Principles of Economies

Principals of economics

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Principals of economics

Principals of economics play a fundamental role not only to the business environment but also in our daily lives. It has offered fundamental lessons in many fields. One of the lessons learnt from principles of economy is how people make decisions. It states that there is nothing in this world that comes for free. In order for a person to acquire something that he or she likes, he has go give up on something else that he likes. Individuals making decisions have to trade off one objective to another.

Individuals in a society face various kinds of tradeoffs. One of the trade-offs faced by governments across the globe is between guns and butter. Notably, governments usually invest and spend a lot of money to protect their borders from foreign intrusions. As a result, the government is forced to spend less on consumer goods that may significantly raise the living standards of its citizens (Menger, 2007). In addition, our current world is caught in the tradeoff between high income levels and reducing the effects of environmental pollution. Governments and environmental conservation authorities have developed laws aimed at ensuring companies minimize environmental conservation thereby raising the production costs of goods and services. This results to companies making fewer profits, selling their goods at higher prices, and paying their workers lower wages. Therefore, as regulations on environmental pollution ensures that we have improved health and cleaner environments, they result to reduced incomes of governments, companies, employees, and the consumers.

Our society also faces the trade-off between efficiency and equity. Notably, efficiency refers to our society reaping the most from scarce resources found in our planet. Equity refers to whether the resources extracted from our society are distributed equally among all individuals. However, as policy makers create policies, they usually conflict the two goals. The principles of economics also teach us on how people interact. Firstly, trade has the ability to enhance the living standards of everyone in the society (eBook, n.d). Unlike sports competition where one side wins while the other losses, trade between individuals and countries results to mutual benefits. In addition, trade enables individuals to specialize in their respective activities such as home building, farming, or teaching. Trading with others ensures that there is a wider variety of various goods and services at lower prices. Countries also significantly benefit from trading with each other. In addition, it enables a country to specialize on the goods and services that they produce best.

There were several countries in the past that utilized communism in the past such as Union of Soviet Socialist Republic and several nations in Eastern Europe. Notably, the system believed that central planners in the government would make the best decisions regarding economic growth. The planners exclusively decided the types of goods to be produced, individuals producing them, and the consumers of those goods. However, the system failed terribly leading these countries to adopt market economy. The economy of a country mainly performs best by developing and encouraging market economies where economic decisions are made by numerous households and companies. Households and companies interact in the marketplace basing their decisions on prices and self-interests. The system has proven to be extremely successful in overall economic developments despite having self-interested and decentralized decision-making. Every country in the globe has abundance of certain resources that may be scarce in other countries. As a result, countries tend to export products that are in abundance and import resources that are scarce. For example, countries in the Gulf region have high deposits of petroleum. As a result, they export the product to other countries and import scarce resources such as agricultural produce and machinery. This interdependence ensures that countries mutually benefit from each other. However, there are some countries that are at a disadvantage in international trade such as third world countries.

The downward slope of a demand curve may be explained by the law of demand. Notably, this law states that as the cost of a product change, the demand of that product will significantly change. Lowering the cost of a product results to increased demand and vice versa. The supply curve tends to curve upwards when the particular good or service lowers its value in the market. The point of equilibrium is achieved when firms does not record any increase of decrease in output levels. At this point, companies tend to gain the highest profit amounts. It represents a point where the amount that consumers want to purchase equals to the amount companies want to sell (Vancouver Community College, 2013). Governments may have the authority to set price ceilings for consumers in order to ensure they are not charged very high prices or very low prices for various goods and services. Notably, price ceilings usually create shortages because the demand quantity demand is bigger than the quantity supply. Price floor usually causes surplus since the quantity supply is greater than the quantity demand. Price elasticity is used to determine quantity change with price change for a particular item. It helps sellers to change their selling price since it directly affects total revenues. Finally, government taxes have an effect on supply and demand. Tax increase on certain goods causes reduced demand while tax reduction results in increased demand. This is because individuals mainly purchase goods with low prices in the market.

References

eBook. Ten Principles of Economics. Retrieved from 202.191.120.147:8020/greenstone/collect/ebooks/index/assoc/HASH60c7.dir/doc.pdf

Menger, C. (2007). Principles of Economics. Retrieved from https://mises.org/sites/default/files/Principles%20of%20Economics_5.pdf

Vancouver Community College. (2013). Microeconomics: Price Controls & Taxes. Retrieved from http://library.vcc.ca/learningcentre/pdf/vcclc/Econ-06-PriceControlsandTaxes.pdf.