Role of

Economic
Agents in Unit 4: 2nd March - 20th April 2021

systems
Role of Economic Agents in Systems

 SOI: The process and models adopted can impact  development

 Key Concept: Connections & Development
 Subject group objective: A and C
 Related Concept: Process/Models
 Global Context : Globalization and Sustainability
 ATL: Research Skills, Information Literacy skill: Access information to be informed and inform others.
Present information in a variety of formats and platforms
 Self Management- time mgmt., avoiding distractions, Communication- Note taking and subject
vocabulary
 Content

 Needs and Wants

 Scarcity and Opportunity cost
 Classification based on ownership and activity
 Economic agents
 Standard of living , Human Development indicators and GDP/GNI
 Circular flow-link to closed and open economy. 
 Role of  Banks-central (bankers bank) and commercial ( no interaction with people versus interaction with
people)
  Factual Questions: What do you understand by the word
process?
 What do you understand by the word model? Name some
Inquiry examples
 What are the factors that affect development?
Questions  Conceptual questions: How is development measured?
 How does economic agents contribute to development?
 Debatable questions: Does free market economy ensure
development?
Subject group Objectives

A: KNOWING AND C: COMMUNICATING

UNDERSTANDING
 What is Process?

 A series of actions or steps taken in order to achieve a particular end.

 Processes are measured movements in the physical, human or cultural world to reach particular results or
consequences, marking gradual changes in geography. 
 Even though the definition of development is subject to much debate (especially regarding its indicators), it can be
understood as a social, economic and political process that enables the rise in the standards of living of the
population.
 A process consists four major elements:
     Steps and decisions — the flowchart. A series of steps and decisions describing the way work is completed.
     Variability of processing time and flow — the pattern of processing times.
     Timing and interdependence — when the arrivals happen, when people work, etc.
     Assignment of resources — how many and where are they assigned.
Create your own Process Model

 Pick any two units studied this year and create a short process model identifying
 things you learn and understood
 How they connected to each other.
What is development ?

 Development can be defined as the systematic use of scientific and technical knowledge to

meet specific objectives or requirements.
 There are 5 basic types of development. Physical, intellectual, social, emotional, and moral.
Terms
WHAT IS ECONOMICS?

 What is economic?
 How economy works
  Economic agents are consumers, producers, and/or influencers of
capital markets and the economy at large.
 There are four major economic agents: households/individuals,
firms, governments, and central banks. 
 ECONOMIC AGENT – AN ECONOMIC DECISION MAKER WHO CAN
RECOGNIZE THAT DIFFERENT FACTORS INFLUENCE AND
MOTIVATE DIFFERENT ECONOMIC GROUPS.
 THEY SHAPE THE WORLD WE LIVE IN. THE ALLOCATION OF
RESOURCES IS DEPENDENT ON THEIR CHOICES. THERE ARE 3
TYPES OF ECONOMIC AGENTS. THEY ARE:

Economic  CONSUMERS
 FIRMS (PRODUCERS)

agents   GOVERNMENTS
 Some economists put governments and central banks together. 
 https://study.com/academy/lesson/circular-flow-of-economic-activ
ity-the-flow-of-goods-services-resources.html
 4 mints 
 https://study.com/academy/lesson/economic-agents-types-roles.ht
ml

For study.com
 user ID: oistechadmin@oberoi-is.org
 PW: Oberoi@2018
Economic Agents

 Economic agents are actors who intervene the economy under certain rules determined by the economic system
and economic institutions. They make decisions trying to resolve an optimization or choice problem. In this
process, they mold the economy; for example, they decide the distribution of goods and services, taxes, laws,
tariffs, etc.

Another definition of economic agents, also known as economic actors, considers them as decisions makers who
are able to recognize different economic factors, incentives, and motivations of the different economic groups.

The concept of "economic agents" was created by economist to simplify and explain economic processes. As a
concept, it was first used in classical and neoclassical models where economists construct a simplified framework
representing the economic process by a set of variables and a set of logical relationship between them
 Economic agent:
families

Families are a domestic group defined by the U.S. Census as "a group
of TWO people or more (one of whom is the householder) related by
birth, marriage, or adoption and residing together; all such people
(including related subfamily members) are considered as members of
one family".
Families consume, work and save. They consume to satisfy their
necessities, they save for a greater future consumption, they borrow to
advance consumption, and they work (sacrificing leisure) to be able to
consume. Their income is distributed in consumption, savings, and
taxes.

They have a dual role in the economy. On one side, they are consumers,
they demand goods and services; and on the other, they own the means
of production through which the goods and services are produced.
Economic agent: firms
 Firms try to maximize their utility (economic
benefits) for their shareholders. To achieve this,
firms use factors of production (land, labor, and
capital) to produce goods and services, creating
value and wealth.

They demand labor from families for a salary, also

they employ capital (machines, vehicles, computers,
etc) in exchange for an interest, and land for a rent.
Finally, They offer goods and services for the
families, others firms or the government.
Economic agent:
government 

 Governments provide most of the rules for how the rest of

economic agents should interact. They offer goods and
services (mostly public goods and services like roads or
national security) through national companies or in
association with private firms.

Governments demand goods from firms and labor from

families. But also, they tax them based on its income,
profits, wealth, etc.

They can regulate prices, limit or prohibit the consumption

of certain goods, create tariffs, to imports, incentivize
production etc. Finally, they distribute the wealth through
social services in education, health and poverty programs.
 Economic agent: Central
Banks

 Central Banks manage country

currency, money supply, and interest
rates. Through monetary policies,
they can increase the money supply
in the economy or modify the interest
rates to incentivize or disincentivize
consumption, savings or investments.
EMPLOYMENT AND EMPLOYMENT
STRUCTURE

 Employment is an agreement between an employer and an employee that the employee will provide

certain services on the job.
 The work is designed to accomplish the employer organization's goals and mission. In exchange for
work performed, the employee receives compensation.
 Employment structure means how the workforce is divided up between the three
main employment sectors - primary, secondary and tertiary.
 Employment structures change over time. Countries in the early stage of development usually have
a high percentage of the population in primary employment.
 There are four types of job. These are primary, secondary,
tertiary and quaternary jobs.

How can Primary jobs involve getting raw materials from the natural

employment be environment e.g., Mining, farming and fishing.

classified? Secondary jobs involve making things (manufacturing) e.g.,

making cars and steel.

Tertiary jobs involve providing a service e.g., teaching and

nursing.

Quaternary jobs involve research and development e.g., IT.

 Employment Structures

 Employment structure means how the workforce is divided up between the three main employment
sectors - primary, secondary and tertiary. Employment structures change over time.
 Countries in the early stage of development usually have a high percentage of the population in
primary employment. This is because most people are engaged in agricultural activities.
 As a country begins to develop an industrial base there is an increase in the secondary sector. An
increase in machinery on farms means fewer people are needed. People tend to migrate to urban areas
to get jobs in factories.
 When a country becomes more economically developed there is a greater demand for services such as
education, health care and tourism. Therefore, the tertiary sector undergoes growth. By this time
computers, machinery and robots replace people in the secondary sector hence the decrease in
secondary jobs.
Brazil is a NIC or Newly
Industrialized Country.
While it is developing its economic
base there are still a large number of
people employed in primary
industries such as farming. There is a
large proportion of people employed
in tertiary industries.
One reason for this is because of the
growth of Brazil as a tourist
destination. Also, there have been
significant improvements in the
provision of health care, education
and transport.
Ghana is an LEDC or Less Economically Developed Country. Most
people work in the primary sector.
This is due to the lack of machinery available in farming, forestry and
mining. Farming is very important because people often grow the food
they eat.
Few people work in secondary industries due to the lack of factories -
machinery is too expensive and multi-national companies rely on the raw
materials available in Ghana to assist in manufacturing products.
 Circular flow in an Economy (Total viewing time 30 mints)

 (13 mints)         The Circular Flow Model of a Market Economy

 (4.45 Mints) The circular flow
 The Circular Flow Matrix How Economy works(   5 mints)   
https://www.youtube.com/watch?v=mN5HPJYJzus&t=184s
 Circular Flow Model in Economics   (4 mints) h
ttps://study.com/academy/lesson/circular-flow-model-in-economics-definition-examples.html


Notes
https://www.economicsdiscussion.net/circular-flow/the-circular-flow-of-economic-activity/18159
The circular flow of income or
circular flow 
is a model of the economy in which
the major exchanges are represented as
flows of money, goods and services,
etc. between economic agents. The
flows of money and goods exchanged
in a closed circuit correspond in value
but run in the opposite direction.
What are Economic Models? (Total 9 mints)

https://study.com/academy/lesson/an-overview-of-economic-models-uses.html

https://study.com/academy/lesson/what-is-an-economic-model-definition-example.html
Explanation : Simple Economic Model

In the very basic model, we have two principal components of the economy:
 Firms. Companies who pay wages to workers and produce output.
 Households. Individuals who consume goods and receive wages from firms.
This circular flow of income also shows the three different ways that National Income is calculated.
 National Output. The total value of output produced by firms.
 National Income. (profit, dividends, income, wages, rent) This is the total income received by people in the economy.
For example, firms have to pay workers to produce the output. Therefore, income flows from firms to households.
 National Expenditure. Total amount spent on goods and services. For example, with wages from work, households
can then buy goods produced by firms. Therefore, the spending goes back to firms.
This represents a simple economic model; it is a closed economy without any government intervention.
In the real world, it is more complicated. We also add two more components:
 Government. The government taxes firms and consumers, and then spend money, e.g. health
care and education.
 Foreign sector. We sell exports abroad and buy imports. Therefore, there is a flow of money
between one country and the rest of the world.
Withdrawals (W) into Circular Flow of Income
Withdrawals are items that take money out of the circular flow. This includes:
 Savings (S) (money not used to finance consumption, e.g. saved in a bank)
 Imports (M) (money sent abroad to buy foreign goods)
 Taxes (T) (money collected by government, e.g. income tax and VAT)
Injections (J) into Circular Flow of Income
Spending that puts money into the circular flow of income.
 Investment (I). Money invested by firms into purchasing capital stock.
 Exports (X). Money coming from abroad to buy domestically produced goods.
 Government spending (G). Government welfare benefits, spending on infrastructure.
https://www.youtube.com/watch?
v=8KDxAWfMwf4
https://youtu.be/KTu8iDynwNc
2.15 Mints http://www.youtube.com/watch?v=KTu8iDynwNc
Activity: Survival Team
Activity: Survival Teams
  All economic systems strive to achieve a set
of broad social goals, including economic
efficiency, equity, freedom, growth, security,
What are Socio and stability.
Economic  How these goals are prioritized—and how
successful an economy is at attaining these
goals? goals—influences the quality of life for all
its citizens
  Economic Plan: What will be your economic and/or socio
economic goals? Choose only most important ones,
recognizing trade-offs. 
 Overall, what will be produced? How will it be produced?
For whom will it be produced? Who will make those
decisions (government, individuals or a mix)? 
 How will your island government be involved in the
economy? 
 Directions: Use answers to "Economic Plan" to determine
SETTING UP the following. Make sure your responses are consistent
with your overall plan. 
YOUR ISLAND  Land/Distribution/Location: Will the land be privately
owned? If so, who gets it and how? 
SOCIETY  Should the land be owned by everyone together? 
 Should you divide it up and distribute it? 
 If so, should it be divided equally? What constitutes equal? 
 Where on the island should you live? (Draw this on map.) 
 Should you consider the needs of the environment? How? 
 Who has rights to the water? How will these be provided
for?
Labor: What work must be done? 
List the kinds of jobs required to sustain the lifestyle you desire. 
Who should do these jobs? 
What about the jobs that nobody likes? 
Does each person just have one job or many?
Land: What natural resources will be used to produce goods? 
Will there be rules governing use of natural resources? Why or why not? If yes, which?
Capital: What kind of capital (tools, machines, etc.) will be used to produce goods? How will this capital be
attained?
Basic Needs: Are there some basic needs that you believe should be guaranteed for 
all? If so, what are they? Or do you think that individuals should secure their needs by themselves? 
Create a name for your team that reflects the type of system you have developed.
         
The Difference Between Wants vs. Needs in Economics - Video & Lesson Transcript | Study.com
Debatable Q

 Does buying more goods make you happy?

Closed Economy

A closed economy is one

that does not swap their trading
with outside economies.
The closed economy
is independent, meaning no
imports enter the country and no
exports leave the country.
The aim of a closed economy is to
provide all that domestic
consumers need from within the
boundaries of the country.
Closed Economy
Open Economy

An open market is an economic

system with little to no barriers to
free-market activity.
An open market is characterized by
the absence of tariffs, taxes,
licensing requirements, subsidies,
unionization, and any other
regulations or practices that
interfere with free-market activity.
Economic
Agents in
Open
Economy
Open Economy
Open economy
Command Economy

 In this type of economic system, the government decides how much workers should produce
 Rulers and centralized governments impose their economic choices on society in the form of production
quotas, etc.
 Governmental decision-makers and planners perform the functions of a market
 Some empires in the distant past had command economies. One example is Ancient Egypt.
 A more recent example of a command economy is the former Soviet Union.
• Different countries have different levels of needs and wants.
• For instance, as some states are in dire want to curb some diseases, others are struggling to
massage their super-power muscles by adding their weapon bankers.
• Due to these differences, the governance of the different countries has to sit and decide how to run
the country financially.
• Commonly, consultations are made, and they determine the kind of goods and services to produce,
how to go about production and deliberate on the intended consumer of the manufactured goods.
• The decision made on…
•What to provide,
•Whom to offer it for,
•And how to create the products, i.e. the goods and services
…determines the kind of economic system a country will run.

https://youtu.be/rQz5q42nmL4
What is Scarcity?

 https://www.youtube.com/watch?v=FoOW4wzhZQ4
 https://courses.lumenlearning.com/wm-microeconomics/chapter/understanding-economics-and-scarcity/
Opportunity cost

 When economists refer to the

“opportunity cost” of a resource,
they mean the value of the next-
highest-valued alternative use of
that resource. If, for example, you
spend time and money going to a
movie, you cannot spend that time
at home reading a book, and you
can't spend the money on
something else.
 (5 Mints )
What is the Basic Economic Problem of Scarcity? - Vide
o & Lesson Transcript

Scarcity & (5.4 mints)

Economic Scarcity and the Function of Choice - Video &
Opportunity Lesson Transcript

Cost total time (6.25 Mints)

Opportunity Cost: Definition & Real World Examples - Vi
(25 mints) deo & Lesson Transcript

(5.55 mints)Economic Scarcity and the Function of Choice

https://study.com/academy/lesson/economic-scarcity-an
d-the-function-of-choice.html
 Gross domestic
product

 GDP is the final value of the

goods and services produced
within the geographic
boundaries of a country during
a specified period of time,
normally a year. GDP growth
rate is an important indicator of
the economic performance of a
country.
https://youtu.be/NJY6P7t-yD0
What is
private
Sector
 You need to research and give  5
What is examples of businesses  operating
in joint sectors in different
Joint countries.
Sector?
Justify why do you call it Joint
sector businesses?
 Terminology

 Basic Economic Problems and Decisions

 • Opportunity cost: The cost of passing up the next best choice when making a decision
 • Rationality: a thought process based on sane and logical reasoning
 • Resource allocation: The process of allocating resources in an economy, or between economies
 • Scarcity: Not having sufficient resources to produce enough to fulfill unlimited wants
 • Scarce resources: Goods and services which are scarce because of the limited availability of the
factors of production
 Terminology

 Factors of production: The resources of land, labour, capital and enterprise

 • Specialisation: The separation of tasks within a system, could be an individual, company or country
who specialises
 • Division of Labour: is a system whereby workers concentrate on performing a few tasks and then
exchange their production for other goods and services
 Primary/Secondary /Tertiary sectors:
 Open Economy
 Closed Economy
 GDP
 HDI
Formative 2

 https://docs.google.com/document/d/1V8eNMKVDA_-91vYmGi-5k7ykNACve1ZwHuS8go6JKto/edit?
usp=sharing