Economics can be defined as the study of how scarce resources are utilized by people either individually or collectively. A specialist in the study of economics is referred to as an economist. A number of reasons have been advanced in the study of economics not necessarily by economists only (Ashby, p. 1).
Importance of understanding economics
The study helps to clear any anxiety that may arise in the day to day life experiences. This anxiety may be prompted by various aspects such as interest rates and fluctuation of prices. This helps in avoiding unnecessary stress that would have been caused by lack of understanding of the economic changes that take place.
It equips one with skills that are helpful in making informed choices even in the choosing of leaders. In this case, an individual can assess the potential leader with a policy that will address social issues like education, health, poverty, and employment among others. Thus, an understanding of economics will improve one’s life and those of the people around in general (Ashby, p. 4).
Basic concepts in economics
For an individual to have a comprehensive understanding of economics, it is important to understand the related concepts. In this case, one should be knowledgeable about economic concepts. Thus, there are various terms and concepts that are used in economics. “Descriptive/positive economics” is a term used in reference to an analysis done by economists. This term explains and tries to predict the choices that individuals are likely to make and the reasons for their choices.
In such a prediction, the economists may give their opinion on what choices the people should make. Such a practice is referred to as “normative economics”. When an economist does a study on the performance of an individual, that is termed as “microeconomics”. On the other hand, if the study is concerned with the performance of a whole entity such as the state, it is called “macroeconomics”.
Though economists cannot predict with a guaranteed accuracy, most often, their results reflect the correct position of a given matter. This can be attributed to the fact that economists deal with large numbers of people, and thus getting the average of how they will respond is not hard.
For example, the economists conduct analyses on how some people will react in a same scenario and then draw a conclusion of a larger group of the population. This has been used over time for the study of suppliers of goods since they will most often want the same result of greater outcomes. The same applies to buyers and sellers. However, the practice of these different players has to be regulated. In this case, the government develops regulation parameters for this purpose.
Some terms used in economics are troublesome. This is especially the case to those who have little or no understanding of what these terms mean. For instance, the term economists’ “self interest” is more often taken negatively to imply a negative aim by the economists. However, it connotes the study of an issue so as to get relevant information that a conclusion can be based on by an economist (Ashby, p. 9).
There are other economic terms that are misunderstood by individuals. For instance, “profits” is another term that is often misunderstood to mean undeserved gains. However, the term should be understood to mean a financial return to those investing in a business. It is well known that no one will want to venture into anything that is not gainful. Therefore, business people make business investments with the hope of reaping profits.
Economists also differentiate between “accounting profits” and “economic profits”. In this case, the accounting profits are normally lesser than the economic profits. Accounting profits are further subdivided into “necessary profits,” which include total costs and “economic profits,” which refer to an excess of the expected profits.
Other terms that are most often used by economists include “price”, “market value” and “average revenue”. All these are used in reference to the amount a given product sales. Another differentiation made by economists is that of “demand” and “want”. The former is that which a person is willing, ready, and able to have whereas the latter refers to the things that are just desired.
The term “efficiency” is used in two respects related to production and allocation. Productive efficiency refers to the cost of generating one unit of output. On the other hand, allocative efficiency refers to how well the economy utilizes factors of production. The factors of production include resources, labor, capital and entrepreneurship.
Opportunity cost emerges in every choice that one makes including a choice not to spend (Ashby, p. 19). This is the basis of the common saying that there is nothing for free. This aspect can be illustrated by the graph of a production possibilities frontier. Under this, it demonstrates that the economy can satisfy demand if factors of production are managed properly.
This refers to the factors that do influence the decision of a buyer when he or she is in the market. The first aspect that comes is that of price. The buyer is bound to assess if the price quoted by the seller of a given product is consistent with the value he or she stands to gain if that commodity is purchased. Factors such as the buyer’s tastes and preferences play a big role too (Ashby, p. 34). The buyer will most often buy a product when its price is low.
There are different factors that affect decisions that are made in the market. All the market players have different situations that face them. The buyer has to assess the price expected to pay and compare it with what he or she stands to gain. Nevertheless, the seller too has in mind how he acquired the said product from the supplier. The seller also thinks of how much he will gain if he sold the product at a given price (Ashby, p. 43). These are self interests that shape the decisions of the market players.
Demand and supply
In most instances, a buyer will buy a given product if its price is low. The buyer will always see that it is in his self interest that he gains from a product by incurring the lowest possible cost (Ashby, p. 38). In addition, buyers find it easy to buy a limited amount of a product per period during a time when the price is higher.
On the other hand, the suppliers face a big challenge in fixing the price since they lack the advantage that the seller will have of assessing the reaction of the buyer on mention of the price. An excess supply situation will arise if the suppliers fix a very high cost of the product (Ashby, p. 43).
Ordinarily, supply and demand affect tangible commodities like agricultural products, which are sold in a number of commodity exchanges across the globe. Bodies like the Chicago Board of trade and Tokyo commodity exchange foresee this process of exchange. The offers of demand and supply apply to these exchanges and the traders fix the prices so as to balance supply and demand.
Tastes, preferences, one’s income, and the product’s price affect the demand level. Shifting of the demand curve illustrates this aspect. Supply is also affected by changes in demand. Factors that move the supply curve to the right include increased number of suppliers while issues like technological breakthroughs will move the curve downward (Ashby, pp. 63-68).
Imperfect markets refer to an aspect that emerges in the market. This is when the point of agreement of a product’s price is supposed to be reached at willingly by the seller and buyer in the market. This point is referred to as the equilibrium point (Ashby, p. 60). The price that is agreed by the buyer and the seller often apply to the entire community. However, it is only determined by the buyer and seller. These make the market an imperfect place since it lacks allocative efficiency
Stocks versus Flows
Whereas supply can be taken as a flow of product into the market, demand can be looked at as a flow of products leaving the market. Supply and demand are thus flows of amounts of products supplied and those demanded whose magnitude is affected by buyers, sellers and producers. In a market led economy, price adjustments is used to regulate the flow of demand and supply which are otherwise independent of each other (Ashby, p. 71).
This refers to the point of agreement between buyers and sellers such that, neither feels displeased with what he or she gets. The equilibrium price is that which supply equals demand. This reflects the current market reality of relative scarcity of products. Demand and supply conditions play equal roles in determining the equilibrium price.
Thus, both buyers and sellers are involved in this exercise. Finding the equilibrium price guards against product shortage and surplus of a given product. This helps both the market players since suppliers cannot sell more than what people are demanding (Ashby, p. 71-80).
Society depends on resources that are scarce and need to be distributed properly so as to satisfy the demands of society. Therefore, maximization of the net profits gained ought to be practiced by all market stakeholders.
Proper allocation of resources prevents dead-weight loss, which involves losing potential benefits to no one. In order to have a fulfilling market, some factors ought to be left undisturbed by external forces. That is why government intervenes in determining market prices destabilizes either the supply or demand of a given commodity.
For instance, after the Second World War, production shifted to military related materials and it took the intervention of the government to introduce rationing and universal wage control that helped prevent impending inflation. In general, prices do reflect the underlying reality that is present in the market. Thus, policies that are in line with the market realities should be implemented (Ashby, pp. 82-92).
Economics is a critical subject in the society. It is an arena that studies the forces that drive people to make certain choices. It is a helpful in one area to society since it gives people the basis of forming their choices.
In economics, there are other factors that come into play such as demand, supply, and opportunity cost among others. The buyer and seller in the market place develop varied opinions that are inclined to each’s self interest. There is no perfect market since they all lack inclusiveness of the entire community in decision making related to the setting of prices.
Ashby, David B. How markets work. Lake Oswego, Oregon. EconAnalytics, 2011. Print.
Understanding of Economics