Understanding Economic Agents and the Circular Flow of Income
Item 3
Economic theory assumes that, in deciding, people are guided by the principle of economic rationality. Economic Rationality is to choose among the available choices, one that seeks more utility or welfare. Rent represents the value or the price paid for the use of something in a productive use of time. Depending on the productive resource that is generated, the income has different names: Salary if it is earned, the rental if it comes from natural resources, and interest if it stems from the capital.
Composition of Households
Employers are those who organize and coordinate productive activity to achieve targets set by the employer previously. The size of the company varies. In small and medium enterprises, ownership and management are united in the same person, while in large firms, the owner and entrepreneur are different people. When people decide to start their own business, they are called autonomous.
Workers are the element which, under the direction of the employer, participates in the productive process, contributing labor for wages. To be a worker, a person must have the following features:
- Personal: The work must be done by the contracted person.
- Voluntary: The relationship is not mandatory nor enforced.
- Employed: The product of labor does not belong to the worker but to the hiring person (entrepreneur).
- Dependent: The employee is under the discipline and direction of the employer.
- Remunerated: In return for work done, the worker receives a salary.
Rentiers: Work is the main source of income for many families, but not always the only one. The factors of production, capital, and natural resources are also sources of income for families. People living on this income only are called rentiers (i.e., those who live off the rent of properties).
Consumers (Strict Sense): This encompasses all persons not participating in any way in the productive process (students, pensioners).
Employers
Maximize Profit: Business profit = revenue – expenses. To maximize the outcome of this equation, companies try to increase revenues and reduce costs.
Stabilize and Grow Over Time: As firms acquire experience in the development of their activities, they become more efficient, so they produce more units at a lower cost and therefore need to expand markets and customers.
Build Wealth and Employment in the Area of Influence: Large industrial processes often outsource to the area where they exert their influence. This is to agree to subcontract with third-party firms for the execution of specific tasks or pieces that are then integrated into their outsourced productive processes. These tasks often include cleaning, machine maintenance, or tax advice.
Respect the Environment: Firms should produce the maximum number of goods and services by using the fewest possible factors of production, but they also now have to bear in mind emissions if they do not want to see their image tarnished in the public eye.
Public Sector
The public sector consists of the administration (national, regional, and local), public enterprises (such as Renfe), and autonomous agencies (without political affiliation, such as Social Security or INEM).
Circular Flow of Income
The Market for Goods and Services: Companies sell, and families buy.
Market of Production Factors: Families sell, and businesses buy.
The Circular Flow of Income is the set of relations of economic agents characterized by:
- The payment of corporate income to families in exchange for labor and other production factors.
- The payment for families to companies in exchange for goods and services produced by them.