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Analysing the economic relationship between households and firms

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 5 Dec 2016

The household is the basic unit of analysis in many social, microeconomic and government models. The term refers to all individuals who live in the same dwelling. In economics, a household is a person or a group of people living in the same residence. Household are owners of the factors of production which is includes land, labor, capital and entrepreneurship. Which are made available to firm that will pay factor incomes to the households.

The firm will use the factors of production to produce output in the form of goods and services, which will purchase by the households. In buying the goods and services, households therefore incur expenditures.

2.0 Circular Flow between Firm and Households

The circular flows between firms and household may therefore be represented by the following 4 flows:

Flow of factor of production from household to firms

Flow of incomes from firm to household

Flow of output of goods and services from firm to households

Flow of expenditures from household to firm

These four flows are illustrated as appendix 1. Outer flow of incomes and expenditures are flow of money, whereas the inner flows of factors of production and outputs are flows of goods and services. According to Google 2011 the basic circular flow of income model consists of seven assumptions it include the economy consists of two households and firms sectors, households spend all of their income on goods and services or consumption. There is no saving and all output produced by firms is purchased by households through their expenditure, there is no financial, government, overseas sector. Last it is a closed economy with no exports or imports.

Withdrawals occur when there are movements of funds out of the circular flow of income.

3.1 Saving (S)

Households may not speed all the factors income received on current consumption, preferring to keep some for later deferred consumption. The first is the Financial Sector that consists of banks and non-bank intermediaries who engage in the borrowing (savings from households) and lending of money. In terms of the circular flow of income model the withdrawals that financial institutions provide in the economy is the option for households to save their money. This is a withdrawal because the saved money cannot be spent in the economy and thus is an idle asset that means not all output will be purchased.

3.2 Taxation (T)

The next sector introduced into the circular flow of income is the Government Sector that consists of the economic activities of local, state and federal governments. The withdrawal that the Government sector provides is through the collection of revenue through Taxes (T) that is provided by households and firms to the government. A tax is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority and is any contribution imposed by government. For example income tax is compulsory charge by the government to the people who is salary RM3000 and above for a month.

3.3 Import (M)

Households may prefer to purchase goods and services from abroad instead of consuming domestically produced goods and services. In the circular flow of income model is the overseas sector which transforms the model from a closed economy to an open economy. The main withdrawal from this sector are imports (M), which represent spending by residents into the rest of the world. There are two basic types of import which is include industrial and consumer good, intermediate goods and service. For example we will import the apple for other country which is not suitable plant in our country.

Injections occur when there are movements of funds into circular flow of income.

3.4 Investment (I)

The injection that the financial sector provides into the economy is investment (I) into the business or firms sector. The household will save some of their income for the investment. An example of a group in the finance sector includes banks such as Public Bank, May Bank and CIMB Bank in Malaysia. The household can make the investment from the particular bank.

3.5 Government Expenditures (G)

The injection provided by the government sector is Government spending (G) that provides collective services and welfare payments to the community. For example the income tax collected by the government can be use when the government redistributes this income in the form of welfare payments, it is a form of government spending back into the economy.

3.6 Exports (X)

Firms may sell some of their goods and services to other countries. The expenditure from abroad becomes an injection into the economy. For example of the use of the overseas sector is Malaysia exporting wool to China, China pays the exporter of the wool (the farmer) therefore more money enters the economy thus making it an injection.

4.0 Conclusion

In my opinion the four factor of production which include land, capital, labor, and entrepreneurship is very important to produce the goods or service and purchases by household.

In economics, the terms circular flow of income or circular flow refer to a simple economic model which describes the reciprocal circulation of income between producers and consumers. In the circular flow model, the inter-dependent entities of producer and consumer are referred to as firms and households respectively and provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goods and services in exchange for consumer expenditure and factors of production from households. More complete and realistic circular flow models are more complex. They would explicitly include the roles of government and financial markets, along with imports and exports.

Question 2

How do the potential outputs of an economy increase?

1.0 Introduction

Long- term economic growth will only occur in the long run when there is an increase in the potential output (productivity) over time. Potential output in macroeconomics corresponds to one point on the production possibilities frontier or curve for a society as a whole seen in introductory economics, reflecting natural, technological, and institutional constraints.

Any changes or increase in Aggregate Demand or output levels or level of economic activity which still within the potential output level is simply a situation of changes in the level of employment from over-employment to full employment to under-employment to unemployment. If there is no increase in potential output overtime, long term economic growth will not occur. Aggregate Demand of an economy is the sum of the total expenditure or spending incurred by household, firms and the government.

2.0 Economic Resources

There are 4 overall types of economic resources which include Capital, Labor, Land, and Entrepreneurship. Economics resources also call input or factors of production. They are factors that are combined in the production process to produce goods and services call output.

2.1.0 Capital

Capital is any human-made input used to produce goods. There are three types of capital: construction, machinery and equipment, inventory.

2.1.1 Construction

Construction includes large human-made structures such as factories, roads, bridges, and airport.

2.1.2 Machinery and Equipment

Machinery and equipment is a device that uses energy to perform some activity such as computer, machine, and hammers.

2.1.3 Inventories

Inventories which are unsold goods, includes good in the process of being produced that will be either consumed in the near future or will be made into finished consumer goods.

2.2 Labor

Labor is known as human resources which are consist partly of the ability of worker to perform physical tasks on the job, such as turning a screw of hauling materials to a particular site. Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations. Human resources is also the name of the function within an organization charged with the overall responsibility for implementing strategies and policies relating to the management of individuals.

2.3 Land

In economics, land comprises all naturally occurring resources whose supply is inherently fixed. For examples geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to the production of all goods, including capital goods. Location values must not be confused with values imparted by fixed capital improvements.

2.4 Entrepreneurship

Entrepreneurship is the act of being an entrepreneur, which can be defined as one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods. This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new businesses. Entrepreneurs will usually invest their own financial capital in a business for example their savings, and take on the risks associated with a business investment. The reward to this risk-taking is the profit made from running the business.

3.0 Quantity of Resources Available

This involves an increase in capital, stock of capital, new investments and capital flows from abroad, improvements in balance of payment. Labor which growth in working population, more women joining work force, migration of foreign worker and professionals. Land, reclamation from the sea, clearing up jungles and marginal land, opening of new highways, discovery of oil fields, new diamonds deposit. Last is the entrepreneurship which population growth and migration of professionals.

4.0 Productivity of Resource Available

This involves an improvement in capital with new investment opportunities, more efficient ROI, more technologically advanced machinery, mechanization, automation, artificial intelligence, improved or speedier transportation, improve communications. Next is improve new skill of labor, provide better health, training and education. New production technology need to improve in land sector, such as more efficient utilization, wastage reduction procedures, innovation, research and development. Entrepreneurship extended life-span, more training and higher education. Long term economic growth depends largely on technological progress.

5.0 Conclusion

In conclusion a government will implement policies to spur high economic growth to help its economy achieve full employment or low unemployment. However, such policies may later cause inflation that leads to balance of payment deficits and thereafter a weaken exchange rate.

In my opinion economic growth is very important to a country, the 4 economic resources which include land, capital, labor, and entrepreneurship, must be fully utilize for the potential outputs.

Potential outputs of an economy can increased if there is an increase in either or both quantity and productivity resources available in term of increase and improve economic resources, which include capital, labor, lad, and entrepreneurship.

Question 3

What are the causes of unemployment?

1.0 Introduction

Nowadays, economic crisis is happened which is cause the unstable of economic in all the country all over the world. The federal government conducts a survey each month to determine the persons, 16 year or older, who are unemployed. The results of this survey are used to calculate the unemployment rate. Unemployment mean that the state of a worker who is able and willing to take work but cannot find it.

Unemployment rate plays an important role in the economy of a country because unemployment rate will lead to recession and inflation which will increase the price of the product. In Malaysia, the employee also facing a higher unemployment rate because of the economic unstable all over the world.

Unemployment rate can be categorizes into few types such as frictional unemployment, structural unemployment, seasonal unemployment, technological unemployment and hidden unemployment. These unemployment rates are usually happened in Malaysia.

2.0 Frictional Unemployment

Frictional unemployment occurs when a people leave the job to another. (Google, 2011). The time period when the person searching new better job is known as frictional unemployment. Frictional unemployment is not considered to be a problem to the economy since mobility is needed for economic growth. The person that experience frictional unemployment will whether they are resigns voluntary or decapitate by the company will not find their job in a short time. They will use more time to find a job which gives them a better offer in terms of salary, bonus, welfare and etc. For example a junior manager just graduate with Master qualification usually will no more stay at the job with a salary of RM2500. The junior manager will search for a job which will offer him a higher position together with a higher salary. Similarly for company, they also will take a longer time to get more candidates so that the company can hire a good quality of staff. The periods that the person searching for better jobs are known as a frictional unemployment. Workers as well as employers accept a certain level of imperfection, risk or compromise, but usually not right away, they will invest some time and effort to find a better match.

3.0 Structural Unemployment

Structural unemployment occurs when the number of jobs in a labor market are unable to provide substantial jobs for everyone who wants one. This type of structural unemployment is usually cause by economy changes such as changes in taste, fashion on competition from substitutes or trend where an industry need more labor while another industry will reduce their demand of labor. For example because of economy unstable many factory are force to cut down the number of employee in order to maintain the company. Therefore the demand of labor in Intel will be reduce which will lead to structural unemployment. The employee will try to change into other industry such as bank, hotel so that they can get a job during economic unstable.

4.0 Seasonal Unemployment

Seasonal employment refers to a situation where a number of persons are not able to find jobs during some months or season of the year. The employee who experience seasonal unemployment will usually won’t have a stable job because their job is not fixed and the salary every month is also unstable. For example, fisherman will experience seasonal unemployment because they won’t have job everyday and every month. The fisherman will don’t have more jobs during the month that raining season. However, they will become employed after raining season.

5.0 Technological Unemployment

Technological unemployment occur when the application of new technology, either by eliminating jobs or by changing the nature of work so that those who had performed the work no longer have applicable skills to do so. For example, the introduction of UPC scanners at retail checkout counters permits fewer employees to perform the same amount of work compared to when prices had to be input into a register. Likewise, utilization of robots in manufacturing plants has reduced the number of employees required to produce most products.

6.0 Hidden Unemployment

Hidden, or covered, unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics, due to the way the statistics are collected. There is only those who have no work but are actively looking for work are counted as unemployed. Those who have given up looking for work and sometimes those who are on Government retraining programs are not officially counted among the unemployed, even though they are not employed. The same applies to those who have taken early retirement to avoid being laid off, but would prefer to be working. The statistic also does not count the underemployed and those with part time or seasonal jobs who would rather have full time jobs. In addition, those who are of working age but are currently in full-time education are usually not considered unemployed in government statistics. Because of hidden unemployment, official statistics often underestimate unemployment rates.

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7.0 Conclusion

Many economists feel that the reported unemployment rate does not accurately reflect the true number of people unemployed. First the people working part-time because they cannot find full-time employment are not counted as part of unemployed, they are treated as being fully employed.

Second, people working in jobs for which they are overqualified are treated as fully employed rather than underemployed. Finally who has quit looking for work is not counted as being a part of the labor force. Some people stop looking due to the frustration of not being able to find work rather than the desire not to work.

In conclusion, unemployment describes the state of a worker who is able and willing to take work but cannot find it. Unemployment rate can be categorizes into few types such as frictional unemployment, structural unemployment, seasonal unemployment, and technological unemployment.

Question 4

Unemployment may be defines as the number or percentage of those working age who are available and willing to work at current rates but are still without work. What could be the possible cost of being unemployed?

1.0 Introduction

Unemployment may be defines as the number or percentage of those working age who are available and willing to work at current rates but are still without work. Therefore, unemployment rate only involve the following: Working age hence children, pensioners and senior citizens of retirement age are not included. Available and willing hence those of working age( more than 16) but choose not to work will not be included. At current wage rates hence those who are not willing to work at the price offered will not be included. The unemployment rate is therefore a percentage of the total labor force who are unemployed and which is not part of the labor resources for the conduct of national production, but still have to spend the national wealth The labor force is hence the number of unemployed working adults willing to work at current wage rates. The following are the cost of unemployment:

2.0 Financial Cost to the unemployed person

This is direct cost due to the lost in earning of the individual, measured as the different between previous wage and current unemployment benefits, if any. Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction and the family maybe will fall in financial difficulty immediately.

3.0 Personal Cost of being unemployed

This will affect the self-esteem and spirit of the individuals, the longer they are unemployed, which may result in stress-related illnesses, social problem such as smoking, alcohol and drug. The person who is in unemployment may loss of self-reliance of the individual and deterioration of self-confidence and they may be will suicide. For example

4.0 Societal Cost of unemployment

This will affect the family and friends of the unemployed individuals, the longer they are unemployed, which may lead to domestic violence, divorce and separation, abandoned families or children. The large unemployed population will lead to social unrest such as theft, robbery fraud and other crime.

According to the Official statistics of Royal Malaysia Police, Violent crimes report to police by types of crimes and states Malaysia 2010, the violent crimes report of year 2011, it include gang robbery, robbery, crime threat the cases still maintain in high level in certain state. One of the causes of the high crime rate in Malaysia is relate to unemployment in our country. This is because of damage to the psychological well-being of the unemployed, and deterioration of physical well-being of the unemployed.

5.0 Economic Cost due to lost of national output/ growth

This will widen the gap between actual output and potential output, hence limiting the possibility of economic growth. Other worker will also lose additional wages, since national output is lower than levels at full employment. Workers can work to maintain and improve the work skills and work attitudes, in particular the rapid technological advances of today, the long-term unemployment is not only a waste of existing job skills, cannot accumulate new skills, which will lose in the future labor market competitiveness and productivity, and thus a higher loss of employment income opportunities.

the waste of economic resources or output reduction.

The economic cost of unemployment is one of the waste of resources or reduce output. Unemployed if not unemployed, or human resources can be fully effective use, it can increase the output, but the output reduction due to unemployment.

6.0 Cost to the government

The cost to the government may be counted as reduction in tax since unemployed do not pay personal income tax. An income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities). Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). Various systems define income differently, and often allow notional reductions of income (such as a reduction based on number of children supported). If the particular people is unemployment, then sure do not have any income tax need to pay by the particular people.

Next is increase in administrative and benefit cost, since some countries provide unemployment benefits. This part of the loss of employment income by unemployment allowances, vouchers or other government transfer payments, in part, be compensated, but the experience of countries shows that these allowances should be less than the loss of employment income, employment income, only about 50% -60%

Reduction in corporation tax revenues since firms are likely to make lesser profit from the lower output level, and reduction in other tax revenues from services tax, excise duties on household consumption and expenditures since household will have lesser factor income to spend.

According to Wikipedia 2011 high levels of unemployment can be causes of civil unrest, in some cases leading to revolution, and particularly totalitarianism. The fall of the Weimar Republic in 1933 and Adolf Hitler’s rise to power, which culminated in World War II and the deaths of tens of millions and the destruction of much of the physical capital of Europe, is attributed to the poor economic conditions in Germany at the time, notably a high unemployment rate.

7.0 Conclusion

Unemployment may be defines as the number or percentage of those working age who are available and willing to work at current rates but are still without work. In conclusion the possible cost of unemployed includes loss of earnings to the unemployed and for those who are unemployed will find it more difficult to get work in the future.

Lower GDP for the economy, the economy will be below full capacity this is inefficient and will lead to lower output and incomes. Beside that unemployment will lead to increase in social problems especially areas of high unemployment, tend to have more crime and vandalism.

In my opinion the crisis of unemployment must be soft as soon as possible by the government. Government should attract more foreign investor invest in our country, and create the employment opportunities to reduce the unemployment rate.


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