Economic Agents and Decision-Making Factors

Posted on Jan 19, 2025 in Economy

Economic Agents and Their Decision-Making Processes

Factors Influencing Economic Decisions

Economic agents make decisions when they are free to do as they wish. The State intervenes only when there are serious problems or defects to be corrected. But how do all economic actors coordinate to make the economy run smoothly?

  • Economic rationality: Minimize opportunity cost.
  • Action: Agents act.
  • Incentives: Leverage incentives.

It is generally accepted that when agents act seeking their individual benefit, they are also contributing to the general benefit of society.

Families and Domestic Economies

What criteria do people use to decide what to consume?

  • Their income level.
  • Their preferences.

Another key feature is that consumers own the factors of production (land, labor, and capital) that firms need for their activities. Thus, in addition to consuming, they will sell or rent these factors to businesses in exchange for money (at the best price possible).

  • Sale or rental of natural resources.
  • Sale of labor: wages and salaries.
  • Sale or lease of capital: interest.

Four Classes of Consumers

  • Investors: Provide capital to companies for production and receive a portion of the company’s profits.
  • Workers: Provide labor to companies through an employment contract that sets out the conditions and wages.
  • Rentiers: Obtain income from rents received for their natural resources.
  • Strict Consumers (Passive Classes): Do not sell any productive factor, so they theoretically have zero consumption capacity. However, thanks to the welfare state, they receive aid or guarantees that allow them to consume some basic goods.

Businesses

Businesses are the economic agents in charge of producing and distributing the goods and services that consumers need.

Business Objectives (Rationality Criterion)

  1. Maximize Profits: This is the most important objective, to which others are subordinate. Profit = Revenue – Expenses. Therefore, a company’s normal behavior will be to try to make its income as high as possible and its costs as low as possible.
  2. Division of Labor: Dividing a task into a sequence of steps or stages, assigning a worker, a machine, or even a factory to perform only some of these steps.
  3. Specialization: By performing only a few, highly repeated tasks, workers or firms specialize and perform these tasks better, becoming more efficient, which can increase production and reduce costs.
  4. Exchange: To greatly increase production, and since each company only performs a few tasks, there must be a high degree of exchange between companies, countries, regions, etc. Therefore, the division of labor and specialization contribute to increasing trade, sales, and profits.
  5. Grow to increase production and sales.
  6. Improve image and influence.
  7. Contribute to the development of their environment by creating jobs and respecting the environment.

The Public Sector

The public sector comprises the organizations and institutions run by the government and present in all populations of a country. The public sector should act rationally in its decisions to be effective.

Major Decisions Taken by a State

  • Decide on income through taxation, raising or lowering taxes.
  • Decide how income is spent: what are the main needs of the population not covered by businesses?

The Spanish Public Sector Consists of

  • Public Administration:
    • Central: State.
    • Territorial: Autonomous Communities and Municipalities.
  • Public Enterprises: RENFE, TVE, shipyards, mines of Asturias, etc.
  • Other Autonomous Agencies: INSS, INE, Museo del Prado.

In recent years, there has been a progressive increase in citizens’ demands on the state to improve their quality of life. This increases the amount of public spending.