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 for the study of economics not necessarily by economists only ( Ashby, p.1).
Importance of understanding economics
To begin with, the study helps to clear any anxiety that arises in our day to day lives like interest rates and fluctuation of prices. This does help 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 since one is able to assess which potential leader has a policy that will address social issues like education, health, poverty, employment among others. Thus, an understanding of economics will generally improve one’s life and those of the people around (Ashby, p.4)
Basic concepts in economics
“Descriptive/positive economics” is term used in reference to an analysis done by economists that explains and tries to predict what choices people are likely to make and why. 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” and if the study is concerned with the performance of like a whole entity like a state, it is called “macroeconomics”.
Though economists can not predict with a guaranteed accuracy, their results most often do reflect the correct position of a given matter like how people will behave. This is because they deal with large numbers of people and therefore getting the average of how they will respond is not hard. They for instance analyze how some people will react in a same scenario and then draw a conclusion for a larger group. 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 hence; the government develops regulation parameters for this purpose.
Some terms used in economics are troublesome especially to those who do not have an understanding of what they 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)
“Profits” is another term that is not misunderstood by some people to mean undeserved gains. However, the term should be understood to mean a financial return to those who take the risk of investing in a business. This is because no one will want to venture into anything that is not gainful.
Economists too do differentiate between “accounting profits” and “economic profits” with the latter being less than the former. Accounting profits are further subdivided into “necessary profits” that include total costs and “economic profits” that that are 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 sells. 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 things just desired.
The term “efficiency” is used in two respects. It may be in reference to productive efficiency or allocative efficiency. The former refers to the cost of generating one unit of output while the latter regard on how well the economy utilizes factors of production which include resources, labor, capital and entrepreneurship.
Opportunity cost arises 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 is able to satisfy demand if factors of production are managed properly. This however changes with the change of demand and supply aspects.
This refers to the factors that do influence the decision of a buyer when he or she is in the market. The fist aspect that comes is that of price. The buyer is bound to assess if the price quoted by the seller for a given product is consistent with the value he or she stands to gain if that commodity is purchased. Factors like the buyer’s tastes and preferences do play a big role too (Ashby, p. 34). The buyer will most often buy a product when its price is low. This illustrates the law of demand in that, when the price is low, the demand of that given product or service tend to rise.
All the market players have different situations that faces them while the buyer assess the price expected to pay against the what he or she stands to gain, the seller too has in mind how he acquired the said product from the supplier and how much he was looking forward to gain if he sold it at a given price (Ashby, p. 43). These are self interests that shape the decisions of the market players.
Demand and supply
Most often than not, a buyer will buy a given product if its price is low. The buyer will always see that it is to his self interest that he gain from a product by incurring the lowest possible cost. This of curse arises when the factors like taste and preference, income, wealth, number of buyers, availability of the product in the market are constant (Ashby, p.38). Also buyers find it easy to buy less of a product per period during a time when the price is higher.
The suppliers on the other hand face a big challenge in fixing the price since they lack the advantage 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 do fix a very high cost on the product. This is in terms of unsold inventory(Ashby, p.43).
This arises due to the fact that in the market, the point of agreement of a product’s price is supposed to be reached at willing by the seller and buyer. This point is referred to as the equilibrium point (Ashby, p.60). That which is agreed by the buyer and seller is applied to the entire community yet, it’s only determined by the buyer and seller. These makes the market an imperfect place since, it lacks allocative efficiency.
Economics is an arena that studies the forces that drive people to make certain choices. It is a helpful one area to society since it gives the people the basis of forming their choices. Several factors come into play like demand, supply, opportunity cost among others. The buyer and seller in a market place develop varied opinions which are inclined to each’s self interest. There is no perfect market since it lacks inclusiveness of the entire community in decision making that regard prices.