Khamis, September 25, 2008

Economic Environment

In a market economy the forces of supply and demand determine how resources are allocated. Businesses produce goods and services to meet the demand from consumers.
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The interaction of demand from consumers and supply from businesses in the market will discover the market-clearing price - the price that reflects the balance between what consumers will willingly pay for goods and services, and what suppliers will willingly accept for them.
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If there is oversupply, the price will be low and some producers will leave the market. If there is undersupply, the price will be high, attracting new producers into the market. There is not only a market for goods and services, but also for productive assets such as capital goods, eg, machinery, labour and money.
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For the labour market, it is the wage level that is effectively the ‘price’, and for the money market it is the interest rate. People compete for jobs and companies compete for customers in a market economy. Scarce resources, including skilled labour such as a football player, or a financial asset such as a share in a successful company, will have a high value.
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In a market economy, competition means that inferior football players and shares in unsuccessful companies will be much cheaper and, ultimately,competition could bring about the collapse of the unsuccessful company and the football player searching for an alternative career.

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Mixed Economies


A mixed economy combines a market economy with some element of state control. The vast majority of economies are mixed to a lesser or greater extent. Whilst most of us would agree that unsuccessful companies should be allowed to fail, we generally feel that the less able in society should be cushioned from the full force of the market economy.
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In a mixed economy, the government will provide a welfare system to support the unemployed, the in firm and the elderly, in tandem with the market-driven aspects of the economy. Governments will also spend money running key areas like defence, education, public transport, health and police services. Governments finance their public expenditure by:
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• collecting taxes directly from wage earners and companies;
• collecting indirect taxes (eg, VAT and taxes on petrol, cigarettes and alcohol); and
• raising money through borrowing in the capital markets.Civil servants, primarily working for the government to raise money and spend it, tend to be one of the largest groups in the labour market.
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Open Economies
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In an open economy there are few barriers to trade or controls over foreign exchange. Although most western governments create barriers to protect their citizens against illegal drugsand other dangers, they generally have policies to allow or encourage free trade.
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From time to time, issues will arise where one country believes another is taking unfair advantage oftrade policies and will take some form of retaliatory action, possibly including the imposition ofsanctions. When a country prevents other countries from trading freely with it, in order to preserveits domestic market, it is usually referred to as protectionism.
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The World Trade Organisation exists to promote the growth of free trade between economies. Itis, therefore, sometimes called on to arbitrate when disputes arise.

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