Three topics for the short report: Chiara Del Bello

Three topics for the short report:

ECONOMICS

• Circular Flow Diagram

• Planned or Command Economy

• Role of Advertising in Monopolistic Competition

Chiara Del Bello

The Circular

Flow Diagram

The circular flow diagram starts with two economic decision units:

the household and the firm.

These two entities capture the ideas of consumption (household) and production (firm).

The circular flow diagram is a simple illustration that shows how income flows through the economy between producers and consumers.

The diagram makes it clear that consumers and producers are interdependent.

CIRCULAR FLOW DIAGRAM

Households provide labor to firms in the market for factors of production. When somebody goes to work in the morning, he’s participating in the labor market.He earns money from the firms and this allows him to buy goods and services in the market for goods and services.

Consumers buy goods and services from firms and firms pay people for their labor.This exchange of money takes place in two different markets: the market of factors of production and the market for goods and services.

The market of factors of production is where firms buy the materials and labor that they need to produce their product.

The firm then converts these resources into goods that they sell in the market for goods and services.


The basic circular flow of income model consists of seven assumptions:

1. The economy consists of two sectors: households and firms.

2. Households spend all of their income on goods and

services or consumption. There’s no saving .

3. All output produced by firms is purchased by households

through their expenditure.

4. There is no financial sector.

5. There is no government sector.

6. There is no overseas sector.

7. It is a closed economy with no exports or imports.


From the FIRM’S PERSPECTIVE, the circular flow involves:

1) Purchasing resources in the market for factors of production;

2) Using the resources to produce a good or service;

3) Selling the item to others in the market of goods and services. Market for Factors of

Productions

Market of Goods & services

Firms


1) Providing labor to firms through the resource market, in exchange for money;

2) Purchasing goods and services from firms in the output market.

From the HOUSEHOLD’S PERSPECTIVE, the circular flow involves:

Market for Factors of

Productions


Households


Households sell labor to earn money and then they spend it on goods and services sold by firms.

When the two perspectives are combined, the diagram shows the flow of money to moving in a circle.

Firms spend money on inputs they need for production, one of these needs being labor.


Market for Factors of

Productions

Income

Spending

Wages, rent, profits

Revenue

Labour, land, capital Factor of productions

Good&services boughtGoods&services sold


Planned or command economy

PLANNED OR COMMAND ECONOMY

A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency.

In an entirely centralized economy, a universal survey of human needs and consumer wants is required before a comprehensive plan for production can be formulated.

Central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources.

Prices are also set by the central planners, but they do not serve as signals to producers of goods to increase or decrease production. Instead, they are used mainly as instruments of the central planners in their efforts to reconcile the total demand for consumer goods with the supply available, allowing also for revenues to the state.


ADVANTAGES OF ECONOMIC PLANNING:Stability :

eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.

●Meeting collective objectives:

Planned economy doesn’t suffer from business cycles; it does not experience alleged crises of overproduction; is theoretically not subject to major pitfalls of market economies.

●Advantages over market economies:

State planners would allocate State resources toward public goods and state projects; can provide public goods which would not have been available at all in a market economy.

Long-term infrastructure investment can be made without fear of a market downturn leading to abandonment of a project

● A new point of view

According to Anatoly Wasserman today's computing power of modern computer technology enable to create a unique and accurate production plan, devoid of defects that afflict the market economy.


DISADVANTAGES OF ECONOMIC PLANNING

Suppression of economic democracy and self-management

Inefficient resource distribution:surplus and shortage

Planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production;The only way to determine what society actually wants is by allowing private enterprise to use their resources in competing to meet the needs of consumers, rather those taking resources away and allowing government to direct investment without responding to market signals.

Neither planners, managers, nor workers had incentives to promote the social economic interest; nor did impeding markets for final goods to the planning system enfranchise consumers in meaningful ways.


Characteristic features of Command Economy:

● A Command Economy is more stable, guaranteeing constant exploitation of the existing resources. It is least affected by financial downturns and inflations.

● In a carefully planned Command Economic system, both surplus production and unemployment rates remain at a reasonable level

● The steady nature of Planned Economy encourages investments in long-standing project-related infrastructures without any possibility of financial recessions.

● Command Economy is just opposite to the concept of Market Economy, with respect to the basic money-making approaches. Command Economic system prefers deliberate planning of the entire money-making process for better results. In fact, such sincere economic planning in the long run proves beneficial to improve the economic conditions of a country.

● Command Economy emphasizes more on collective benefits, rather than the requirements of a single individual. Under such circumstances, rewards, wages and other monetary benefits like bonus are distributed on the basis of the joint rendering of services. This is how Planned Economy actually eradicates the profit-making at individual levels.

Summing up…

Advertising in Monopolistic Competition

ADVERTISING IN MONOPOLISTIC COMPETITION

Advertising is commonly used by firms operating under monopolistic competition as a way to create product differentiation and thus to acquire some degree of market control and thus charge a higher price.

Firms usually spend between 10 and 20 percent of annual revenue for advertising, more than $100 Billion.


CRITIQUEFirms advertise in order to manipulate people’s

tastes: commercial creates a desire that otherwise might not exist

Advertising impedes competition: It tries to convince consumer that products are more different than they truly are and makes buyer less concerned witn price differences among similar goods.


DEFENSEFirms use advertising to provide information to

customer: these info allow customer to make better choices about what to buy and enhances the ability of markets to allocate resources efficiently;

Advertising foster competition: Customers are more fully informed about all the firms in the market and they can more easily take advantage of price differences

The two fundamental goals of Firms using Advertising


To increase the demand:

Firms's current profit-maximizing production is 6 sandwiches, each of which is sold for a price of $4.95.

The goal of Firm with advertising is to shift the demand curve; to increase the number of sandwiches buyers are willing and able to buy at each price.


The demand curve shifts up and out.With this new demand curve, higher prices correspond to each quantity.Firm's new profit-maximizing production level is 6.7 sandwiches, each of which is sold for a price of $6.85.

To reduce demand elasticity:ADVERTISING IN MONOPOLISTIC COMPETITION

Since the Firm is in a competitive market it has to face a relatively elastic demand.This limits the range of prices that can he charge.


The new demand curve is now a little steeper.This less elastic demand means that buyers are less inclined to change their quantity demanded with a price change. As such, the Firm is able to charge a slightly higher price for the same quantity of production.It can now collect a price of $5.95 for each of the 6 sandwiches sold at the profit-maximizing level of production.

THANK YOU ALLFOR THE ATTENTION

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Three topics for the short report: Chiara Del Bello