Sample Coursework Paper on Why Study Economics

Economics is the study of how households, businesses, and governments are faced with the problem of having to make choices because of the scarcity of resources. This is because the world we live in has limited resources and therefore one has to make a choice of satisfying one want and foregoing the other. Therefore, having a basic understanding of economics is important even if one is not planning to be an economist because:

  • Enables one to understand the economic changes in an environment.
  • One will be able to make informed choices because they have an insight understanding of the economic environment.
Basic Concepts

Descriptive economics and normative economics. Descriptive economics is concerned with what is, what was and what will be concerning choices of people whereas normative economics is concerned with giving advice and depends on the judgment of what is acceptable. Another concept is microeconomics and macroeconomics. Microeconomics deals with individual economic units and tries to explain how and why they make their choices. Macroeconomics on the other hand explains how economic units behave at the aggregate level. Satisfaction maximizers and profit maximizers are other basic concepts used by micro economists to explain consumer’s average behavior to maximize the utility that is satisfaction maximization and producer’s behavior to maximize profits, which they call profit maximization. Hence, consumers tend to behave as satisfaction maximizers and producers as profit maximizers.

Micro economists incorporate a lot of theories and models into their economic study. A theory is a reasonable assumption that is intended to explain an occurrence whereas a model is a mathematical representation that is based on the economic theory. In economics, a market is not a place but an interaction of buyers and sellers and under microeconomics, an assumption of a market-oriented system is made. This is where prices of goods and services are determined by the market forces.

Troublesome Concepts.

These concepts can be easily misunderstood and misinterpreted by people because some have completely different meanings when used in economics. They include terms like self-interest, which most people confuse, with the term selfish. Having self-interest is not being selfish because it is still considered with other people’s well-being. In microeconomics, there are two kinds of profits and that is accounting and economic profits where accounting profits is the profit made where the business break-even and any more profits made above these profits are the economic profits. Cost and price are other misunderstood concepts. Cost is what is used to enable the product to reach the buyer whereas price is the cost-plus net profit.  The term marginal is another troublesome concept, which means the increase or decrease in quantity or price due to a one-unit change in a factor of production. Lastly, there is demand and want where want is what one desires whether they consume it or not and demand is what one desires and has the power and the willingness to consume it.

Visualizing the Possibilities

Whenever one makes a choice to consume a certain product, another is always forgone. The forgone choice is the opportunity cost of consuming the chosen product. A production possibility frontier curve can be used to explain the opportunity cost as shown in figure 1.1 on the attached pages. In this figure, the country can choose to produce only producer’s goods and forgo consumers goods but this will not be good for the economy because they are both parties in the country and therefore, the country will choose a combination of both goods, which will be along the production possibilities frontier curve.

CHAPTER TWO: MARKETS

Most markets in the real world are imperfect. A perfect market has the following characteristics.

  • There is free entry into the market for both buyers and producers.
  • The market consists of many buyers and producers but they do not influence the prices of goods and services in the market. The market forces determine the prices.
  • Availability of perfect information that is both buyers have perfect information about seller’s products and sellers have perfect information about buyers demand.
  • Only the buyers and sellers in the markets enjoy the profits and incur the cost of the products in the market.
Market Basic

Consumers vary in their taste and preference, meaning one may consider a product price worthwhile while another person may not consider that product’s benefits worth its price.

Figure 2.1 shows the total benefit curve, which shows that as quantity increases, the total benefits TB raises at a diminishing rate because additional units used yield less than the previous units. This is called the diminishing marginal benefit. The vertical axis shows the dollar value and the horizontal the average quantity demanded by consumers at a specific period of time. If one consumes quantity QB1, they receive benefits worth $ 1.As we move along the horizontal, only the quantity and total benefit change meaning this change are caused by other factors either than price.

Figure 2.2 shows the supply side of the market. Producers face two types of cost, that is a fixed cost which is constant in the short run, and variable cost which changes with the volume of output produced. The curve is of total variable cost denoted by TVC. It rises at an increasing rate meaning as more output is produced; the workers and machines are used more extensively and intensively. We assume that the producer’s aim is to maximize profit and therefore profit=TR (total revenue)-TVC. If we introduce a price line, the distance between the horizontal axis and the price line is the TR at quantity level Q this means that the distance between the TVC curve and the price line is the profit at quantity level Q. An increase in price will rotate the price line upwards meaning the quantity produced to maximize profits will increase. A decrease in price will rotate the price line downwards meaning the quantity produced to maximize profits will reduce. This is called the law of supply, which states that quantity supplied increases with an increase in price and decreases with a fall in price.

Figure2.3 shows a combined demand and supply curve where the prices are set too high. The buyers are willing to consume QB and the supplier is willing to supply QS at the given price level. Since the price is too high, the buyers will not buy the entire amount supplied, and therefore there will be excess supply, QS-B. This excess supply will mean losses to the suppliers and therefore they will reduce production and price up to a point where QS=But at this point, the TB and TVC curves are furthest apart and the slope of the two curves are equal and also equals the slope of the price line. This condition is called market equilibrium.

If the price was so low, then they would be excess demand and therefore suppliers would increase production and price until the market reaches equilibrium.

Demand and Supply Curve

The demand curve is a downward-sloping curve. It is the marginal benefit curve as shown in figure2.4.The supply curve is the marginal cost curve and it slopes upwards as shown in figure2.5. Figure2.6 shows the two curves combined and the equilibrium price P and quantity. The area above P and below the demand curve is the consumers’ surplus and the area below P and above the supply, the curve is the producer’s surplus.

Imperfect Markets

Most markets in the real world are imperfect. According to one of the characteristics of a perfect market, a market should only affect its participants. This is not always true as non-participants are often affected and this leads to what economists call externalities.

CHAPTER THREE: SUPPLY, DEMAND, AND PRICE
Demand

Figure3.1 shows a demand curve that is downward sloping indicating that as prices increases, quantity demanded decreases. This is a one-way relationship and it is shown by movement along the demand curve. Apart from changes in the product price, there are other factors, which cause changes in the quantity demanded. These include the number of buyers, buyer’s income, taste and preferences, price of complementary products, and price of substitute products. Changes in these factors will cause a shift in the demand curve either to the right or to the left as shown in figure 3.2 and 3.3

Supply

Figure3.4 shows a supply and it slopes upwards indicating that as prices increase the quantity produced increases. This relationship is shown by movement along the supply curve. Other factors that cause a change in quantity supplied either than price will cause a shift of the supply curve. The curve will shift upwards if the shift factors reduce marginal cost and hence the quantity produced increases. It will shift downwards if the marginal cost increases.

Stock versus Flow

Both demand and supply are flows and not stock. The magnitude of demand does not affect the magnitude of supply.

Market Equilibrium
The equilibrium price Pe as shown in figure 3.5 is the price at which quantity supplied equals quantity demanded. At this point, both the seller and buyer enjoy equal benefits as measured by the consumer and producer’s surplus. Under a perfect market, the total net benefits are the sum of consumers’ and producers’ surplus. The part of the demand curve above Pe represents those that bought the product and the part below Pe represents those that did not buy.

Figure3.6 and 3.7 show what happens to the equilibrium price when supply and demand curves shift.Figure3.6 shows a shift of the demand curve inwards which means the demand will reduce causing a reduction in sales and bringing about excess supply. This means that Pe will move down to the new Pe. A shift in the supply curve to the right as shown in figure3.7 means an increase in output and therefore excess supply. This causes Pe to fall.

Do not mess with Prices

Whenever the government intervenes and tries to regulate prices, there are always unintended consequences. One way by which the government can regulate prices is by setting a price ceiling or price floor. This can be illustrated using figure3.8.In the figure, the government has set the price floor at P1 and the price ceiling at P2. At P1, suppliers will sell only quantity Q and at P2, suppliers will only be willing to supply Q. At equilibrium, consumers enjoy consumers surplus as shown by the area a, b and d. Producers, on the other hand, enjoy producers’ surplus as shown by the areas d, e, and f. Under price floor P1, consumers will lose the benefits represented by areas b and c, and the producers will lose the area f but gain area b. Consumers will lose and producers will gain but the combined net benefit will reduce and will be less than the area c and f. If the government sets a price ceiling P2, producers will lose the area f and d and consumers will gain a small net benefit area b and d.

Whether it is a price floor or ceiling, the net benefit always reduces. This loss is called dead-weight loss because neither the producer nor the consumers enjoy these benefits.

Another way of government intervention is by imposing minimum wage laws. Minimum wage law is a law that dedicates to employers the minimum pay they should offer their unskilled workers.Fig3.9 shows the wage W paid for unskilled labor before the minimum wage is fixed. Since the demand for unskilled labor is very high, employers pay very low wages. This wage cannot even enable these workers to support their families’ minimal acceptable living standards.

The government, therefore, comes in and sets a minimum wage at MW as shown in figure3.10.We use demand and supply analysis to analyze wages because wages are a commodity. In this figure, the slope of the supply curve is steeper because the producers cannot change their technologies. The cost of paying more wages is passed on to the consumers but not all of it. Therefore, the cost of production will increase but the profits will not. The only way for producers to increase profits is by changing their technologies to better ones so that they use less labor.

DIAGRAMS

Fig.1.1                                                                   Fig2.1

Fig.2.2                                                                      Fig.2.3

Fig.2.4                                            Fig2.5                                             Fig.2.6

Fig.3.2                                                Fig.3.1                                Fig.3.3

Fig.3.4                                                        Fig.3.5

Fig.3.6 and 3.7

Fig.3.9

Fig.3.8