Reasons to Learn Economics - Essay Example

Chapter Why study Economics Our choices in life depend upon two variables- one is our own interpretation and the other is the outside environmental factors like output, talent, employment, price, demand, supply, poverty, trade and so on. The study of the second category of variables is called economics because it helps us take better and informed decisions about what is going on in the expanded market and how individual lives get affected by social and governmental policies and behavior. Study of economics aids in understanding the bigger impact of operations in businesses and governments and it is always studied in context of a definite place (nation or geographical area) and time (Ashby 2011). Basic concepts Economics, as stated is the study of both individual and the government and business behavior in terms of price, interest rates, jobs, poverty, employment, etc. As such, it has to deal with groups of people which is classified into categories namely households, business and government to facilitate the analysis of behavior. While individual behavior study is termed micro-economics, study of people at large is called macro-economics. Also, actual behavior of people falls under descriptive economics while advice or choices of economists comes under normative economics. It is evident that when policies and structures are to be studied in totality, individual responses can deliver highly variable results. As a result, economists have simplified individual responses by setting out average of a large number of responses and which behave in a similar fashion or towards a common goal. On the basis of this concept, assumptions emerge which turn into simplified models or theories of economics because they demonstrate a common and shared behavior of a large group of people. For instance, assumption of profit maximization relates to suppliers because in a particular situation, average response of a number of suppliers would be that of maximizing their profits. Likewise, assumption of satisfaction maximization applies to buyers as they tend to derive maximum satisfaction from their investments. Market in economics refers to the place where interaction between buyer and seller takes place. Level of scarcity in the production or delivery of a service determines its market value. Surplus product comes at lower price while scarce product is associated with higher price. When government intervention happens in the market due to price or supply concerns, it gets turned to public goods. Troublesome concepts Scholars of economics are continuously confronted with some difficult terms like profits, efficiency, quality, want, demand, etc. A want turns into demand when it is supplemented by willingness and ability to pay. Similarly, profits in economics are classified into accounting and economic profits. However, accounting profits are those which are necessary to cover up the costs while profits above accounting are termed economic profits which serve as incentive or motivating factor for businessmen and producers. Cost in economic refers to the investment involved in bringing out the desired output. Inputs required for outputs are the factors of production namely land, labor and resources. While allocative efficiency measures how fruitful has been the use of factors of production, productive efficiency deals with average cost of producing one unit of output. Marginal in economics refers to the time, cost or labor required to produce one added unit of output. Production in economics is also measured with reference to time periods called market period, long run and the short run. While long run allows capital expenditure, short run focuses on improving operational efficiency. Correlation is also positive or negative depending upon simultaneous movement of two variables in similar or opposite direction. Visualizing the possibilities As mentioned in the beginning, every choice comes with an opportunity cost which would have been earned if that choice had been pursued. With regard to opportunity cost in respect of producers and buyers, production possibilities frontier graph is prepared to study different combination of inputs and outputs. Economic growth takes place when capital is created and is positively correlated with the pace of capital creation. Chapter 2 Market basics Markets are categorized into perfect and imperfect depending upon the favorable outcomes and their desirable characteristics. For a market to be perfect, its buyers and sellers should be in a large number so that no single buyer or seller is in a position to affect the dynamics of the market. Also, buyers should have proper access to product information and other sources of supply of the product. There is not restriction on the entry of any buyer or seller. Buyers always judge the perceived benefits of the product with the investment that they are making to buy the product. Benefit cost analysis measures the trade off between price and perceived value because less expected value will make the price look higher and high perceived value will make the price look lesser. When buyers buy a large number of the same product, diminishing marginal benefits come into picture as with every successive unit of the product purchased; the additional benefits expected from the product are lesser than the first unit. Obviously, buyers buy to maximize their value and satisfaction while sellers sell to maximize their profits. This phenomenon motivates both of them to remain in a state of market equilibrium because it stabilizes the price of the product and also the self interests of both the buyers and the sellers in situations of excess demand or supply. In production parlance in economics, costs are also classified into fixed and variable. Fixed costs are those costs which do not change with the level of output like land, machinery, infrastructure, etc. Variable costs on the other hand are those which change with the level of output such as materials and labor. The total cost incurred by a firm in the production of a product is the sum of fixed cost and variable cost. Demand and supply curves One of the most important processes in markets is the demand and supply dynamics. Demand is the quantities of products buyers are willing to purchase at the prevailing price. Because of diminishing marginal benefits in operation, buyers tend to purchase high quantity of product when its price falls and low quantity of product when price rises. In this regard, rise or fall in the price of complementary and substitute goods also impact the demand of the original product. In the former case, fall in the price of complementary good accelerates the demand of original product. On the contrary, rise in the price of a substitute good leads to increased demand of the original product. The demand and supply changes for every successive unit of product are plotted on graph with total cost, total fixed costs and total variable costs. The point at which demand equals supply price and output is the equilibrium price. The graph then depicts two areas named consumer surplus and producer surplus, combination of which gives the total net benefits accruing to both the buyers and the sellers. Imperfect markets As discussed above, perfect markets have certain specific characteristics. Out of those, one special feature was the affect of the market on buyers and sellers only. However, when the market impacts parties other than buyers and sellers or does not behave in the desired way, it is termed as imperfect market and leads to market failure because then the outcomes produced are not favorable or attractive to one or more parties affected. Such undesirable outcomes are termed as externalities and can further be classified as positive or negative based on their effect. These externalities might affect the production, purchases or any of the market process depending upon the parties involved. Work Cited Ashby, D.B. Winter 2011. 29 January 2011 . Read More