Types of Economic Activity

1. Types of Economic Activity Primary: extraction or utilization of natural resources Secondary: the processing and manufacturing of materials to make them more useful Tertiary: business and labor specializations that provideservices to the primary and secondary sectors and services to the general community (includingprofessional, clerical, and personal). Form vital producer-consumerlink. Quaternary: services rendered by white collar professionals working in education, government, management,information processing, and research The relative importance of the above in different countries?

2. Political-Economic Systems • Traditional subsistence: most production for local population, groups mostly self-sufficient. Common in feudalism and other precapitalist settings. • Centrally planned: government controls production and distribution, generally have been communist or in some ways socialist.* • Commercial: market based, capitalist, price and quantity mostly determined by supply and demand. Laissez-faire. • Mixed: combinations of above; but typically means a market system that has significant government intervention and planning. None of the political-economic systems in today’s world are strictly of one type; all are to some degree mixed. What is the best “mix”? What sorts of goods/services should be market based? Which ones should not? How does the US “mix” compare with other advanced nations? The U.S. state is smaller, intervenes in the market less, and provides fewer social services than almost all other advanced nations.

3. *Socialism: various theories of economic organization advocating public worker ownership/administration of the means of production and allocation of resources, and a society characterized by somewhat equal access to resources for all people.

4. Key Free Market Assumptions 1. Consumers possess perfect information – they know all of the options, prices, and quality 2. Perfect competition exists – there are many producers competing with each other, and no single supplier is large enough to significantly affect the price. Prices thus set by supply and demand. 3. Mobility of factors – capital, labor, and consumers are free to go elsewhere if they don’t like conditions 4. Firms have the single minded goal of maximizing profits 5. Consumers have the goal of maximizing utility by pursuing the most satisfying products at the best available price ------------------------------------ Are these conditions met in any particular product or service? Could capitalism survive if free markets predominated? (what happens to profits?) ------------------------------------- -market failure: when the outcome is not efficient or is suboptimal, if production of the good or service results in an externality: (price does not reflect all costs), or if the good or service is a public good. (stable climates) -Nonetheless, most economists believe that markets are most optimal way to allocate most goods and services. Some poss. exceptions: education, healthcare, agriculture -Many kinds of commodity systems and industries, however, have few producers/suppliers (monopoly or oligopoly) & thus uncompetitive prices if allowed. Prevention? What happens when free markets are allowed to dominate a country or region?

5. The fundamental political economy question is “What should the role of government be?”

6. Informal economic activity • The exchange of goods and services not accurately recorded in gov’t. accounting. Generally untaxed, commonly includes goods and services such as day care, tutoring, or black market exchanges. A large part of all employment in developing countries such as in Latin America and Africa. Is the informal sector large in the United States?