The principles of basic economics affect and guide the market scenario, the government policies, and societies at large.
Economics is basically the study of those scarce resources having alternative uses and how to allocate them to get the maximum output. Some of the resources include land and labor, capital and natural resource. Economics has nothing to do with making a moral judgment but is more about mathematical calculation and doesn’t explain ‘Love’ or doesn’t talk about emotion. Market Economics makes use of price to allocate the scarce resources. Individuals bid higher for those goods that are useful to them and it even connects market participants in the complex network, thereby helping to avoid the market coordinator. Consumers and producers can ignore why things get more expensive or cheaper. The buying decision can simply be taken on the basis of the price. So, prices tend to guide the buyer’s intention. Prices affect demand and also offer financial incentives such as profits and losses that in turn affect behavior in using the resources. If there is any loss due to a lack of demand, the producer stops producing it altogether or reduces the volume of production. The producers then shift resources to productive activities from the wasteful ones.
Profit incurred by a company or organization is like the cost which a society bears in return for efficiency. People do better jobs that give more earnings only when they have some personal incentive to fair well and do better. Consumers, on the other hand, buy more when the price of items is less and they buy less when the price is more. Similarly, producers produce more when the prices are high in comparison to when the prices are lower. Just like any of the resources, capital also flows towards the most productive uses. However, capital investment projects are restricted when the investment laws are complex. Each and every resource has several uses and economics revolve around making effective use of it. The end product is as per the demands of the consumers. For instance, there is no use of baking delicious cakes when the consumers demand cookies and bread rolls. If the product in demand is scarce, a shortage is created. People then desire to consume more of that product and so the price increases. On the other hand, when the demand for a certain product is less and the supply is more, a surplus will exist.
Economics is also about understanding certain incentives moving along with using the resources. In Economics, a truly open market is the market where the buyers and sellers interact freely in order to fulfill their needs, demands and wants. Here the incentive will be to manufacture the items that have more demand from the buyer’s front. If this is accomplished, then a profit is made. The profit earned by the company is the reward the company gets for supplying products as per the demand. What matters is manipulating the open market to incentivize people to act in a certain way. Some of the incentives in an open market are discounts, price cut offs, price fixing, price rise, taxing and subsidizing. These all incentives are present in the open market. If any process or product is taxed, there will be less of manufacturing since the product is costly. This is so because money is the driving force which facilities the production/distribution of wealth. As it is difficult to barter goods and services, money is the chief medium of exchange, acting as an intermediary. With money, you may exchange apples and chairs and can also divide into several small units. The Government of any state or nation enforces rules such as property rights to allow the market transactions to take place. The government also plays an important role in guarding all negative externalities of various transactions.
Basic Economics also revolves around International Trade and how it is not just about Zero-sum game. International Trade is not at all about one nation being a winner and another loser.
When both nations have some gains, they enter into trade relations or else it makes no sense at all. The countries don’t need to fight for jobs as they can create more job
opportunities by becoming prosperous. Trade is helpful owing to the comparative or absolute advantage. Free trade has a comparative advantage for the countries can import or export goods with a no-tariff barrier. Free trade generally allows low prices for customers, more and more exports, offers more choice of goods while benefiting from economies of scale.
Removing tariffs can lower the price of goods for the consumers.
There are different schools of thoughts with respect to Economics. One of the popular thoughts is incentivizing people such that they care for themselves through free market or open market. Second is having government entity care where the government takes all the major decisions. Societies allowing free trades prosper more. Capitalism or open market or free trade, they are all the same. When setting any of the economic policies, it is important to comprehend inherent tradeoffs, the incentives and consequences of the policy whereas the intention behind the policy take a backseat. It is important to weigh a policy before implementing it. If this is not done, then the policy may have a disastrous effect on the economy.
Income and wealth distribution statistics can be misleading as the poorer section may be the younger workers who will rise higher in due course of time. Then, the household income may be misleading for the size of any household changes from time to time. Thus, the per capita income fluctuates and is not stagnant. Similarly, the income of the household may also decrease with the reducing household size. The unemployment rate may be misleading for the people who are looking for jobs; they are also included in the list of unemployed people.
Basic Economics talk about all these factors. Economics is mainly divided into microeconomics and macroeconomics. While in microeconomics one study about the economic behavior of a particular individual, in macroeconomics the economic behavior of large aggregate is considered like the total production, the total consumption, total savings, and investment.
Would you like to read more about this topic? This book might interest you: Basic Economics.