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
To begin with, 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 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. 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, as well as 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, for instance, how people will behave. 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 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. 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. It may be in reference to productive efficiency or allocative efficiency. 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. However, this 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 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. This illustrates the law of demand in that, when the price is low the demand of that given product or service tends to rise.
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 the what he or she stands to gain. On the other hand, the seller too has in mind how he acquired the said product from the supplier, and how much he was looking forward to gaining 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
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. This of curse arises when the factors like the taste and preference, income, wealth, number of buyers, the availability of the product in the market are constant (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. This is in terms of unsold inventory (Ashby, p. 43).
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 applies 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.
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.
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