A Level Economics 11: Objectives of Economic Agents

Explain the objectives of economic agents.

Economic agents are individuals, groups, or entities that participate in economic activities and have an impact on the economy. They play various roles and functions within the economic system. Let's explore the different types of economic agents and their objectives:

1. Individuals/Consumers: Individuals are economic agents who act as consumers, seeking to fulfill their needs and wants through the consumption of goods and services. Their objectives include maximizing utility or satisfaction by allocating their limited resources, such as income and savings, to obtain goods and services that provide the highest level of satisfaction.

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3. Firms/Producers: Firms are economic agents engaged in the production of goods and services. Their primary objective is to maximize profits. Firms aim to optimize production, manage resources efficiently, and make strategic decisions that yield the highest financial returns. Profit maximization involves increasing revenue by selling goods or services at the highest possible price while minimizing costs.

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5. Workers/Laborers: Workers are economic agents who provide their labor in exchange for wages or salaries. Their primary objective is to maximize their income or earnings. Workers seek employment opportunities that offer competitive wages, good working conditions, job security, and opportunities for career growth. They may also pursue personal development and job satisfaction in addition to maximizing their income.

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7. Government: The government is an economic agent that influences the economy through policy-making and implementation. Its objectives can vary depending on the economic and social context. Common government objectives include:

   • Economic Stability: Governments aim to maintain stable economic conditions, such as low inflation, low unemployment rates, and steady economic growth, to ensure the well-being and stability of the overall economy.

   • Redistribution of Income and Wealth: Governments often seek to reduce income inequality by implementing policies that redistribute wealth and provide social welfare programs to support disadvantaged groups and ensure social equity.

   • Provision of Public Goods and Services: Governments are responsible for providing public goods and services, such as infrastructure, healthcare, education, defense, and environmental protection, to meet the collective needs of society.

   • Promotion of Economic Development: Governments often strive to promote economic development by attracting investments, fostering entrepreneurship, implementing supportive policies, and encouraging innovation and research and development.

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9. Financial Institutions: Financial institutions, such as banks and investment firms, are economic agents operating in the financial sector. Their objectives typically include:

   • Profitability: Financial institutions aim to generate profits by providing various financial services, including lending, investments, and fee-based services, while managing risks effectively.

   • Risk Management: Financial institutions focus on managing risks associated with lending, investments, liquidity, and market fluctuations to safeguard their stability and protect the interests of depositors and shareholders.

   • Intermediation: Financial institutions facilitate the flow of funds between savers and borrowers, supporting economic activities and capital allocation.

These are general objectives associated with different economic agents. It's important to note that individual economic agents may have additional goals or objectives that align with their specific circumstances, values, and external factors. Economic agents' objectives are influenced by factors such as individual preferences, market dynamics, regulatory frameworks, and societal needs.

Economics for Non Economists 1: What is a free market economy?

by Girish Menon

Suma, you have asked a really fundamental question and I will try to answer it in two parts viz;

-         What is a market economy?

And

-         What does free mean in the context of free market economy?

So let’s start with the first aspect – What is a market economy?

The activity of buying or selling a good is called a market transaction or a market activity. Thus a market is a set of arrangements where goods are exchanged for money.

Today most countries in the world adopt the market model for the production and consumption of goods and services. They believe in the Adam Smith quote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’

Google Dictionary defines self interest (own interest) as ‘one's personal interest or advantage, especially when pursued without regard for others.’ Some economics texts assume that the self interest of a goods producer is to earn profits whereas the self interest of a consumer is to maximise her happiness by paying for goods she requires.

Adam Smith’s theory expects citizens in an economy to be both producers and consumers of goods. As a producer you are expected to generate a profit from your toils. You, as a consumer, are expected to use the profits to buy other goods to live your life.

Based on the above logic, market theory predicts that if all the citizens of an economy are left to pursue their self interest then it will result in the automatic production of all goods and services that citizens require in order to be happy.

Though Adam Smith preferred the word ‘invisible hand’, I have used the term automatic. Google dictionary defines automatic as ‘working by itself with little or no direct human control’. In other words producers make and sell goods which they think will be demanded and hope to profit from it. There is no authority other than their anticipation of consumer needs that guide their decision to produce and sell goods. Similarly, consumers pay for a good because they think it will make them happier and there is nobody telling them what to buy and consume.

Thus, a market economy would be an economy where the production and consumption of all/most goods and services is determined by the self interest of its producers and consumers. This system is also known as capitalism.

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So, what is a free market economy?

These days it’s not only the UK, USA etc. but many other countries who call themselves free market economies. But are they truly free market economies where the production and consumption of all goods are determined automatically with its citizens unabashedly following their self interest?

I notice that you seem to be shaking your head. Especially in this Covid climate you will have noticed the role that the UK government has played in your life and the way it has affected your pursuit of self interest and happiness. So what I will now do is list the conditions necessary for Adam Smith’s theory of the invisible hand to work:

1. There are many buyers for a good in the market and no buyer is large enough to get a discount on the price.
2. There are many small sellers of a good in the market and no seller is large enough to set its own price.
3. The goods produced and consumed are identical or homogeneous. In other words a consumer cannot recognise the producer of the good.
4. There must be freedom of entry to the market – or no barriers that prevent a potential producer from entering the market.
5. There must be freedom of exit from a market – if a producer wishes to quit a market then s/he should be able to do so freely and without any sunk costs.
6. There must be perfect knowledge. Producers must have full knowledge of the technologies used by its rivals and consumer preferences. Consumers must be aware of the short and long term benefits and costs from consuming a good.
7. The factors of production must be mobile. It means that the land, workers, machines used for producing a good should be easily redeployed to producing any other good when demand changes,
8. There must be no transport costs.
9. There must be independence in decision making. No external forces affect the decision making ability of producers and sellers.
10. No externalities. The act of production and consumption based on self interest should not result in benefits or costs to third parties.

I am sure that after you have read the above conditions you will agree that neither the UK economy nor for that matter the Indian economy is anywhere close to being a free market economy. I don't think there is a single economy in the whole world that satisfies most of the conditions of a free market.

I will now let Ha Joon Chang have the final word on free markets:

“The free market (economy) does not exist. Every market has some rules and boundaries (by governments) that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.’

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• When I presented this article to Suma she said, 'Girish, you have not understood my question. I meant where can I find the free goods that should by definition be there in a free market?' 

What is a market?

What is a market? asked a Russian
It is a form of coordination
Where many producers
Meet demands of consumers
Using profit as a consideration

Copyright - Girish Menon