Principles of Economics
With economics, there is a lot to learn. It can be defined as the science of analyzing the production, distribution, and consumption of products. In simple terms, economics is all about the choices people make, why, and when buying products and services. Economics, as a subject of study, features two subcategories, microeconomics, and macroeconomics. As you may have already guessed, micro means small. Hence, microeconomics is the study of economics at an individual or business level. It seeks to discuss how people or businesses behave and the decision they make when faced with scarcity and government intervention. It includes concepts of demand and supply, price fluctuations, quantity demanded, and supplied, among other aspects.
Macro, on the other hand, is a term that defines something much larger. Thus, in microeconomics, we are referring to the study of the performance and structure of the economy as a whole. Instead of focusing on individual markets, as in microeconomics, we look at economics as a field that affects humanity as a whole. Macroeconomics deals with elements such as inflation, international trade, unemployment, notional consumption, and production, among other concepts. The study of economics is necessary for modern society because it gives people a chance to make decisions that lead to a better life. And this is why there is a set of principles that offer guidance in economic studies.
Key principles in Economics
Every theory and concept of economy is based on a specific principle. The study of production, distribution, and consumption of goods can be described using these guidelines.
Scarcity is the main cause of problems in the global economy. Human beings require specific resources to survive. They include human wants like clothes, shelter, food, transportation, and many others. To get these things, one must be ready to pay for them. And where does the money come from? People work to earn the money they need to enjoy certain things in life. However, we all know that there are people who don’t have food, others don’t have shelter, and others cannot get a job, even after going through many school years. And for those who have jobs, how many can say they have everything they need to live the way they want? Very few. It is all because of scarcity. The best definition of economics is carried in these terms, which, by default, seems to determine the cause of national and global economies.
Human beings need resources to meet their daily needs. However, there is a finite supply of these resources at any given time. Whereas this is so, human wants are infinite, and these limited resources cannot meet them. When a good or service gets to a non-zero price, it is considered scarce. As such, the consumer should be prepared to pay a high cost to consume such. It is, therefore, a scarcity that leads to the study of economics; without it, the world would not be facing any economic problems, hence no need to study. People will consume everything they need to consume without being compelled to choose or make trade-offs between goods.
Marginal is a term used in economics that means a small, or one-unit change. For instance, one must decide how much better off they would be with one more unit. Human beings are rational thinkers. For this reason, As such, to answer this question, they will continue to increase the variable until the gains additional (marginal) value from the previous small addition that is the same as the marginal cost of the prior increase. Let’s think about your favorite $1 menu from your restaurant of choices. Each additional item costs you the dollar, and with every addition, you eat or drink, your want is satisfied. But it will come a time when you stop consuming the product. We can say that is the point at which the additional benefit you got while consuming the item is valued at $1 or less. The marginal benefit is said to be equal to the minimal cost.
We can break the principles of the economy into three main categories:
- The way people make decisions
- The way people interact with each other
- Forces and trends the shape economy
People and decisions
In this category, four principles define economies.
- People and Trade-offs
The principle states that “there is nothing like a free lunch.” In order to get something you want, you must always give up something else you like. In other words, making decisions compels individuals to trade something they like with another. Sometimes it is so automatic that people don’t even realize they have sacrificed something for another.
A good example is how families make financial decisions. After saving for a long time, do you buy that you really need for a fancy vacation? Also, the government must decide how they are going to revenues and how laws may protect the environment but affect the investor.
The trade-off between efficiency and quality maybe perhaps a perfect example of what this principle stands for. Efficiency is when a property benefits from a scarce resource, whereas equality is when the property is shared equally among the members of the society. For instance, the rich pay taxes, which can be shared to improve the lives of the poor. However, it lowers the incentives for hardware, which cuts down the effort produced by our resources.
- The impact of opportunity cost in relation to decision making
Because trade-offs are inevitable, people must compare the costs against the benefits of alternative choices. For instance, going to college for a year costs tuition, books, and fees, together with the foregone wages. One the other hand, going to the movies costs the price of a ticket and the value of time one has to stay in the room. Here, one has to make a decision based on the opportunity cost of resources, which states that whatever must be left in order to gain some item is the best decision. In this case, therefore, thinks must look at the opportunity cost of each alternative.
- People are naturally rational, they think at the margin
We have already seen in the previous section that most people are rational thinkers. Economists look rational as a process of one systematically and purposefully doing everything they can to achieve their goals. Based on the current price and incomes people face, consumers will want to buy a certain group of products and services that satisfy them the most. The firm follows production strategies that help them tap into maximum profits. Most decisions in life are defined as incremental. Should I do more to gain more? Rational thinkers look at the marginal benefits first, and then marginal cost before settling on a decision. Also, a consumer will pay for a commodity based on additional satisfaction from an increase in the unit of the item.
- Incentives change how people think and react
An incentive is something that motivates someone to take action. It does thin by promising rewards to individuals who change their actions or behavior. We have seen above that rational people decide by a comparison between costs and benefits. For this reason, they respond to incentives in a more positive way. Incentives may carry both positive and negative implications. For instance, when workers are promised a salary raise if they work harder, it becomes a positive incentive because it will encourage them to be more productive. A negative incentive can be like putting a tax on fuel, which causes people to consume it much slower.
Another category of economic principles is how people interact with each other. In this category, we also get their vital principles.
- Social and economic well-being depends on trade
Trade cannot be likened to a sport where one side wins, and the other loses. Trade makes everything gain at equal levels. Think of a trade that happens in your house, for instance. Let’s say your family gets involved in trade with other families every day. Many of us don’t make our own food, clothes, and many other commodities. Hence, we depend on others to provide, as we pay back with what we can do. A country benefits by signing trade treaties with others. A country that specializes in specific products can export outside and import what they don’t have.
- Markets help organize economic activities
In the past, many countries relied on centrally planned economies. But they have since abandoned this system and adopted market systems. The market economy is defined as an economy that allocates resources via decentralized decisions involving many firms and stakeholders, who mingle in the market for products. Market prices, for instance, are a reflection of a product to consumers and the representation of resources that went into its manufacture. Markets are fundamental in an economy because they allow for the sharing of goods and services in a more straightforward manner. Economies that don’t allow markets to work have failed because they don’t have a proper sense of direction. Markets create a point where producers and consumers can meet and exchange items.
- Governments’ role in market outcomes
Governments are always interfering with the economy. This is because they seek to ensure promotion efficiency as well as equality. For instance, government policy can be beneficial where a market fails. Market failure is a condition where a market left along cannot allocate resources efficiently. An example or market includes externality and market power. Externality is the influence of the behavior of one individual on the well being of a bystander. Market power is when a particular economic entity has the ability to cause substantial influence on market prices. The market economy benefits people based on their ability to work and produce consumer valuables. For this reason, the chances of an unequal distribution of economic prosperity are very high. This principle highlights that a government can improve market results. But it does not mean the government improves market outcomes at all times.
Force and trends the determine economy causes
Many forces influence the behavior of an economy. They are used too, to determine how much economies drop or grow. They include:
- A country’ production dictates the standard of living
There is a huge difference between the standards of living among countries. What is witnessed in one can be totally different from what another has. And the changes in living standards over time also very large. It is all about the productivity of a nation. Productivity is the quality of goods and services produced from each hour in a worker’s time. The higher the productivity, the higher the standard of living. This means policymakers must be aware of any policy on people’s ability to make products. They need to raise productivity by making sure workers gain proper education and are equipped with everything they need for better delivery of goods and services. Today, technology run economies and policymakers must make it available for workers. Production is simple per capita of a nation.
- Money Supply Affect Pricing
Inflation is a constant increase in the overall price levels within an economy. Many factors lead to inflation and the major one if when the government prints too much money. In this case, the value of money drops significantly, leading to poor exchange rates. This forces producers to raise prices to meet production costs.
- Inflation and unemployment are normal short-run trade-offs in society
According to many economists, when there is a monetary injection (adding money in an economy), it causes short-term effects, including a low level of unemployment and higher prices in the market. More money initiates spending, which causes a surge in demand for goods and services. And as we know, high demand means firms raise prices, though it also motivates them to create a better quality of goods and services. More production leads to more hiring, which handles unemployment. Some economists doubt if this relationship still exists. The short-run face-off between inflation and unemployment is a key consideration in analyzing the business cycle. Policymakers have a task to research this trade-off using different policy instruments. However, the stretch and desirability of such interventions are still under debate and scrutiny. The assumption that they have a great impact on the business cycle is enough to hold water as a controller for the trade-off.
Author: James Hamilton