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Barter – goods are traded directly for other
goods
Problems:
◦ requires double coincidence of wants
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Monetary economy has lower transaction and
information costs
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Relative price = price of a good in terms of
another good
Nominal price = price expressed in terms of
the monetary unit
Nominal value -refers to a value expressed in
money terms (that is, in units of a currency)
in a given year or series of years.
Real value - adjusts nominal value to remove
effects of price changes over time
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In a market economy, the price of a good is
determined by the interaction of demand and
supply
To sell we need a supplier
To buy we need a customer
The two blades of
Marshall's scissors
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In the words of Adam Smith:
◦ It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their self-interest. (Adam Smith,
Wealth of Nations, Book I, Chapter I)
◦ [A producer,]...by directing that industry in such a manner as its produce may be
of the greatest value, he intends only his own gain, and he is in this, as in many
other cases, led by an invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it was no part of it. By
pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have never known much
good done by those who affected to trade for the public good. (Smith, Book IV,
Chapter II)
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Customers vote using their money
Demand
P
profits
S
P
Q
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In a market economy:
◦ profit maximization requires least-cost production
(holding quantity and quality constant).
◦ sellers of a resource have an incentive to supply the
resource to its most highly valued use.
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buyers or sellers who cannot instantly find a
trading partner, and must therefore search
for a partner prior to transacting
Examples:
◦ frictional unemployment resulting from job hunting
by workers
◦ consumer theory, applied to analyze purchasing
decisions
Whether a given job or product is acceptable
depends on the searcher's beliefs about the
alternatives available on the market.
 Household
 Business
sector
sector
 Government
 Foreign
sector
sector
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includes everyone, all people, seeking to
satisfy unlimited wants and needs.
this sector is responsible for consumption
and undertakes consumption expenditures.
it owns all productive resources
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consists of one or more individuals sharing
living quarters
the basic residential unit in which economic
production, consumption are organized and
carried out.
may be the synonymous with family.
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includes the institutions (especially
proprietorships, partnerships, and
corporations) that undertake the task of
combining resources to produce goods and
services;
this sector does the production;
it also buys capital goods with investment
expenditures.
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includes the ruling bodies of the state and
local governments.
regulation is the prime function of the
government sector, especially passing laws,
collecting taxes, and forcing the other
sectors to do what they would not do
voluntarily.
it buys a portion of gross domestic product
(GDP) as government purchases.
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includes everyone and everything
(households, businesses, and governments)
beyond the boundaries of the domestic
economy.
it buys exports produced by the domestic
economy and produces imports purchased
by the domestic economy, which are
commonly combined into net exports
(exports minus imports).
1. State-owned – very inefficient
2. Municipal – owned by local government
other administration units
e.g. in USA States -> counties -> township
in Poland province (commune) ->second level
of local government administration in
Poland->district
◦ Utilities companies – water supplier, sewage
companies, public transportation companies, waste
management companies
◦ City driven company – technology park
3. Co-operatives - – organisation in which all
the members own an equal share. Share of
profit does not depend on the value of owned
shares.
◦ Housing co-operatives – non profit organisation
◦ Service co-operatives – for barbers, shoemakers
◦ Production co-operatives – e.g. agriculture
producers of milk, cheese
4. Private – the most effective
◦ Sole Entrepreneur (Am. sole proprietorship)
◦ Partnership
 SC - mutual liability
 SJ - general partnership
 SP – partnership (only for professions like doctor,
architect, lawyer, artist)
 SK - limited partnership
 SK-A - limited joint-stock partnership
◦ Corporation
 Sp. z o.o. – Private limited company Ltd
 S.A. – Public limited company, joint stock (am.
incorporated enterprise)
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Single owner
Advantages:
◦ Autonomy
◦ Easy to establish
◦ No starting capital
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Disadvantages
◦ difficult to acquire funds
◦ unlimited liability
Most common form of business
organization (by number of firms)
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Two or more individuals share ownership
Advantages:
◦ Pooled wealth and resources
◦ Pooled business skills
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Disadvantages:
◦ Loss in autonomy (relative to sole proprietorship)
◦ Unlimited liability
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A legal entity separate from its owners
Advantages
◦ limited liability
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Disadvantages
◦ double taxation
◦ separation of ownership from control
◦ required starting capital
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Most output is produced by corporations
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Independence:
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No fixed working hours
No fixed vacation date
No direct supervision
Management autonomy
Self-determined focus
Self-determined scale of operation
You are free to close down company at any time
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No caps to your profit
◦ The more you work the more you get
◦ You can multiply profit by hiring people
◦ You set your own gratification policy
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Self-fulfilment
◦ You work out your own ideas
◦ You can put your skills to best use
◦ direct relation between your performance and
your profits
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Employees
◦ You pick your own team
◦ You can hire your friends and relatives
◦ You can hire a secretary
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Funding
◦ You can take out investment credit
◦ You can find a venture capitalist
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Boons (additional benefit) of having
company:
◦ You can get wholesale deals
◦ You have access to trainings, conferences which
are held by your business partners
◦ Getting to know VIP’s
◦ Access to promo programmes of your business
partners
Other benefits:
 You determine your company location
◦ You can work from at home
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You can
You can
You can
family
You can
You can
deals
paint your office pink with orange dots
do extra work
establish a real multi-generation
build your own self-esteem
support charities and offer sponsor-
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High taxes
◦ Compulsory social security contributions
◦ Income tax
◦ Indirect taxes (VAT, excise)
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Responsibility
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For
For
For
For
you and your family
your employees
your customers
product
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Bankruptcy risk
◦ Mutual liability for some companies (you put your
own belongings at stake)
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Starting investments:
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Money for your office space
Money to refurbish your office or buy equipment
Computer, software, telephone
Operation funds
Pension scheme contribution (ZUS)
Disadvantages of running
a business
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Accounting problems:
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Stress:
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Security:
◦ If done by yourself very time-consuming – you need to
monitor the legislation (amendments to tax code have a
knock-on effect on your tax policy) and you need to deal
with very impressive bureaucracy, filling up forms, filling
statements and providing explanatory notes
◦ If done by accounting office or accountant – you have to
pay for this service
◦ Unlimited working hours
◦ You face the risk of your investments
◦ Insuring company assets
◦ Gangster extortions, protection racket
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„Government help”:
◦ Bureaucracy
◦ Audits from various agencies (tax office, social
security office, control office for labour)
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Competition:
◦ Pulling no punches
◦ Real risk of market entry from competition
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Costs:
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Salaries
Operating costs
Maintenance costs
And dozens of things you can not even name now
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Dishonest:
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Bad debts:
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External and random factors:
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Business partners
Company partners
Employees
Bureaucrats
◦ Business partners go bankrupt
◦ Postponements of payments
◦ Debt collection problems
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Market cycles,
Poor legislation
Cataclysm, Acts of God
Macroeconomic factors
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Municipal Office
◦ Company name
◦ Scope of operation
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Statistical office
◦ Statistical ID
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Tax office
◦ determining your tax liability
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Bank
◦ Setting up an account
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Social Security Office
◦ Compulsory social insurance
 Pension scheme, health care scheme and others
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Liabilities – money you owe to people
Amount Due – money your business partners owe to
you
Due date – The date on which a payment to the
Company is due. This date is given on the invoice
with bank account. In Polish economy due date has
nothing to do with the date of real payment.
Payment notice – request for payment which was not
paid until due date
Invoice – A commercial document in a form
consistent with the trade identifying both buyer and
seller, showing details such as: the articles sold,
quantities, prices, due date, invoice number, the
currency used for payment, bank account number
etc.
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Debt collecting agency – An organisation that
specialises in collecting their outstanding
debts off its clients, charging at commission
for doing so.
Accounting office – people who can do the
most unpleasant work for you
Bankruptcy – the state of the company which
isn't able to pay it’s debts and against which
a bankruptcy order has been made by a
court.
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Wikipedia.org
Smith A., Wealth of Nations, Book I, Chapter I
Haviland, W.A. (2003). Anthropology.
Wadsworth: Belmont, CA.
http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=circular+fl
ow