https://www.youtube.com/watch?v=okiZ9jVvskQ&feature=emb_logo
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VIDEO: Economists love markets. Generally speaking, if there is a problem facing the world, economists will propose a market to solve it. For instance, to address the ongoing catastrophe of rising greenhouse gas emissions, economists have proposed carbon trading. This is a market where people and companies buy and sell permission to emit carbon dioxide. The reason economists love markets so much is that they see markets as efficient. Because they are competitive, those companies that make the best use of resources, the most productive companies, will be the ones who succeed. In the carbon trading market, for instance, the companies who can make the most profit from each unit of carbon emitted will be the ones willing to pay the most for them and thus the world will make the most out of the emissions we can afford. At the end of the day, an economist will tell you, the world only has so many resources. If we select only one company to use those resources – say a state-owned company as was under the Soviet Union – then we may have given all our resources in one industry to a company that isn’t making the most of them. However, if we allow multiple companies to compete against each other, the inefficient companies, those that waste money, will go bankrupt and the most efficient ones will thrive. (free market importance) Better still, in order to get an edge on each other, companies will constantly experiment and improve – introducing new technologies say – in order to be the most efficient and thus the most profitable. New technologies can lower the costs companies pay to make products. This allows the companies to lower their prices without lowering their profits. Now consumers will demand the products of the cheaper company instead of its rivals, meaning that the company can increase the supply of its products because it knows it will be able to sell them, which in turn means more profit. Best of all, if consumers can save money on one product, because it is now cheaper, that means they have extra money left in their pockets to spend on something else. Perhaps they will use this money to buy a new product, or more of an existing one. In either case, this means more people are needed to make these additional products and each one sold increases the overall size of the economy. In other words, efficiency gains lead to economic growth and higher employment. In the end then, markets are institutions that decide, through competition between companies and the preferences of consumers, the price of every product. And when they work well, this will be the lowest price possible for the best quality possible. People, being rational, want the best quality for the lowest price, and companies, wanting to make the most profit they can, compete to give it to them. Both companies and people are rational actors, therefore, at least according to economists. This all sounds just great. But if markets work so well, why are so many people unhappy with the system of free markets known as capitalism? Why are so many people poor and so few people rich? Why is there so much pollution? Well it might be that not everything is so rosy in the market garden. First off, lowering prices seems great in abstract, but achieving this may involve firing workers or paying them less. Another word for efficient may be ruthless and markets have no time for those that are seen as holding a company back from ever more profit. Furthermore, no resource is more efficient than a free one and nature is often a free resource. Historically, companies have paid little or nothing for all the pollution and waste they have generated. As long as this is the case, the profit motive and competition will force them to keep using this free resource as much as they can. Finally, one very successful company in a market can be a threat to the market itself. There is nothing in the free market that stops you from buying your competition. Companies like Coca-Cola and Pepsi have consistently bought every new competitor over the years, or threatened to cut off supply of their cola to shops that stocked these new products. This is monopoly power and it is power that Microsoft, Facebook and Google have all enjoyed to some degree more recently. In these cases, the market can actually destroy its own efficiency. In the end then, no matter how much economists love markets, most will agree, at least to some extent, that government has an important place in making them work properly.
My answer: (1) A free market is made when a voluntary exchange, without government intervention, happens, and when the laws of supply and demand provide the sole basis for the economic system. Independent companies decide what to do for themselves. (2) Healthcare and educational sector, postal service, nuclear weapons.
https://www.youtube.com/watch?v=V6rcWS0O6AU&feature=emb_logo
We discovered in our last video that the function of the market is to take all of the information it receives from producers and consumers and use it to calculate the price. One key piece of information that helps determine the price of a product is its cost. Cost means the total amount of resources needed to produce a particular product or service. Traditionally, costs have been divided into three types: land, labour, and capital. These are known as ‘the factors of production.’ (1) The land portion of costs comes either in the form of a mortgage or rent. Every business needs somewhere to make its products and this premises has to be paid for. Land is normally a ‘fixed cost,’ in that it normally doesn’t vary depending on how many units are made. (2) The labour portion of the cost of a product is the cost of the wages paid to employees of the company. Labour would tend to be a variable cost, meaning it varies depending on the number of units produced. The more units you produce, the more labour is required to produce it and the thus the higher the wage bill. (3) Finally, capital is necessary to produce any product. For instance, if you borrowed a large sum of money from the bank to finance your business, the payments you make to the bank are part of the cost of the product. The cost of raw materials would also be considered a part of capital. Capital is a variable cost: you need more raw materials to produce every additional unit. If you divide all of these costs by the total number of units the company has manufactured, you get the cost per unit. The aim of every producer is to get for their product a price above the cost per unit. This profit is the return on investment and is normally calculated as a percentage of the total invested. Six percent annually would normally be considered a good return or yield. Make less than this and you may begin to worry about the opportunity cost. The opportunity cost is the return you would have received from your next best investment opportunity. More generally, any time you take an action you forgo the chance to take a different one. This missed opportunity is an opportunity cost. Bearing in mind the opportunity cost of every action you take will help you make better decisions, in life as in business. Not all costs, though, are paid by the producer of the product. Who, for instance, is paying for all the carbon dioxide released into the atmosphere? We will return to this cost when we consider externalities.
My answer: Nowadays, human capital is the most important factor for business people because the most recent richest people became rich not because of the land but because of how productive, efficient, and smart they or their employees were. In that sense, if a businessperson can find people with high human capital, which is labor, and make good use of their work, he/she will reach success. The Land is also not as important anymore because many activities can be done online, and physical capital is still not as important as the human one because it can be inherited, and we live in a meritocracy where things that are inherited are not as valued as the things that everybody has to train or learn themselves.
https://www.youtube.com/watch?v=TaGG6uFco4I&feature=emb_logo
VIDEO: And now onto one of the two factors that have the biggest bearing on price: supply. Supply is the total amount of a particular good/service available for exchange in a market. It has an almost symbiotic relationship with demand, which we shall cover next. In the world market, generally speaking, the greater the supply of a product, the cheaper that product will be. As we learned earlier, for economists, consumers are rational. They want the best product for the lowest price. This forces companies to continually compete with each other to lower their prices. For example, in conditions of oversupply, where companies have made too much of a product, they will compete with each other to sell the product below what it cost them to produce. This is because it is better to get some money for a product than to have it sit, unsold, in a warehouse, for which rent must be paid. Conditions of oversupply do not tend to last very long, however. A company that is losing money will not stay in business very long. Either it goes bankrupt or its owners will decide that their investment will make a greater return elsewhere, and take their capital out, say by selling the business to a rival. This reduces the supply and prices then return to a level, ideally, a little more than the cost per unit. Where supply is limited, however, the price normally rises. This is the purpose of the OPEC cartel, for example. The countries in the cartel agree to limit their production to a certain amount. This limits the total supply, meaning that the price per unit goes up. We will understand this better when we examine demand. Normally, however, conditions of scarcity – that is, of relatively low supply – also do not exist for very long. The oil situation is an interesting example. High prices, as a result of the cartel, lasted a very long time. With the exception of a few years, 1986 for instance, oil prices had been successfully kept artificially high. However, this encouraged more oil exploration outside the cartel. With the rewards so great, investors felt it would be profitable to purchase new, expensive machinery that could exploit previously unobtainable supplies of oil. The result was that oil supplies began to rise outside the cartel’s control, especially in the USA. This eventually broke the cartel, at least for the foreseeable future, and oil prices plummeted. Of course, the oil market is not a free market, as a result of the cartel. In a free market, unusually high prices rarely last very long. Manufacturers increase production to take advantage of the high prices and the increase in supply causes that price to drop very soon after. This rapid flexibility is one of the key advantages of the free market.
My answer: The OPEC cartel kept the oil prices artificially high, limiting their production to a certain amount. Consumers wanted oil to be cheaper, which resulted in the oil exploration outside the cartel. Firstly, investors found the reservoirs, and started extracting new supplies of oil, which increased the oil supply. However, the supply rose even more significantly when the investors purchased fast new machines to extract new oil supplies. As a result of the new exploration, and investments in fast technology, the oil supply began to rise.
https://www.youtube.com/watch?v=zSLbFXLB5jo&feature=emb_logo