APPLICATION OF ECONOMIC CONCEPTS
Economic concepts in all economic systems are interrelated such that a change in a particular variable in a concept affects other variables in other concepts. For example in market determination of prices, the level of supply and demand of commodities in the market plays a large role. The equilibrium prices are determined by the availability of the commodity in the market and the extent to which buyers are willing and able to buy the commodity. Consumers’ ability to purchase the commodities may be affected by various issues like high prices as a result of inflation or unemployment during recession times. At any price less than the equilibrium price, the quantity of a commodity demanded by the buyers is always greater than the supply in the market. This implies a shortage of the goods, either due to the seasonality of the products or the high cost of production.
As a result, the producers demand a higher price which is passed on to the consumers, resulting to an increase in prices towards the equilibrium price. On the same note, when the prices increase above the equilibrium price, more suppliers get the incentive to bring their products to the market leading to a surplus. In order to increase the demand by consumers, the suppliers have to lower their prices to increase the buying capacity of the buyers and thus reduce the surplus commodity. The prices are reduced towards the equilibrium thus ensuring there is no shortage or surplus of the commodity in the market.
The economic concept on business cycles refers to the variations in production, trade and other economic activities in a given economy. There are four major business cycles in the economy. The cycles are determined by measuring an economy’s growth rate using the gross domestic product (GDP). In other words, the economic business cycle is the variations of up and down movement in GDP. It consists of seasons of expansions and contractions in economic activities level. The expansion phase of the business cycle is the season where there is a high level of employment of both capital and human resources. Due to the great expansion of the economic activities, the business cycle enters its economic boom where the level of employment is above capacity, and the economic growth is at maximum capacity.
The prices experience an inflationary effect where they are pushed upwards. This gives the producers an incentive to increase their productivity thus increasing the level of employment. With the majority of consumers employed, their purchasing power increases and their overall welfare increases as well. The economy does not however stay at the peak. The prices start decreasing as a result of the interaction of the supply and demand forces; unemployment sets in since the producers start getting fewer incentives to produce. The reduced purchasing power of the consumers further lowers the demand for products, and economic growth starts to slow down. The slow economic growth reaches the trough where it becomes stagnant until the next phase of expansion and the cycle continues as illustrated below.
Expansion Recession
Depression
________________________________________
Figure 1: Business cycles in an economy
The economic resources are scarce in general thus for one to fully satisfy their needs and wants they tend to give up certain competing goods. The cost of the alternative product that is given up by the individual is called the opportunity cost. For one to make a decision on the good to forego, they need to make very thorough evaluation of the commodity so that they do not have a big opportunity cost.
The purchasing power of individuals can be affected by the level of inflation in the economy. This implies a sustained rise in prices that makes the value of money reduce and thus increasing the cost of living. The economic activities in a given country are measured by the level of national output. A growth in national output of an economy leads to an increase in the people’s welfare in terms of better employment opportunities with good working conditions, good infrastructure and a general improvement in the basic necessities like housing. Similarly, a decrease in national output leads to a fall in the welfare of the citizens, characterized by factors such as unemployment and inflation.
In a mixed economic system, the private sector has a role in directing the economy, as well as the government. The private entities in a mixed economy are allowed to own means of production but the government sets in the control of factors such as prices and supply. The government intervention using the fiscal and monetary tools is meant to ensure the economic stability by avoiding any surplus or shortage of money in the economy. Unlike the mixed economy, the government controls the way the economic resources are allocated in a planned economy. The government dictates on the prices to be sold by fixing price ceilings and price floors. The government also dictates the investments, and the private sector has an insignificant role in running the economy. In the market economy, the decisions on the allocation of resources are purely based on the forces of demand and supply. The equilibrium price and supply are determined by the shortage or the surplus of commodities in the market. The traditional economy is one that the cultures of its people determine the goods and services that are produced in the economy. The economic system is not very popular because it is associated with an undeveloped economy.
In conclusion, good economic decisions are made with a keen consideration of the various concepts that affect the economy. Investors have to ensure they are aware of the type of economy in the country before venturing into business. At times the government has to get involved in the business enterprises to control the level of inflation and make the business attractive to the private sectors, thus increase the national output of the country.
