Economics Essay

And economy is a system that deals with human activities related to the production, distribution, exchange and consumption of goods and services of a country or other area. Lionel Robbins defined economics as â€Å"the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. † (Robbins L. 1932) Economics is based on the principle of scarcity of resources to satisfy human wants. As the resources to cater for the various human needs are limited, consumers have to make choices. Scarcity of resources creates an economic problem that the economic systems try to solve. Economics uses different techniques, tools and theories to carry out analysis and to explain various actions and behaviors in the economic systems. Economics may be studied in various fields including environmental economics, financial economics, game theory, information economics, industrial organization, labor economics, international economics, managerial economics and public finance. The two main areas of economics are macroeconomics and microeconomics. Macroeconomics deals with the aggregate national economy of a country while the microeconomics deals with the economics of an individual firm or person and their interactions in the market, given scarcity of resources and regulations by the government. Micro-economics is much concerned with the behaviors of individuals and firms in an industry and how these behaviors affect supply and demand of goods and services. These behaviors also affect the prices charged to the goods and services. Supply and demand are affected by the prices while price is affected by supply and demand. Hence these three aspects have to balance at certain equilibrium. At this point, the price charged to the goods and services will attain equilibrium between supply and demand of the goods and services. The theory of Demand and supply is one of the fundamental theories in microeconomics. This theory explains the relationship between price of goods and services in relation to the quality sold. It also explains the various related changes that occur in the market. The theory of demand and supply helps in the determination of prices of commodities in a competitive market environment. Demand of a commodity is the amount of goods and services that consumers are willing and able to buy at a certain price. Besides the price demand of a commodity is affected by other factors such as the income of the consumer and tastes and preferences. The demand theory suggests that consumer are rational in choosing the quality of a product that they will consume at a certain price and also considering other factors like their income and tastes. Most of the time, the consumption of goods and services by these customers is constrained by their income. As consumer seek to maximize the utility they obtain from a certain good or service, their income will act as a limiting factor. Thus the demand of a commodity depends on the purchasing power of the consumers. The purchasing power is determined by the amount of income the consumer gets. At a fixed income the demand of consumers will be determined by the price of the commodities. The law of demand suggests that demand and price of a commodity are inversely related. The higher the price of a commodity, the lower the demand of that commodity. When the price of commodity rises consumers will demand less of that good. This is because their purchasing power decreased. This is called the income effect. Increase in the price of a commodity will also result to the customers changing their consumption of the commodity preferring other less expensive commodities. This is called the substitution effect. The demand of the planes I sell will depend on their price and other factors such as tastes and preferences of the various customers in different parts of my market. However their demand will also be constrained by their level of income. If I increase the price of the planes my customers will demand fewer quantities due to income effect. Some other customers may change to other similar products thus causing substitution effect. When the income of the consumer changes, his consumption of the commodity will not move along the same demand curve, his demand curve will shift in proportion to his change of income. If the income increases the demand curve will shift outwards for a normal good. This means that at a certain price the consumer will now consume more goods than he could with his earlier income. If the income decreases the demand curve will shift inwards and the consumer will demand fewer quantities of commodities at a certain price. Supply is the quantity of a commodity that suppliers are able and willing to bring to the market at a certain price. Producers seek to maximize their profits and so will bring to the market quantities of commodity that will result to highest profits. The quantity of goods and services supplied depend on the prices of those commodities. Supply and price of commodities are directly proportional. This means the higher the price of the good at the market the higher the quantity supplied. For the prices of a commodity to be stable, the quantities of the commodity demanded must be equal to the quantity supplied. When demand and supply are equal on equilibrium in price is attained. The equilibrium price is that which results to equal quantities of demand and supply. When the price of a commodity is higher than the equilibrium the quantity demanded will be lower than the quantity supplied. There will be excess quantities in t he market. The price will have to come down until the excess quantities are eliminated. IN the same way if the price is lower than equilibrium the quantities demanded will be higher than quantities supplied and hence the price will have to be increased until the demand equates supply. The demand and supply theory is used to determine prices in perfectly competitive markets. Price is the value paid by the consumers for the utility they receive from a commodity. The price of a commodity affects the demand, supply and the quantities of the commodity sold in the market. The market price of a commodity is the intervention between marginal utility of the consumer and the marginal cost of the supplier. The equilibrium price is the point where these marginal utility and marginal costs equate. Elasticity measures the changes of one thing in relation to another. Elasticity of demand is the rate of change of quantity demanded of a commodity for a particular change in the price of the commodity. Different commodities will change different for the same change in their prices. For example two products may have the same price and the same demand but different elasticities, meaning when their prices change by one unit, their demand will change with different quantities. The commodity with higher demand elasticity will have a greater change in demand for the same change of price than a product with a lower elasticity. This can also happen in the case of supply resulting to price elasticity of supply. Both price elasticity of Demand and price elasticity of supply are the two types of price elasticities. Another form of elasticity is income elasticity of demand which measures the rate of change of demand in relation to change in income (Nelson, Salzmann). If the price elasticity of supply of my panels is high, then a little change in the price will greatly affect the quantity of panels the suppliers will bring to the market. On the other had if the price elasticity of demand of the panels in my market is high, my varying of the prices at which I sell the panels will greatly affect their demand. Monopolies are whereby one firm controls the whole market or a big percentage of the market of a commodity. When a firm have monopoly over a commodity the operations of the market as in a perfectly competitive market will not be possible. The monopoly will set its own prices whether they lead to equilibrium of demand and supply or not. Unless the monopoly is highly regulated the monopoly can manipulate the market by unfair practices like hoarding and price hikes. If I have a monopoly on the sale of the panels in my markets, I will have the liberty to set any price as far as it gives me maximum profits in disregard of the needs of the consumers. However, if there is only one source of the panels then I will have to accept any price the supplier determines. Monopoly is one cause of market imperfections. Market imperfection is where by the market systems are inhibited from operating normally as in a perfectly competitive market. Other causes of market imperfection are externalities, public goods, uncertainties and extreme interference in the economy by the government. Market imperfection can lead to market failure. Macro economics deals with performance of the national economy as a whole. It describes the behavior and structure of the economy using indication such as GDP, unemployment rates and price index (Mark Blaug 1985). Gross Domestic product â€Å"is the sum of the market values or prices f all final goods and services produced in an economy during a period of time† according to Sparknotes (http://www. sparknotes. com/economics/macros/measuring1/section1. html). Gross domestic product (GDP) is calculated by summing all the private consumption in the economy, investment by business or households, government expenditure and the net of exports and imports. The formula GDP = C + I + G + (X-M) is used where C is private consumption, I is investment, G is government expenditure and X is gross exports and M is gross imports (Sparknotes). Unemployment is whereby a person who is willing and able to work has no work (Burda, Wyplosz 1997), Unemployment rates show the performance of the economy as a whole. Unemployment is caused by different reasons. Unemployment rate can be calculated by dividing the number of unemployed workers by the total labor force. Philips curve was a theory that suggested that unemployment reduce inflation stating that unemployment reduces inflation stating that unemployment was inversely related to inflation. Inflation is the percentage rate of change of a price index (Burda, Wyplosz 1997). Inflation leads to general increase in the prices of gods in t he economy. Inflation affects the value of money in that it makes the purchasing power decrease. There are several theories used to explain practices in macro economics. The quantity theory of money is one of these theories that give the equation of change. It explains the relationship between overall prices and the quantity of money. The equation of change is given as M. V= P. Q where M is the total amount of money in circulation on average in an economy. V is the velocity of money P is price level Q is Index of expenditures. There have been different approaches to economics. These approaches differ on their view on certain aspects of economics. Some of the approaches that are there include Keynesian, monetarists, neo classical and the new classical. These different approaches led to up come of different schools of thoughts according to the inclination in the approach. However new developments have been advanced leading to acceptance of some of the aspects that had been disputed before by some approaches. Keynesian economics supported the use of policies to control the economy. The argument was that to reduce fluctuations the government had to base on actions (fiscal or monetary policy) on the prevailing conditions of the economy. The new Keynesian economics tried to provide microeconomic to the older Keynesian economics Monetarism was against fiscal policy as it has a negative effect on the private sector Monetarists argued that government intervention through fiscal policy could lead to crowding out o f monetary policies rules (Mark B. 1985). Fiscal policy is government intervention in the economic operations aimed at bringing stability of affecting certain changes in the economic environment. Fiscal policies are carried out though control of the government spending in the economy and use tax charged Fiscal policies are aimed at influencing the level of economic activities in the economy resource allocation and income distribution. The two tools, that is, Government spending and taxation is used differently to achieve different results. Incases of recession expansion fiscal policies are utilized. In this case the government increases its spending in the economy and reduces taxation. Contractionary fiscal policies are utilized by reducing government expenditure or spending in the economy and increasing tax charged. Contractionary fiscal policies can be used when there are high rates of inflation. Monetary policies are a form of intervention of the government into economic operation through interest rates so as to control the amount of money in circulation. Expansionary monetary policy is applied during recession to increase the amount of money in circulation. Expansionary policy can also be used to curb unemployment in this case interest rates are lowered hence encouraging circulation of money. Contractionary monetary policies are applied by increasing the rate of interest rates in order to reduce the rate of money in circulation in the economy. Contractionary monetary policy can be utilized during high rates of inflation. Economic growth can be achieved by leaving the competitive market conditions to prevail. However the government should intervene where the market is so unstable so that to bring regulation aimed at attaining optimum operation in the economy.