To laymen, economics, may seem to be a really boring course which is full of diagrams and unnecessary statistics. It is however, quite a complex branch of science that deals with different choices that individuals as well as a company can make. Global politics as well as psychology is also something that economics combine within its curriculum.
Economics, can be essentially termed as a study of how resources are used when people are presented with certain constraints. The object being analyzed, is assumed to be one rational in nature and improves its condition of well-being with time. To branches of economics have therefore emerged for further studies, macro and micro economics.
Microeconomics as its name suggests, is concerned with choices made by individuals. It will deal with entities and how those interact among themselves. Macroeconomics on the other hand, deal with economic outcomes as a whole.
Lessons provided by economics, is often appreciated by common man. This is because application of economics can be found in day-day situations in lives of people. Students, for example are faced with choices of whether to buy books for the semester or buy few packs of cigarettes. These are the choices and a constraint in form of limited amount of pocket money is what students have to deal with.
The very aim of economics, is understanding decision making processes behind allocation of resources. One needs to realize that needs are endless but resources are always limited. Economic and political systems in a country are closely related to each other.
Demand and Supply
Demand and Supply, is one the fundamental framework according to which actions of a n economy can be assessed. Demand is actually quantity of a certain good that people are willing to buy by paying a certain price. Supply, on the other hand, is the quantity of good that sellers would deliver to customers at a certain price. Final price of any good is decided in accordance to the tussle existing between demand and supply of it. Different things such as quality, brand name of a product are kept constant. Higher prices will ensure that demand from consumers is low.
Laws of demand, supply and time
Higher prices of products, will ensure that supply coming from manufacturers also stays high. These things constitute laws of demand and supply. Time has to play a very important role in free market economy. It is more so, for entities, that compete heavily to serve different customers. Situations involving stock-outs, is not something that suppliers want. It affects brands, also consumers may move elsewhere to purchase the same.
If an increase is demand is observed, then producers and manufacturers need to gauge what kind of demand has surfaced up. This demand can be seasonal in nature or just a passing trend. Producers always need to react in a swift manner to gain an upper hand in markets and retain regular customers.
State of equilibrium
A stable state of equilibrium in an economy makes it quite efficient. Here, it is observed that suppliers regularly move their goods and consumers receive what they demand. You have to however understand, achieving this kind of equilibrium is quite elusive in nature. This equilibrium is known to fluctuate like an angry bull with passage of each unit of time.
Free market hypothesis
In a free market, no matter what the product or service is, the total quantity of it supplied by sellers and total quantity demanded by buyers will always stay at a state of equilibrium. This is bound to take place over a period of time in a perfect free market. The free market model is followed well, provided two basic assumptions remains prevalent.
These two assumptions are existence of good competition and absence of any kind of unwanted quotas and regulations from governments. The amount of regulation that a government imposes and which is right, is something quite debatable at present.
By perfect competition it is assumed that no individual seller, is big enough to influence natural movement associated with markets. This can happen when a single company owns a very large share in markets and has similar cash reserves too. This is often something observed in case of corporations existing in a capitalistic setup. This kind of system can literally wipe out small players in businesses very swiftly. Regulations are in place, to prevent monopolies and unfair practices from takin place in markets. If too many government quotas are present, then natural process towards reaching equilibrium will be definitely hindered.
Cost efficiency and scarcity
Opportunity cost can be defined as a value which represent the price of an immediate next substitute of a particular resource. For example, you may have to choose between attending lectures at the university or attending a session on computer gaming. If you are not going for lectures, then there is a risk of not understanding concepts and even failing semester exams. This is an opportunity cost that you need to remain aware of.
Needs and resources associated with particular entities keep changing with time. Therefore, lots of views exist regarding what would be the best course of action.
It is a measure of output obtained by you after giving a certain amount of input. Wastage corresponding to your efforts need to be minimal here. In today’s age, technical ability often decides what would be the upper limit for achieving maximum efficiency. Definition for scarcity can be deemed to be a little philosophical in nature.
It states that human desires are infinite, however their ability to produce is quite limited, taking into account factors of labor, time, capital etc. Different trade-offs are also required to be done, in order to allocate resources in the most efficient manner.
Production possibility Frontier
The PPF, can be termed as a bridge that brings together three concepts. In a hypothesis, if it is assumed that an economy would be producing just two goods, say guns or roses. Then it is observed that a higher quantity of guns can only be produced if a reduction in quantity of roses is brought about. Every point in a PPF curve, represent maximum possible output that an economy can produce.
Elasticity can be termed as a change in quantity of a certain number of goods, associated with change in prices. This is usually dependent on nature of a particular product, as well as substitutes available in market of the same and the market share of that product. If amount of a particular good in a market, changes dramatically with change in its price, then it is said to be elastic in nature. For example, when a great discount is given on a particular product, a very sharp rise in sales of this product is observed.
If quantity of a certain good, does not change too much with a change in its price, then that product is said to be inelastic in nature. For example, products which are basic necessities of people need to be purchased even if prices soar, hence they are inelastic products. Utility can be termed as a satisfaction that a person can get by consuming a particular service. Marginal utility on the other hand is extra satisfaction that individuals can get by each unit of consumption.
A common example that one can see here, is that of how money earned by an individual affects his happiness in life. In initial stages, getting more riches amount to getting a lot of happiness, however this relationship withers off as the amount of the income increase.
Inflation and scarcity
Cost point is the part where goods begin to get really costly. If rate of inflation is deemed to be 5%, then it is implied that things are getting costlier at rates of 5% per year. It is really vital to keep an eye on rate of inflation to balance out economic condition in a country.
Scarcity can be termed as amount of availability of resources which can satisfy needs of customers. Study of economics help students to understand how limited resources can be utilized for satisfying unlimited needs of people to a certain extent.
Corporate finance is a really diverse and complex subject. Different corporations have ownership of long term assets. These kinds of assets usually require a very large amount of up-front expenditure.
Over the next course of time, they yield certain amounts of income. Corporations usually do not pay for such assets out of their own pockets. Therefore, they are known to raise funds in form of equities and debts. A high ratio of debt to equity is known as leverage. This is called so, because debt acts like a lever.
Prices play an important role in determining efficiency of products. Both producers as well as consumers are dependent on prices, which serve as signals for making marginalized substitution decisions. According to theories of economics, prices of products will tend to a point where amount of quantity being demanded tend towards amount being supplied.
This kind of pricing is known as market-clearing price as it gets rid of all kinds of excess demands supplies. When prices go up, consumers tend to demand less of it and supply stagnates. The exact opposite happens when prices go down.
Setting market price
Different kinds of markets have different laws for operations. Market prices, are usually set by forces of supply and demand. Individual setting down prices for a product is known as a specialist. Different orders to buy and sell that product goes to the specialist. This person determines the price which would maintain a good balance between demand and supply.
If a person is asked to sell a certain share when its price reaches a certain value, then he or she would not be selling that share at any lower value. This is known as limit order.
Labor market economics
In labor markets, different workers form source of supply and producers can be called source of demand. Producers set the price and this is known as the wage rate. If this wage rate is set to be too high, then a company will pay its workers too much and end up losing money. If wage rate is set to be too low, then a company will lose skilled workers to other competing firms. With time, this rate will be balanced to a certain level where supply and demand is completely balanced.
Discussing Equilibrium and Disturbances
When you find that price of a product is just right and there is no surplus of supply or demand, then a market is said to be in equilibrium. It is seen that one event or the other is always taking place which cause this kind of equilibrium to change. These events are therefore termed as disturbances.
Suppose there are two restaurants serving meals at $50 and $60. People will obviously flock to the one with lower price. This will in turn increase demand to a large extent and it will be forced to increase its price to say $45. The higher priced one, will lower its price to $45, and thus an equilibrium will be attained.
Economics in the long run
Producers of certain commodities, are known to engineer disruption in distribution of the product or its production to cause a spike in prices. This rise in price happens in the short run. In the long run however, prices eventually settle down.
This is a commonly observed pattern in case of disturbances. Elasticity of demand can be termed as percentage of decrease in demand in response to one percent increase in price. Elasticity associated with supply and demand is usually higher in the short run than in the long run.
Michelle Johnson is a really famous face in the sphere of economics, among her students. She is a graduate from the University of Harvard and explains difficult and long economic theories with ease. She has completed her MBA and has more than 6 years of experience in this particular sector.