tax there is a taxpayer; object of taxation; the tax base; and the tax rate. The tax rate can be both fixed, i.e. specified in monetary units, and proportional, i.e. specified as a percentage of the tax base.
The division of taxes into direct and indirect is important from the point of view of economic science. Direct tax is a tax paid by an explicit payer from their own income. Indirect taxes are mandatory payments that are included in the price of goods and are paid by the seller, not the buyer.
The taxation system, which consists of all taxes, fees and other obligatory payments, has several functions in the economy. Firstly, this is a fiscal function, i.e. function of filling the budget and extra-budgetary funds. Secondly, the regulatory function, which is expressed in stimulating some types of activity and limiting others. Thirdly, the social function, which consists in reducing property stratification in society and smoothing out social tension.
To perform all these functions, a complex tax system is needed, but it should be built on several basic principles. These principles include:
1. The neutrality of the tax system. This implies the introduction of uniform tax standards for all taxpayers, i.e. the tax system should not give competitive advantages to any of the subjects of the economy.
2. The principle of fairness of taxation. It lies in the fact that tax exemptions should be fairly distributed among certain categories of citizens and firms.
3. The principle of simplicity.
The tax burden always negatively affects the economy. High taxes are harmful to the economy and reduce the tax base; it should also be borne in mind that citizens do not at all believe that it is fair to pay taxes at the current tax rates. Of course, they believe that taxes are fair and necessary, but they consider them too high and seek to reduce tax deductions using both legal and illegal means. This is especially evident at high tax rates, since the fight against low taxes is unjustified due to high opportunity costs.
Thus, it becomes clear that a high tax rate is harmful to the state budget, as it leads to a decrease in tax collection due to the departure of taxpayers to the shadow economy, as well as due to a decrease in economic activity. At the same time, too low tax rates are also disadvantageous for the state, since they bring too low income. Similar reasoning was first made by the American economist A. Laffer.
In honor of Laffer, a curve was named (the graph is not published, but is available on the Internet), reflecting the dependence of tax revenues on the tax rate. At low tax rates, tax collections increase, but gradually this growth slows down due to citizens' withdrawal from taxation and suppression of economic activity, and at some point it stops, the point at which the growth of revenues stops is the optimal tax rate. After the optimum, there is a rapid decline in tax collection and a decrease in total tax collections. At the same time, legal business is suppressed, but the shadow sector begins to flourish, fueling organized crime and corruption.
The fiscal policy of the state, as a part of the financial system, is aimed at the implementation of its economic and social functions, the performance of which is associated with the consumption of financial resources, and the latter can be used to pay for the labor of persons employed in the public sector (from officials to employed in public works), for the purchase of a product produced outside the public sector (from military equipment to school supplies), as well as for government spending in the form of social benefits.
Fiscal policy - 1) the policy of public expenditures, decisions and actions of the state in relation to expenditures for the implementation of its functions; 2) part of the economic policy of the state related to the regulation of the economy at the expense of government spending.
It is worth noting that fiscal policy has two main goals: 1) minimization of expenses when the state fully fulfills its functions, this should ultimately lead to a reduction in taxes, or the maximum expansion of the list of functions of the state with fixed income; and 2) regulation of the economy. But still, if we take into account that government spending is largely determined by its revenues, then it turns out that the task of determining the optimal fiscal policy is to choose such a policy so that it helps to achieve conflicting goals with limited resources. For example, improving the country's defenses and raising the level of education are contradictory goals for the state when it comes to the distribution of financial resources, but both of them are consistent with the economic state of the state, although in different ways. The state should allocate resources between these goals, trying to achieve optimal satisfaction of the needs of society.
How can government spending affect the non-government sector of the economy? First, part of the government's expenditures are converted into incomes of citizens working for this state, which means that they increase national income, consumption and savings. Secondly, part of the government's expenses go to the purchase of goods and services.
Above, only the direct impact of government spending on the economy was indicated, but there is also an indirect impact. Using all these properties of government spending, the government can increase the Gross Domestic Product during periods of economic downturn, as well as reduce it during a boom in the economy.
The financial system operates with such concepts as budget deficit and surplus. The budgets of the state, regions and municipalities are lists of income and expenses. If too many functions are delegated to the state, and society cannot finance the execution of these functions, a budget deficit occurs, i.e. excess of government expenditures over its revenues.
The opposite situation is also possible, i.e. budget surplus, but this situation is much less common, since society seeks to withdraw surplus financial resources from the state by changing tax legislation by representative authorities. And the state, expecting this, seeks to fully spend the funds raised, albeit not even very efficiently.
A budget deficit can be planned when drawing up a budget, when it is known in advance that revenues will be significantly less than expenditures, or it can be revealed in the course of budget execution, when, for example, real revenues turn out to be significantly less than planned.
When it comes to the budget deficit, one can distinguish between the total budget deficit of the state and the deficit of individual budgets. For example, if total budget revenues are lower than expenditures, then we have a total budget deficit, but if there is a budget deficit in certain regions with a surplus of the federal and local budgets, then this is only a deficit of these budgets, and the total budget may not have a deficit. If the deficit is not cumulative and persists for a long time, then it is a sign of mismanagement of income and an improperly designed tax system.
Since the state must maintain a balance of revenues and expenditures, the budget deficit must be covered in some way. The main ways to cover the budget in the short term are the emission of money and the increase in public debt. There are drawbacks to financing the budget deficit with public debt:
1. The funds received by the state in debt are attracted on a repayable basis.
2. The funds received by the state in debt are attracted on a reimbursable basis. This means that the creditors of the state must receive remuneration.
3. Funds received by the state are provided on a voluntary basis, which means that at some point the state's creditors may refuse to trust it and stop lending their monetary resources.
4. The state, borrowing from citizens and firms, competes for credit resources with other borrowers, which means that the growth of public debt leads to an increase in the interest rate in the economy.
5. Rising public debt is a sign and source of economic instability.
But the public debt has its positive aspects. First, government lending is the most reliable way of placing free funds. Secondly, securities that represent government debt are usually highly liquid, and therefore can be used as a means of preserving the liquidity of the banking system. Third, these securities are ideal collateral.
The state has a current debt, ie. obligations for payments to their suppliers, banks, as well as persons working for the state, as well as long-term debt, formalized in securities. The state borrows in the domestic market, issuing bonds of various maturities, denominated in the national currency and intended for sale in the domestic market (domestic debt); as well as in the external market, attracting funds from foreign investors (external debt).
Consideration of individual markets for goods and services is accompanied by consideration of market equilibrium as its key state, to which this market seeks, and in which it can exist for an arbitrarily long time with unchanged external parameters, since the participants of this market not interested in getting out of equilibrium. The question arises whether there is such a state in which the economy, as a set of markets and economic agents, can also be for an arbitrarily long time, if the environment external to the economy does not change, and if there is such a state, then is it the only one, and whether the economy, brought out of this state, strives to return to it.
Before asking about the existence of such a state, which we will call the state of general economic equilibrium, it is necessary to consider in detail what characterizes the state of general economic equilibrium. First, consider a static equilibrium, in which the economy can really be at any time, that is, in an extremely long-term equilibrium. In this state, all consumers, as well as the state, must fully spend their income. At the same time, all consumers must choose the optimal combination of benefits. Further, all producers must transfer all income to the owners of the production factors. In addition, producers must be in a state of long-term maximum profitability. Finally, for the economy to be in a state of general equilibrium, it is necessary that in every commodity market, demand is equal to supply, and in every market for factors of production, demand is also equal to supply.
Static equilibrium in an unchanging economy does not reflect the actual state of the economy, in which changes are constantly occurring, which means that static equilibrium is purely theoretical. Therefore, the concept of short-term equilibrium, which has a dynamic character, appeared in economic theory. In this equilibrium, the conditions of equality of expenditures and incomes of all economic entities are fulfilled, but the requirement for the absence of savings and loans is not met. Since economic equilibrium requires the equilibrium of all markets, this equilibrium can be called microeconomic.
Let's consider two approaches to economic equilibrium. The model created by L. Walras reduced the problem of finding equilibrium to solving a system of equations in which some of the equations described the behavior of firms based on the production function; part - consumer behavior, and part - equilibrium of individual commodity markets and resource markets. It turned out that this system of equations has more variables than equations, i.e. it is solvable in principle, which means that the existence of a simultaneous equilibrium in all markets is possible. Moreover, according to the original Walrasian model, the state of equilibrium in the economy is not unique. There are an infinite number of possible equilibrium states, differing in the scale of prices. But at the same time, the relative prices of goods and services are determined unambiguously. However, from the fundamental possibility of the existence of a simultaneous equilibrium in all markets, deduced by Walras, it did not at all follow that this equilibrium is achievable, and that the economy tends to this equilibrium.
The neoclassical general equilibrium model in macroeconomics is built on exactly the same principle as the Walrasian model. It contains an equation for the budget of the consumer sector, an equation that sets the optimal volume of production based on the production function, and on the basis of these equations, equilibrium equations are derived for three macroeconomic markets: the market for goods, the labor market and the capital market. And just like in the Walrasian model, it turns out that the equilibrium of the economy exists, and there is one single equilibrium value of the relative prices of goods and wages (which is the only variable factor of production).
This model of economic equilibrium has demonstrated not only the fundamental possibility of the existence of equilibrium, but also its attainability and stability. But the development of macroeconomic theory has shown the inconsistency of the neoclassical model. And in macroeconomics, the Keynesian approach arose, which developed its own general equilibrium model based on the principles of price viscosity and the interconnection of the money market with other markets.
All factors causing a shift in equilibrium or an out of equilibrium of the economy can be divided into external in relation to the economy and internal. Moreover, among the external factors, special attention should be paid to the factors controlled by the state. And we will start the analysis with internal factors.
From the point of view of macroeconomics, there are only two subjects of economic relations - the aggregate of consumers and the aggregate of producers, only the actions of these subjects can unbalance the economy, since markets are only mechanisms for balancing the interests of producers and consumers. Consumers can shift the equilibrium in the economy or unbalance the economy in only three ways:
1. By changing your propensity to consume;
2. By changing its function of supplying labor;
3. By changing your demand for money as a store of value.
Producers can also affect the equilibrium of the economy. To do this, they can change the amount of investment, which, by the way, depends on such an external factor as economic progress, or they can change their production function, which determines the volume of production. The production function gradually changes as investment in productive capital transforms, but it can also change dramatically due to a change in technology or due to such a subjective factor as the expectations of entrepreneurs. In addition, the decisions of entrepreneurs are influenced by expectations regarding the prices of factors of production and products. For example, if entrepreneurs overestimate the growth rate of prices for their products downward, then they will overestimate both their profits and output downward.
Among the not yet specified external factors affecting the economic equilibrium, it is necessary to take into account natural factors, in the first case, these are various parameters affecting productivity in the agricultural sector, in the second, it is an increase or decrease in the explored and available for the extraction of reserves of natural resources.
The next two factors that can affect the economic equilibrium are "owned" by the state. First, it can indirectly regulate the behavior of consumers and firms by changing tax and social policies. Secondly, the state has the ability to directly influence the economy through changes in fiscal and monetary policies.
One of the desired results of the state's economic policy is economic growth, when the volume of the economy (GDP or national income) increases, as well as the national wealth (property of citizens, enterprises and the state) grows, another result of growth is production of new goods and services. Economic growth in economic theory means not just an increase in production, but long-term changes in the natural level of production (i.e., the level achieved with statistically average unemployment and average utilization of production capacities), as well as the production potential of the economy. With this approach, the subject of analysis in the study of economic growth is the rate of increase in the production potential of the economy, i.e. investment processes.
However, you need to understand that economic growth occurs in conditions of limited resources, which means that it is not enough just to increase the production base. Therefore, economic growth can be analyzed in terms of the resource intensity of production, as well as the breadth of the resource base. And finally, economic growth is characterized by structural shifts in the economy: the emergence of new types of products, industries, an increase in the share of services, etc., thus, economic growth can be considered from the side of changes in the structure of the economy, however, in practice, economic growth is reduced to the growth of the well-being of the population, which is measured by the following indicators:
1. Average per capita income of the population.
2. The amount of free time.
3. Homogeneity of income distribution among different segments of the population.
4. The quality and variety of goods and services in the economy.
The faster these indicators grow, the faster economic growth is and the higher its quality, the rate of economic growth is usually measured using the rate of growth of gross product or the rate of growth of national income per capita, and the rest of the indicators characterize the quality of economic growth ...
Let us consider the phenomena and processes that cause and stimulate economic growth, as well as increase the potential for economic growth. In other words, the factors of economic growth, which are divided into direct and indirect. Direct factors of growth include the following factors directly related to factors of production:
1. An increase in the size of the labor force, an increase in its quality and an increase in the propensity of workers to work.
2. The growth of productive capital, and not only quantitative.
3. Attracting new lands into circulation and increasing their fertility.
4. Increasing the quantity and quality of natural resources involved in circulation.
5. Improving technology, improving the organization of production, deepening the division of labor.
6. Growth of entrepreneurial activity in society, an increase in the share of optimistic entrepreneurs.
7. Reducing government pressure on the economy: lowering taxes, increasing production quotas.
Among the indirect factors of economic growth, one can single out the factors of demand, factors of supply and factors of distribution. The second group includes: a decrease in the degree of market monopolization; reduction in income tax; expanding lending to the economy and reducing the cost of money. If these factors are present in the economy, they accelerate economic growth, if there are opposite factors in the economy, then economic growth is inhibited.
There are two types of economic growth, extensive and intensive. Extensive economic growth occurs due to the involvement in production of an increasing number of supply factors that can accelerate economic growth without improving their quality, for example, extensive economic growth is caused by an increase in the number of people employed in the economy.
Intensive economic growth is caused by the qualitative improvement of the supply factors that accelerate growth.
Economic growth is included in the economic cycle, which is defined as the sum of the phases of recession and growth of the economy, and the duration of the cycle is the time interval between two production peaks. In the economic cycle, not only the phases of recession and recovery are distinguished, but, upon a more detailed examination, a phase is distinguished:
1. Crisis, i.e. rapid decline in production;
2. Depression, i.e. slowing down the decline;
4. Boom, i.e. rapid growth and gradual overheating of the economy.
In the economy, many cyclical processes occur simultaneously, each of which is superimposed on others, more long-term. For example, the nature of damped cyclical fluctuations can be the process of restoring equilibrium in a separate market, out of equilibrium under the influence of external influences. The period of these fluctuations ranges from a day to a month; natural seasonal changes in the economy are also periodic in nature, which can lead to the same observed effects as the economic cycle itself. Further, inflationary processes are cyclical with a short period lasting less than a year.
There are also longer economic cycles with a stable period, and many economists have devoted their attention to the analysis and study of these cycles:
1. Kitchin's cycle. 2 - 4 years (Stock Cycle). This cycle is based on fluctuations in stocks of various commodities, including agricultural products.
2. Zhunglar cycle. 7 - 12 years old. (Investment cycle). The most typical cycle for the capitalist mode of production. Traced in the economy since 1787. The mechanism of this cycle is based on fluctuations in investment activity in the economy.
3. Blacksmith's cycles. 16 - 25 years old. (Construction cycle).
4. Kondratyev's cycles. 40 - 60 years old (Long waves). Long waves are generated by fundamental changes in technology, the emergence of fundamentally new goods and services in the economy, and the emergence of new needs on their basis.
When considering the mechanism of the cycle, it is necessary to separate the concept of the mechanism of the economic cycle and the concept of the mechanism of the economic crisis. These concepts are related to each other, but far from identical.
The mechanism of the economic cycle is a set of interconnections in the economy that prevent the economy from reaching long-term equilibrium, deviating the trajectory of the development of economic processes from the trajectory that directly leads to a state of equilibrium; or that prevent an economy that has reached equilibrium at a non-zero rate from stopping at that point. For example, in the mechanism of the investment business cycle, these are economic relationships that force firms to continue investing after reaching the optimal capital-labor ratio.
There is no consensus on the mechanism of the cyclical development of the economy. On the contrary, there are a huge number of theories explaining the economic cycle, below are the main ones.
1. Theories of external factors. In these theories, factors external to the economy, such as natural factors such as solar cycles, are named as the cause of economic fluctuations.
2. Monetary theories. The monetary theory of economic cycles fully links the cyclical fluctuations in the economy to the monetary factor.
3. Overaccumulation theory. This theory argues that because during an economic recovery, investment increases sharply, there is an overdevelopment of industries that produce the means of production to the detriment of industries that produce consumer goods. The imbalance in the structure of production makes the economy ineffective, and this leads to a crisis.
4. Underconsumption theory. This theory connects cyclical processes in the economy with ups and downs in consumer activity. If consumers sharply increase their savings, then this leads to an overproduction of consumer goods, and this already leads to a decline in other sectors. The underconsumption mechanism is an important component of any cycle mechanism, since during an economic downturn, consumers always reduce their activity.
5. Adaptive cycle theories. In the neoclassical and neo-Keynesian theories of the cycle, the cause of the cycle is the random deviations of the amount of capital from the optimal value for the current volume of production. As soon as such deviations occur, the economy tends to eliminate them, but instead there is a further deviation from the optimal value.
We will begin the analysis of the economic cycle by looking from economic boom to economic recession, ie. since the onset of the economic crisis. It does not matter what triggered the crisis itself, the only important thing is that the crisis can take on a general economic scale if the demand in the commodity market turns out to be less than the supply. There can be various reasons for this, from a monetary shock to changes in consumer preferences between consumption and saving, or entrepreneurial preferences between expanding production and increasing current payments to owners.
The economy can correct the arisen demand deficit in two ways: by lowering prices and lowering the volume of production. In the first case, the cycle develops according to the neoclassical model, and in the second, according to the Keynesian one. From the point of view of neoclassical theory, a decrease in prices leads to a decrease in producers' profits, and a decrease in profits leads to a decrease in investment and employment.
The economic downturn can end in several ways:
1. Faced with massive unemployment, wage earners agree to lower wages;
2. In the economy, there is a massive death of inefficient enterprises, and efficient enterprises increase profits;
3. The economy is reaching the limit of declining demand.
Further, it turns out that the new state of short-term equilibrium is unstable, since employment in it is too low and profits are high. The result is investment demand, which pushes up employment and profits. From the point of view of Keynesian theory, the cycle develops in a slightly different way. Lack of demand immediately leads to a decrease in output and unemployment. A decrease in output automatically leads to a drop in investment. In addition, the rise in unemployment does not lead to consumer consent to lower wages, but to an increase in their propensity to save, etc.
The recession ends only when the economy meets the minimum demand, consisting of autonomous consumer demand, government spending and autonomous investment, thus the Keynesian model of the economy assumes a faster and deeper recession than the neoclassical one. And the economic downturn is able to reproduce itself. Simultaneously with the end of the recession in the economy, the interest rate falls, as the unemployed spend their money savings on consumption. Having exhausted their savings, the unemployed become accommodating to lower wages, which means that employment begins to grow.
In general, the cyclical nature of the economy does not particularly harm it, since the slowdown in economic growth during periods of recession is compensated by its acceleration during periods of boom, as a result, the average rate of economic growth remains. Moreover, the cyclical nature of the economy makes it possible to increase its efficiency due to the death of inefficient enterprises during periods of crisis and the dismissal of inefficient workers during the same periods, thus, it turns out that cyclicality is a natural property of the economy that does not have harmful consequences for the entire economy. Therefore, it turns out that restraining the economic cycle is not necessary for the state.
But in the conditions of a deep global crisis, bankruptcy of even quite efficient enterprises is quite possible, that is, the economic cycle in some conditions does not lead to an increase in production efficiency. Further, after the bankruptcy of enterprises, production capital is released. In a local crisis, this capital will fall into the hands of more successful entrepreneurs. But in the context of the global crisis, entrepreneurs do not have the resources to acquire productive capital, so the released productive capital becomes the property of banks and other creditors. These persons are not effective owners, which means that the efficiency of production capital does not increase as a result of the crisis. The release of labor resources in the course of the global crisis is massive, and not sporadic, therefore, the efficiency of labor use does not increase. And finally, long-term unemployment and abrupt change of profession lead to losses of human capital and degradation of labor resources, and therefore reduce labor productivity and economic efficiency.
It is also worth noting that in addition to economic effects, economic crises lead to negative social events: an increase in discontent in society, an increase in alcoholism and drug addiction, the loss of some unemployed and bankrupt entrepreneurs from society, an increase in crime, an increase in the number of suicides, an increase in the number of mental illness.
But one should not think that during the economic cycle only the crisis carries with it adverse consequences for society and the economy. The economic boom also has traits that are dangerous for society and the economy. First, an economic boom means that production has exceeded its normal level, which means that all economic resources are being used inefficiently. Secondly, the rapid economic growth leads to the overexploitation of land and other natural resources, which inevitably leads to a deterioration of the ecological situation.
Consequently, cyclicality in an economy based on the use of complex technologies and human capital needs regulation and suppression. And the only person who has enough resources and power to do this is the state.
STATE REGULATION OF THE ECONOMY
All the goals of the state in the economic sphere can be represented in the form of four blocks:
1. Provision of services to the population and business. First of all, this includes the provision of public goods: defense, internal security, education, health care, protection of historical heritage and the environment. As well as services such as conflict resolution, registration of rights and their protection.
2. Social goals. The state has been delegated such important functions in the social sphere as caring for orphans and disabled people, ensuring old age, developing science and culture ...
The first two blocks of goals of the state are those tasks of the economic plan that the economy itself cannot solve, and therefore society entrusts them to the state. Striving to achieve these goals does not interfere with the operation of the economy, but because the state operates in the economic environment, it indirectly regulates the economy.
3. Improving the operation of the market mechanism. An economy is most efficient when all the markets in the economy are operating efficiently. And since the market mechanism works most effectively in a perfect market with perfect competition, the state is trying to make the market more perfect.
4. Regulation of the economy. This refers to the goals of macroeconomic regulation.
Let us define the methods that the state can use to regulate the economy, since the methods used to achieve other goals are intuitive. For the microeconomic regulation of industries, the state applies:
1. Production quotas.
2. Producer subsidies and specific taxes.
3. Government purchases or government orders.
4. Concessional lending.
5. Nationalization of some enterprises or privatization.
To regulate the economy at the macro level, the state uses:
1. Tax measures, i.e. increasing or decreasing the tax burden on the economy, changing the structure of taxes.
2. Fiscal measures, i.e. increasing and decreasing government spending, changing the structure of spending.
3. Monetary measures.
4. Public Debt Management Measures.
5. Stimulating industries that play the role of a locomotive of the economy.
The state can regulate the economy through taxes and government spending, but these methods of regulation are limited. And taxes and expenses are interconnected. The main instrument of tax regulation of the economy is the manipulation of the tax burden on the economy. An increase in the tax burden negatively affects the economy, because:
1. the amount of disposable income of consumers decreases, since, in the end, the entire tax burden falls on consumers, which means that the demand for goods and services decreases;
2. firms' demand for financial resources increases;
3. suppressed entrepreneurial activity and the desire of people to work, since their work brings them less remuneration.
Therefore, a more effective means of stimulating the economy may turn out to be a change in the structure of taxes. For example, in order to increase consumer demand, it is beneficial to shift the tax burden to the wealthiest citizens.
If taxes are a way of withdrawing a part of income from the economy, then government spending, on the contrary, increases the income of economic entities. Therefore, an increase in government spending can increase production during a crisis, but at the same time, an increase in government spending during an economic boom can cause not an increase in production, but an acceleration of inflation.
But do not forget that an increase in government spending is not only an increase in demand, but also new jobs and new investments necessary to meet demand from the government, and hence an additional (multiplied) increase in demand, which in itself is capable of causing a further increase in demand, and, consequently, an increase in production.
Note that changes in the structure of government spending can also affect the economy. For example, if the state increases the demand for the products of capital-intensive industries, then this will cause a greater increase in investment, and ultimately, faster economic growth. But for a rapid decrease in unemployment, it is necessary to direct state funds to industries with increased labor intensity of production.
Monetary methods of state regulation of the economy are less tied to the state budget, which means that they can be more freely used to regulate the economy. On the other hand, attempts to influence the economy by monetary methods are always fraught with increased inflation expectations and inflation acceleration.
An increase in the money supply in the economy can lead to both an increase in production and an acceleration of inflation, again due to an increase in nominal demand. And since the growth in nominal demand is not accompanied by an increase in real income, the relationship between the acceleration of inflation and the growth of production is determined by the willingness of producers to raise prices for their products and increase production. In addition, if economic entities expect an increase in the money supply, then they react to an increase in nominal demand by increasing prices, and not by increasing production.
Thus, during an economic boom, the injection of money into the economy can only lead to an increase in inflation and a very limited growth in production caused by the cheapening of credit. But during an economic crisis, an increase in the money supply can cause an increase in production and can stop the wave of bankruptcies of banks and manufacturing companies. A decrease in the money supply during an economic boom can stop inflationary processes and overheating of the economy, since an increase in the price of money leads to a decrease in investment, and a decrease in nominal demand causes a decrease in sales.
A direct increase in the money supply makes a profit for the banking sector, since the money issued by the state is multiplied in the banking system. As a result, the emission of money leads to the overdevelopment of the banking sector and its seizure of control over a part of the real sector of the economy. Therefore, the state seeks to use other methods of controlling the money supply besides direct emission.
For example, lowering and raising the interest rate serves as a substitute for pouring money into and out of the economy. But at the same time, money (in the form of central bank loans) enters the economy on a repayable and reimbursable basis, therefore, the banking sector's gain from the growth of the money supply will be less than with direct emission. In addition, raising and lowering the base interest rate has a psychological effect, since the money market is guided by the interest rate set by the state.
So, in the field of economics, the state has the goal of performing its functions and regulating the economy. Due to the limited financial resources of the state, the political problem arises of determining the key functions of the state and the distribution of financial resources between these functions.
But for the correct distribution of resources between functions, it is necessary to determine in advance the amount of those financial resources that will be at the disposal of the state and the cost of performing certain functions by the state. For this, the state makes short-term forecasts of economic development without state intervention. But on the basis of short-term forecasts, it may turn out that the economy is not developing at all the way the state would like. In this case, several variants of economic development forecasts are constructed, taking into account various degrees of possible state intervention.
As a result, there are many predictive scenarios of economic development in the near future, differing in indicators of government intervention in the economy. And from these scenarios, the optimal one from the point of view of the government is determined, and then, on its basis, the state budget is formed, which is submitted for approval to the parliament, which represents society. The rest of the scripts are for reference purposes only.
The approved budget is the official plan for the development of the state in the short term and the government's action plan in the economic sphere. On the basis of this plan, economic agents make decisions, i.e. the economic development plan drawn up by the government has not only an informational, but also a regulatory role: if the plan indicates a high growth rate for the economy, then it will be much easier to achieve this rate in practice.
In addition to short-term plans for 1 year, the state also builds long-term plans for the development of the economy, in which the state informs society about its long-term plans for fulfilling its functions to influence the economy, about the optimal trajectories of economic development from its point of view, and about actions that society (i.e. consumers and firms) must take in order to achieve optimal indicators of economic development.
Since the impact on the economy must be carried out over a long period of time to stimulate economic growth, the measures taken by the government must be balanced. Since economic growth can be achieved by increasing the capitalization of the economy, modernizing technologies and improving the quality of the labor force, it is precisely by influencing capital, technology and human capital that economic growth can be accelerated.
To influence the value of productive capital in the economy, several measures can be applied, among which it is necessary to mention direct state investments and investments of state-owned companies in those industries that the state considers key for the development of the country, and the state can also stimulate investments through reduction of taxes on investors, as well as the application of production sharing agreements, the creation of special economic zones, the allocation of tax credits, etc.
The most difficult for the state is the development of technology. As a rule, a state seeking to accelerate the growth of its economy uses technology imports, i.e. creates conditions for foreign investment, provided that foreign investors also import their technologies. The stimulation of foreign investment is carried out in the same way as the stimulation of domestic investment, with the only difference that the condition for obtaining tax incentives for foreign investment should be the import of advanced technologies. Additionally, foreign investors are encouraged to reduce customs duties and other payments related to foreign trade.
Development of own technologies presupposes the creation of a developed system of research and development centers, which presupposes the development of science and education, as well as significant expenditures on science. It is necessary to introduce scientific results into production by firms in various sectors of the economy. To do this, it is necessary to maintain a high level of competition in the economy so that enterprises have an incentive to invest in new technologies. And finally, improving the quality of the labor force implies, first of all, state investments in the education system. Moreover, we are talking about a systematic approach to education, and not just about vocational education. Statistics show that the maximum benefit is obtained from investments in general basic education.
INTERNATIONAL ECONOMIC RELATIONS
International economic relations is a special branch of the economy, in which there is a competition not of individual firms and citizens, but of entire states, for in international economic relations the ability of the state to influence the economy is most clearly manifested, for example, in a long period, the volume and structure of the country's foreign trade operations directly depends on the export and import duties established by the state, as well as its policy in the field of taxation of foreign capital.
When they talk about international economic relations, they mean the following types of relations:
1. International trade, i.e. movement of goods and services between different countries. When international trade is viewed from the side of a specific country, exports are distinguished, i.e. export of goods and services; and import, i.e. import of goods produced abroad.
2. International movement of capital, i.e. the movement of financial resources between countries, which implies that foreign citizens and firms invest their financial resources within the country in question in the manufacturing sector; and the citizens and firms of a country invest in firms in other countries.
3. International credit and foreign exchange transactions. In contrast to the movement of capital, international credit is of a shorter-term and repayable nature. In addition, the state is the main recipient of international loans.
4. The international movement of labor, i.e. emigration in order to find work abroad.
5. International payments, i.e. international settlements for completed international trade transactions, loan payments, money transfers in cash, etc.
6. Activities of international organizations. First of all - the activities of international financial institutions capable of influencing the foreign economic policy of states, for example, the IMF.
7. Activity of transnational corporations.
The main component of international economic relations is international trade. International trade involves the production of a product in one country and the sale of it to the final consumer in another. But between production and consumption, there is a movement of goods across two borders, during which the goods are first subject to export duty and then import duty and taxes in the importing country. With such a system of taxation of international trade, it turns out that at the same costs, the value of imported goods will exceed the value of local goods by the amount of import and export duties. Consequently, imports will be justified only if the foreign good is produced at much lower costs.
After the export-import transaction is completed, the seller of the goods turns out to have foreign currency, which he cannot use to pay for the factors of production in his own country, which means that after an international trade transaction it is necessary to sell the received currency. Therefore, the effectiveness of a foreign trade transaction depends on the foreign exchange rate: an increase in the foreign exchange rate (a decrease in the exchange rate of the manufacturer's national currency) makes exports profitable, and a decrease in the foreign exchange rate makes imports.
The development of the world economy results in the outstripping development of international trade. This is a fact, but this fact needs to be explained. Note that if all economies produce the same product, then there is no point in international trade. However, as the economy develops, more and more types of products are produced and the production of various products is concentrated in different countries.
But with a weak differentiation of products, international trade will be practically impossible; the rapid growth of international trade in similar goods requires low transaction costs and, at the same time, low customs barriers.
But differentiated products and low trade costs are still not enough for large-scale international trade, because such can exist only if countries specialize in the production of certain types of products. For the emergence of long-term specialization in the production of a certain product, it is necessary that the relative costs of producing this product in the country under consideration are lower than in other countries (Ricardo's theory of relative advantages).
This specialization of countries in the production of individual goods is called the international division of labor.
With the development of capitalism, the emergence of free capital, the growth of competition within the most developed countries, and the transformation of the interests of capital into the interests of the state, international investment has become one of the most important components of the IEE, at times in some countries even exceeding the volume of international trade. A powerful impetus to the development of the international movement of capital was given by the separation of financial capital from production capital, since financial capital is much more mobile than real capital and is focused on constant liquidity and quick profits. In many developing countries, starting in the middle of the twentieth century, the economic recovery began with the arrival of foreign financial capital.
Currently, developed countries are net consumers of capital, and developing countries are its exporters. This is due to the fact that in developed countries, despite low capital productivity, investment risks are also low.
What drives international investment. First of all, a situation when capital can bring different incomes in different countries. And it is clear that capital, due to its fluidity in monetary form, easily rushes to where it can bring more income.
However, the international movement of capital is hindered by risks, where the main place is occupied by political risks, the strongest in underdeveloped countries. In addition, currency risks play an important role. Along with currency risks are the economic risks of the country receiving investments, if this country is a developing country, then it is much more susceptible to cyclical phenomena in the world economy than a developed one; investments or, conversely, preferences to foreign investors. Finally, it can be noted that foreign investments, since they are more often carried out in financial form, depend on the development of the financial market of the host country.
In international economic relations, there is labor migration. The international movement of labor has always existed, but its development has been much slower than the development of international trade and the international capital market.
First of all, international migration is restrained by the same reasons as internal: people's unwillingness to take risks when changing jobs; unwillingness to spend money on moving; potential uncertainty with the place of residence when moving; discomfort experienced by family members when moving, etc. But all these reasons are much more restricting international migration than internal.
Economic factors constraining the international movement of labor:
1. Lack of the same social and economic guarantees when working abroad as when working in your own country. Namely, lack of basic health insurance; absence (at least) of a part of social insurance rights; lack of pension insurance; lack of social guarantees and rights for family members, for example, the right to free education. This factor hinders the movement of labor from more developed countries to less developed ones.
2. The employer's preference for local labor over foreign labor, i.e. a foreign worker will face lower wages and a higher probability of being fired.
3. Various expenses required while living on the territory of a foreign state.
4. Underestimation of foreign human capital and difficulties in using it. In particular, the need to confirm higher education diplomas.
Further it is necessary to mention the social barriers that impede the international movement of labor: the language barrier, which impedes, in particular, communication between the employee and the employer; as well as the cultural barrier that complicates the life of a foreigner, also, it should be noted the barriers to labor migration, set by states. The main such barriers include quotas for labor migration, as well as bans on entry and exit.
What is the role of international labor migration. First, in developed countries, labor migration makes it possible to cover the shortage of low-skilled labor in industries that are not prestigious for the local population. Second, it tends to equalize wage levels across countries. Thirdly, labor migration of highly qualified specialists is accompanied by the transfer of technologies and ideas.
The international monetary and financial system occupies a special place in international economic relations.
The financial system of the national economy is based on a two-tier banking system and a credit market, to which all other financial markets and various financial companies are already connected: investment, insurance, intermediary, etc. There is nothing like this in the global financial system.
First, in the international financial system there is no single center of the banking system, because each central bank is independent from the others. This means that no one in world finance has such power as the central bank within the country. The existing international banking institutions do not have political power over central banks and can influence them only by economic means, that is, only through credit relations.
Secondly, there is no single money market in the world, since there is a huge number of emission centers. As a consequence, each currency has its own financial market.
Thirdly, for some countries there is an internal and external financial market based on the currencies of these countries. The external market is a market in which citizens and firms of foreign countries operate.
Fourthly, the capacity of the world financial market is much greater than the capacity of the domestic market, therefore it is more profitable for states to attract large loans in the world market. But only a few states can attract loans in their own currency. The rest attract loans in foreign currency.
The purpose of the world financial system is to redirect financial capital flows to those countries where the maximum return on invested capital is observed, i.e. the global financial system provides consumers of capital with access to sources of capital around the world and at minimal prices. For example, states that need to cover the budget deficit are able to cover it through foreign loans at a relatively low interest rate.
In the modern economy, there is a more rapid development of international economic relations in comparison with the pace of development of the world's economy itself. This is primarily due to the lifting of restrictions on international economic activity. But these processes are also explained by the change in the perception of foreign goods by consumers as absolutely less quality than those produced in their own country.
The observed growth of international economic relations makes producers and consumers of each individual country more and more dependent on the actions and decisions of producers and consumers from other countries. Moreover, consumers, producers and the state above them are influenced by the economic decisions of foreign governments. The mutual influence of economic entities of different countries on each other is carried out through the global markets for goods, capital, labor and natural resources. The set of processes leading to the formation of global markets, and the processes accompanying them, are collectively called globalization processes.
What is globalization leading to? Firstly, a consumer in any country of the world can find those goods that he is used to consuming at home, therefore he feels more comfortable abroad. Secondly, local producers of goods enter into competition with large foreign producers and lose in this competition. Thirdly, globalization leads to cultural unification, which at the initial stages is expressed in the ability of representatives of one culture to perceive the achievements of another.
Well, now about the purely economic consequences of globalization. First and foremost is the creation of global markets. The creation of global markets for goods leads to increased production and lower transaction costs. The globalization of product markets means globalization, and hence the strengthening of competition.
The globalization of the capital market is leading to the formation of a global financial market, where trading continues around the clock, and capital is easily moved to where it can bring the greatest income. At the same time, the cost of raising capital and the risk payment fall. But on the other hand, financial flows in the global market are so great that they can easily unbalance the financial system of a small country.
The global labor market makes it easier to recruit workers overseas, increases labor mobility and equalizes labor costs around the world. Consequently, the globalization of the labor market leads to a smoothing of employment disparities.
But globalization is expressed not only in the globalization of trade, but also in the globalization of production. In particular, there are production facilities oriented towards foreign markets and production facilities created by foreign corporations. This leads to an equalization of the technological level of production development in different countries, as well as to an equalization of the cost of labor and the level of employment. But on the other hand, it is more difficult to manage globalized production at the state level, and the orientation of production towards foreign markets makes production dependent on the world situation.
REGULATION OF THE OPEN ECONOMY
An open economy can give society much more in terms of public welfare than a closed one. However, an open economy is fraught with many more threats to society. Some of them are simply a consequence of the openness to international economic relations, and some are associated with the peculiarities of the modern structure of the world economy.
The consequences of the openness of the economy, for example, is the penetration of external economic crises into the economy in question. These crises can be of three main types. First, there may be a deficit of imports, often generated by a variety of catastrophic events. Secondly, a crisis of overproduction of goods exported from the country may arise. Thirdly, the economy may suffer from external financial crises.
Labor emigration and immigration may pose a threat to society. The first is dangerous when educated people leave the country, taking with them significant human capital, labor immigration is dangerous when a large number of unskilled labor rushes into the country. Undoubtedly, the export of capital is a threat to society and the economy. Mention should be made of the threats to an open economy associated with the modern world order. The main reason for these threats is the existence of many almost completely independent states, each of which pursues its own foreign and domestic policies.
The economy of the country in question will be threatened primarily by trade wars against it and the protectionism of foreign states. The next threat is real wars. Even if the country in question does not participate in the war, but the war affects the suppliers of raw materials for its economy, the country will face a major economic crisis.
Let's list the additional functions of the state related to the openness of the economy and the transparency of borders associated with it:
First. Obligations of the state in open commodity markets. In short, these functions can be reduced to the protection of the domestic market and expansion in foreign markets. To do this, the state must support its own producer, working for export, with subsidies, reduced taxes and tariffs, and the state must protect its domestic market from foreign goods: a) low-quality; b) sold at reduced prices.
Second. Obligations of the state in open financial markets. In open financial markets, the main task of the state is to prevent excessive capital outflow from the country. Capital outflow has several paths, and all of them must be controlled by the state. The main of these ways are bank loans to foreign borrowers, corporate investments abroad, repatriation of capital by foreign investors, insurance operations, private investments abroad.
Third. Obligations of the state with an open labor market. The state must protect its labor market from the inflow of foreign labor of unsatisfactory quality, as well as from crowding out the citizens of the country in question by foreign workers. In the latter case, the state acts in its own interests, for if foreigners crowd out local workers, the state has to pay unemployment benefits.
Fourth. In an open economy, the state is obliged to protect the intellectual property of its citizens and their firms, as well as to protect its culture from the export of its artifacts by foreign citizens. In the latter case, the state is faced with an inevitable difference in prices for cultural objects inside and outside the country. At the same time, the state must protect the culture of its country from outside influences.
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