on 17-Oct-2016 (Mon)

Which of the four will it be? Recurrent collapse seems unlikely: the knowledge underlying civilization is so widespread today that complete annihilation would be more probable than a long period of darkness followed by recovery. However, in case of extinction, there is no human future of any kind to consider. If we define the future as a time that looks different from the present, then most people aren’t expecting any future at all; instead, they expect coming decades to bring more globalization, convergence, and sameness. In this scenario, poorer countries will catch up to richer countries, and the world as a whole will reach an economic plateau. But even if a truly globalized plateau were possible, could it last? In the best case, economic competition would be more intense than ever before for every single person and firm on the planet. However, when you add competition to consume scarce resources, it’s hard to see how a global plateau could last indefinitely. Without new technology to relieve competitive pressures, stagnation is likely to erupt into conflict. In case of conflict on a global scale, stagnation collapses into extinction. That leaves the fourth scenario, in which we create new technology to make a much better future. The most dramatic version of this outcome is called the Singularity, an attempt to name the imagined result of new technologies so powerful as to transcend the current limits of our understanding. Ray Kurzweil, the best-known Singularitarian, starts from Moore’s law and traces exponential growth trends in dozens of fields, confidently projecting a future of superhuman artificial intelligence. According to Kurzweil, “the Singularity is near,” it’s inevitable, and all we have to do is prepare ourselves to accept it. But no matter how many trends can be traced, the future won’t happen on its own. What the Singularity would look like matters less than the stark choice we face today between the two most likely scenarios: nothing or something. It’s up to us. We cannot take for granted that the future will be better, and that means we need to work to create it today. Whether we achieve the Singularity on a cosmic scale is perhaps less important than whether we seize the unique opportunities we have to do new things in our own working lives. Everything important to us—the universe, the planet, the country, your company, your life, and this very moment —is singular. Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.

In a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income. Macroeconomics has its roots in microeconomics, which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics.

Demand and supply analysis is the study of how buyers and sellers interact to determine transaction prices and quantities.

Prices simultaneously reflect both the value to the buyer of the next (or marginal) unit and the cost to the seller of that unit. In private enterprise market economies, which are the chief concern of investment analysts, demand and supply analysis encompasses the most basic set of microeconomic tools.

Traditionally, microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by profit-maximizing firms. The theory of the consumer and the theory of the firm are important because they help us understand the foundations of demand and supply. Subsequent readings will focus on the theory of the consumer and the theory of the firm.

Investment analysts, particularly equity and credit analysts, must regularly analyze products and services, their costs, prices, possible substitutes, and complements, to reach conclusions about a company’s profitability and business risk (risk relating to operating profits). Furthermore, unless the analyst has a sound understanding of the demand and supply model of markets, he or she cannot hope to forecast how external events—such as a shift in consumer tastes or changes in taxes and subsidies or other intervention in markets—will influence a firm’s revenue, earnings, and cash flows.

Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as:

• Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”?

• What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities?

• If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why?

• What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss?

• What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another?

• Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks?

• How do different types of auctions affect price discovery?

Markets are broadly classified as factor markets or goods markets. Factor markets are markets for the purchase and sale of factors of production. In capitalist private enterprise economies, households own the factors of production (the land, labor, physical capital, and materials used in production). Goods markets are markets for the output of production. From an economics perspective, firms, which ultimately are owned by individuals either singly or in some corporate form, are organizations that buy the services of those factors. Firms then transform those services into intermediate or final goods and services. (Intermediate goods and services are those purchased for use as inputs to produce other goods and services, whereas final goods and services are in the final form purchased by households.) These two types of interaction between the household sector and the firm sector—those related to goods and those related to services—take place in factor markets and goods markets, respectively.

Los factores de producción son todos aquellos recursos que por si solos o por manufactura del hombre son empleados en los procesos de elaboración de bienes y en la prestación de servicios. Los clasificamos en dos principales grupos:

Factores tradicionales

• Factor humano o trabajo: Toda actividad humana que interviene en el proceso de producción. En economía dicho factor es representado con una "L".

• Factor capital: Se representa con una "K" y podemos dividirlo en tres grupos:
  • Capital físico: Formado por bienes inmuebles, maquinaria, etc.
  • Capital humano: Todo el personal, sean empleados o ejecutivos.
  • Capital financiero: formado por el dinero.
• Factor tierra: Engloba los recursos naturales y es representado con una "T".

In the factor market for labor, households are sellers and firms are buyers. In goods markets: firms are sellers and both households and firms are buyers. For example, firms are buyers of capital goods (such as equipment) and intermediate goods, while households are buyers of a variety of durable and non-durable goods. Generally, market interactions are voluntary. Firms offer their products for sale when they believe the payment they will receive exceeds their cost of production. Households are willing to purchase goods and services when the value they expect to receive from them exceeds the payment necessary to acquire them. Whenever the perceived value of a good exceeds the expected cost to produce it, a potential trade can take place. This fact may seem obvious, but it is fundamental to our understanding of markets. If a buyer values something more than a seller, not only is there an opportunity for an exchange, but that exchange will make both parties better off.

In one type of factor market, called labor markets, households offer to sell their labor services when the payment they expect to receive exceeds the value of the leisure time they must forgo. In contrast, firms hire workers when they judge that the value of the productivity of workers is greater than the cost of employing them. A major source of household income and a major cost to firms is compensation paid in exchange for labor services.

households typically choose to spend less on consumption than they earn from their labor. This behavior is called saving, through which households can accumulate financial capital, the returns on which can produce other sources of household income, such as interest, dividends, and capital gains. Households may choose to lend their accumulated savings (in exchange for interest) or invest it in ownership claims in firms (in hopes of receiving dividends and capital gains). Households make these savings choices when their anticipated future returns are judged to be more valuable today than the present consumption that households must sacrifice when they save.

Indeed, a major purpose of financial institutions and markets is to enable the transfer of these savings into capital investments. Firms use capital markets(markets for long-term financial capital—that is, markets for long-term claims on firms’ assets and cash flows) to sell debt (in bond markets) or equity (in equity markets) in order to raise funds to invest in productive assets, such as plant and equipment. They make these investment choices when they judge that their investments will increase the value of the firm by more than the cost of acquiring those funds from households. Firms also use such financial intermediaries as banks and insurance companies to raise capital, typically debt funding that ultimately comes from the savings of households, which are usually net accumulators of financial capital.

1. Which of the following markets is least accurately described as a factor market? The market for:

   1. land.

   2. assembly line workers.

   3. capital market securities.
      
      

      Solution to 1:

      C is correct.
      
      

2. Which of the following markets is most accurately defined as a goods market? The market for:

   1. companies.

   2. unskilled labor.

   3. legal and lobbying services.

Solution to 2:

C is correct.

In this reading, we will explore a model of household behavior that yields the consumer demand curve. Demand, in economics, is the willingness and ability of consumers to purchase a given amount of a good or service at a given price. Supply is the willingness of sellers to offer a given quantity of a good or service for a given price. Later, study on the theory of the firm will yield the supply curve.

The demand and supply model is useful in explaining how price and quantity traded are determined and how external influences affect the values of those variables. Buyers’ behavior is captured in the demand function and its graphical equivalent, the demand curve. This curve shows both the highest price buyers are willing to pay for each quantity, and the highest quantity buyers are willing and able to purchase at each price. Sellers’ behavior is captured in the supply function and its graphical equivalent, the supply curve. This curve shows simultaneously the lowest price sellers are willing to accept for each quantity and the highest quantity sellers are willing to offer at each price.

If, at a given quantity, the highest price that buyers are willing to pay is equal to the lowest price that sellers are willing to accept, we say the market has reached its equilibrium quantity. Alternatively, when the quantity that buyers are willing and able to purchase at a given price is just equal to the quantity that sellers are willing to offer at that same price, we say the market has discovered the equilibrium price. So equilibrium price and quantity are achieved simultaneously, and as long as neither the supply curve nor the demand curve shifts, there is no tendency for either price or quantity to vary from their equilibrium values.