Fundamental Economic Concepts and Market Principles

Posted on Apr 26, 2025 in Economy

Core Economic Concepts and Definitions

Economic Activity Components

  • Production: Economic activities involve the creation of goods and services to satisfy human needs.
  • Distribution: Economic activities include the allocation of goods and services within society.
  • Consumption: Economic activities directly satisfy human needs through the use of goods and services.

Schools of Economic Thought

  • Mercantilism: Focus on international trade.
  • Physiocracy: Emphasis on agriculture.
  • Classical School: Focus on agriculture and industry.
  • Neoclassical School: Analysis of market performance.
  • Marxism: Advocates for public property of the means of production.

Elements of an Economic System

  • Productive Activity: The most important activity in society.
  • Technical Elements: Technology and methods employed to obtain goods.
  • Legal and Political Elements: Determine social relations and the property regime.

Key Economic Terms

ICT (Information and Communication Technology): New procedures applied to the processing, storage, and communication of data and information.

Commercial Code: A set of legal rules governing the economic behavior of citizens and businesses.

Obligation (Bond): A document demonstrating that the owner has granted, along with others, a loan to a company or entity.

Institution: An organization, often state-related, with its own distinct elements, standards, and goals.

Goods and Services Market: The market where families are typically the demanders (consumers).

Factor Market: The market where businesses are the demanders, needing productive resources (like labor, capital) for their activities.

Market Dynamics: Demand and Supply

Understanding Demand

Factors Influencing Demand

  1. Price of the Good: Generally, the higher the price of a good, the lower the quantity demanded.
  2. Income Level of the Consumer: Demand for most goods (normal goods) increases as consumer income levels increase.
  3. Prices of Other Related Goods: The price of substitutes (e.g., tea vs. coffee) and complements (e.g., cars and gasoline) influences demand.
  4. Consumer Preferences: When consumer preference for certain products increases, demand tends to rise.

The Demand Curve

The demand curve is the graphical representation of the relationship between the price of a good and the quantity demanded, assuming that income, tastes, and the prices of other goods remain constant.

Marketing’s Role

Marketing: A set of activities and techniques used to investigate consumer needs and ensure that products are appropriate to meet those needs.

Understanding Supply

The Supply Curve

The supply curve is the graphical representation of the quantities of goods that producers are willing to offer at various prices.

Price Elasticity of Demand

Elasticity measures the responsiveness of the quantity demanded to changes in price.

Market Structures

Perfect Competition

Requirements for a perfectly competitive market:

  1. The goods offered must be homogeneous (identical).
  2. There must be many buyers and sellers, none large enough to influence the market price.
  3. The market must be transparent (information is readily available).
  4. There must be freedom of entry and exit for firms.

Imperfect Competition

Oligopoly: A market structure with a small number of sellers, where several of them have a significant market share.

Cartel: A group of independent companies that maintain an agreement to reduce or eliminate competition (e.g., by fixing prices or limiting output).

Trust: Historically refers to large business concentrations with significant monopoly power, often formed through mergers.

Holding Company: A company that owns a controlling interest (majority shares) in other companies, coordinating their activities.

Measuring the Economy

Value Added and GDP

Value Added: The increase in value that is incorporated into raw materials and intermediate goods through the application of labor and capital during the production process. It is the outcome of an economic activity.

GDP (Gross Domestic Product): The total market value of all final goods and services produced within a country’s borders during a specific period (usually a year).

Current Accounts (Nominal GDP): Measure production value using the prices existing in the current year.

Constant Accounts (Real GDP): Measure production value using the prices from a specific base year, adjusting for inflation.

National Income Measures

  • RN (National Income): Total income earned by a nation’s residents. Calculated as: Wages + Rents + Interest + Corporate Profits.
  • RD (Disposable Income): Income available to households after taxes and transfers. Calculated as: RN – Direct Taxes – Social Security Contributions – Undistributed Corporate Profits + Transfer Payments (Aid).
  • RPC (Per Capita Income): Average income per person. Calculated as: RN / Number of Inhabitants.

Income Distribution and Development Indicators

ABB (Income Distribution Measure): Indicates how income is distributed among the population (Note: ‘ABB’ is not a standard abbreviation; it might refer to concepts like the Lorenz Curve or Gini Coefficient).

GDP vs. IDH: GDP allows calculation of a country’s economic growth. The IDH (Human Development Index) is considered a more complete measure of development as it includes health and education alongside income.

Economic Indicators and Environment

Short-term Indicators: Used to identify changes in various economic variables over a recent time period.

The Economic Environment (or Business Cycle): Refers to fluctuations in economic activity, often observed through changes in key economic parameters over relatively short periods.