Principles of economics

Critical Lessons from the Principles

It is clear from the 10 principles of economics that individuals make decisions in specific ways. As per the principles, reasonable people mostly think of the margin; they spend money on the items that give them the most use for their money by maximizing the efficiency or profits. People also react to incentives, according to Rios, McConnell & Brue (2013). In this regard, they often choose the available options after considering the benefit (incentive) or loss (disincentive) brought to them by the purchase. According to the 10 principles of economics, it is obvious that people in society interact with each other in different ways. In such interactions, people often gain advantages from trade; it allows individuals to gain possession of commodities they may need while offering the opportunity to trade away those they produce. In such a manner, trade allows for specialization. Premised on the ten principles of economics, markets are a great way for societies to organize economic activities. This is so because the prices of commodities at the market, which is the invisible hand as Case, Fair & Oster (2014) portend, tend to reflect the value of such products as well as the resources that went to their production. Additionally, governments can help improve the outcome of markets especially when failures loom of such markets to efficiently appropriate resources.

Drawing from the ten principles, it is possible to understand how the economy as a whole works. First, when the government prints too much money and puts it into circulation, prices of commodities rise as the demand for such commodities rise. Standards of living in a nation depend on the output of the workers in such an economy; high productivity spells higher living standards. In the short run, the level of inflation (sustained increase in the general price levels) increase, the rate of unemployment increases; the vice-versa also holds true.

How Markets Work

Each society has ways of managing the scarce resources at its disposal and benefiting from economic interdependence. The scarce resources in society are allocated optimally through the realization by the actors in such society that the cost of a commodity or resource is that which is given up to acquire it. In essence, the scarce resources are allocated based on demands, with the most pressing demands being met first while the less urgent ones follow. This ensures that the most pressing needs and wants, in the event that the available resources are not sufficient (as they usually prove to be), are met first. Economic interdependence allows members of society to engage with each other in trade and commerce. In that manner, economic interdependence allows the society to redistribute wealth through the factor markets where individuals sell their labor and are paid wages for such labor while producers use money (paid as wages) to access the labor they so desire in their production activities. The exchange of commodities (including money and labor-power) with other commodities then promotes the economic interdependence that allows society to derive benefit.

Ordinarily, the demand curve slopes downward while the supply curve slopes upwards. For the demand curve, the slope is explained by the fact that the demand equation (represented by P=a-bQ) allocates a negative value to b which indicates the slope of the curve that results from such equation. The negative value is allocated because the relationship between the price and quantity demanded of commodities is inverse; increase in price (holding other factors constant) leads to a reduction in the quantity demanded of such commodity. On the other hand, in the case of the supply curve, the upward slope is explained by the fact that the supply equation (represented by Q = -a + bP) allocates a positive coefficient to the b that determines the curve. Essentially, the price and quantity supplied are directly related; meaning a price increase leads to an increase in the quantity that suppliers avail to the market. The point of equilibrium is the point at which the demand curve and the supply curve meet, note Nicholson & Snyder (2011). At the point, the quantity demanded of a commodity and the quantity supplied of the same commodity show an inherent tendency to remain unchanged. The equilibrium signals a point of concurrence (in terms of price) between suppliers and consumers.

Often times, in economies (with the cyclic changes witnessed), the equilibrium condition does not persist. Price controls, taxes and elasticity lead to the changes in the condition by influencing the supply, the demand and the reigning equilibrium prices. Price controls tend to put ceilings and floors on the prices and therefore pre-determine the range within which prices can shift; this curtails the freedom of the prices to move freely as determined by the market forces of demand and supply. Taxes also lead to increments in the price levels, causing a shift in the equilibrium price by reducing the quantity demanded of a commodity (going by the inverse relationship between the quantity and price). Elasticity, as Rios, McConnell & Brue (2013) observe, refers to the extent to which price the quantity supplied of a commodity or demanded of such commodity changes due to a change in price. Higher elasticity mean equilibrium conditions stay for shorter periods as opposed to lower elasticity (inelasticity) which mean equilibrium conditions reign for longer.

References

Case, K. E., Fair, R. C., & Oster, S. (2014). Principles of Economics. Upper Saddle River, NJ: Pearson Higher Ed.

Nicholson, W., & Snyder, C. (2011). Microeconomic Theory: Basic Principles and Extensions. New York, NY: Nelson Education.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, Problems, and Policies. McGraw-Hill.