Economics 4 Essay, Research Paper
Economics is the social science that studies the production, distribution, exchange, and consumption of goods and services. The study of economics focuses on how individuals, corporations, and societies choose to use the scarce resources provided by nature and previous generations.
Scarce resources provided by nature that societies choose to use include oil, land, water, and time. These elements are important to the economy because oil, land, and water provide money for the market. The more they are used, the more scarce they become, the higher the demand for them, the higher the prices go. Time plays an important role in this cycle because there is not a lot of time before resources run out. Time is important because people need to use it in the best way that they can. For example, if a machine makes one thousand products in one day, and there is an order for one thousand and two hundred, what does the owner of the company do? He can either stay late to make the extra two hundred, but he would have to pay the workers overtime which is time and a half and that would cost him money. His other option would be to wait until the next day, but then he might loose business because the order was for one thousand and two hundred for that day. Scarce resources provided by previous generations that societies choose to use are people, labor, banking, machines, roads, bridges, and transportation. These resources are important to the economy because they are what keeps the market economy going at a steady pace. The roads, bridges, and transportation provide a way for the people to get to their destination, while banking and labor keep the people going to their jobs.
Economists study the ways people earn a living and provide for their material needs. They study how people behave as a result of a change in price, income, or other variables. Many are employed in business and industry but there are many different areas of economics that economists specialize in. Industrial economists study many different forms of business organization. They study the production costs, markets, and investment problems. Agricultural economists study farm management and crop production. Labor economists study wages and hours of labor, labor unions, and government labor polices. Other fields of economics include taxes, banking, international trade, economic theory, and comparative economic systems. Some economists specialize in inflation, depression, employment, unemployment, and tariff polices. Others specialize in investments, the utilization of manpower, business cycles, and the development of natural resources. Societies are interested in economist’s conclusions because they keep us up to date with how the market economy is holding itself up. They give us information on how our wages will be affected, how prices on goods will alter, and how demand on products will go up because of certain decisions we make.
Macroeconomics deals with the big picture-with the macroaggregates of income, employment, and price levels. Although microeconomics still deals with important details because the big picture is made up of its parts. Billions of dollars would be meaningless if they did not correspond to the thousand and one useful goods and services that people really need and want.
Microeconomics is the study of economic behavior of individual decision makers who are making choices about what to buy and what to sell, how much to work and how much to play, how much to borrow and how much to save. Microeconomics focuses on what factors affect individual economic choices and how changes in these factors alter these individual economic choices.
Macroeconomics is the sum of microeconomics. Macroeconomics is the study of the economy’s performance as a whole. Macroeconomics considers the combined effect of individual choices on the overall performance of the economy as reflected by such measures as the nation’s price level, total production, and level of employment. (1) Macroeconomics puts all the little pieces of the economy together and focuses on the big picture. Macroeconomics is the study of the sum total of economic activity that focuses on the issues of the economy such as inflation, growth, and unemployment. Macroeconomics is the branch of economics that deals with a country’s overall economy including the country’s input and output. It also includes the GNP (Gross National Product) which is the total value of goods and services produced in an economy in a certain period of time, usually a year.
Economics is a social science that predicts actions based on certain changes. A positive economic statement is purely based on facts and makes no value judgement. The statement does not have to be true, but it must have references available for verification. Positive economics can be referred to as “What is, what was, and what will probably be” economics. Positive economics is based on sound economic theory, probability, and statistical methods as it studies and determines the probable outcomes from an increase or decrease in taxes. It provides only the probable outcomes of alternative decisions. It is assumed that an educated society will make the most rational choices for themselves, and exercise those choices in the marketplace. Positive economics attempts to understand behavior and the operation of economic systems without making judgements about whether the outcomes are good or bad. It strives to describe what exists and how it works. Positive economics is an approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works.
In contrast, normative economics looks at the outcomes of economic behavior and asks if they are good or bad and whether they can be made better. Normative economics involves judgements and prescriptions for courses of action. Normative economics is a method of economics that states “what should be” instead of what is. Normative economics is subjective, and values judgement and opinions that cannot be tested or proven. Normative decisions are stated during political events. The candidate for a particular party may make a speech stating, “We ought to get the homeless put into shelters”, “People should make an effort to stop violence”, and “We should lower taxes”. Normative economics focuses on the total outcomes of economic activity and asks if they need improvement and it requires the judgements and prescriptions for courses of action. A normative economic statement represents someone’s opinion, which can not be proven or disproven because there are no facts. Positive statements are concerned with what is, while normative statements are concerned with what, in someone’s opinion, should be. (2)
Positive economics is often divided into descriptive economics and economic theory. Descriptive economics is simply the compilation of data that describe phenomena and facts. Where does all of this data come from? The Census Bureau produces an enormous amount of raw data every year, as do the Bureau of Labor Statistics, the Bureau of Economic Analysis, and non-government agencies such as the University of Michigan Survey Research Center. One important study now published annually is the Survey of Consumer Expenditure, which asks individual households to keep careful records of all their expenditures over a long period of time.
Economic theory attempts to generalize about data and interpret them. An economic theory is a statement or set of related statements about cause and effect, action and reaction. An example of this is a theory that Alfred Marshall stated in 1890 about the law of demand: When the price of a product rises, people tend to buy less of it; when the price of a product falls, they tend to buy more.
In economics and politics, Laissez-faire is a doctrine holding that an economic system functions best when there is no interference by the government. The capital follows its most lucrative course. It is based on the belief that the natural economic order tends, when undisturbed by artificial stimulus or regulation, to secure the maximum well being for the individual and therefore the community. The principles of laissez-faire were formulated by the French physiocrats in the 18th century in opposition of mercantilism. In time, laissez-faire came to be perceived as promoting monopoly rather than competition and as contributing to boom-and-bust economic cycles, and by the mid non-interference in economic affairs had generally been discarded. Nevertheless, laissez-faire, with its emphasis shifted from the value of competition to that of profit and individual initiative, remains a protector of conservative political thought, influential in the 1980’s in such government administrations as that of Ronald Reagan in the U.S. and Margaret Thatcher in Britain. Laissez-faire is a doctrine that the economic affairs of society are best guided by the free and autonomous decisions of individuals in the marketplace, to the near exclusion of government interference in economic matters. That is, the doctrine that government should almost always leave people alone and let them do as they please, as long as they respect the personal and property rights of others; the absence of regulation and interference by a government in trade, business, industry, etc.
A command economy is one in which the people, through the government, own and operate all business and factors of production. Central government planning determines what goods and services satisfy citizen’s needs, how the goods and services are produced, and how they are distributed. This kind of economy mostly practices in communist countries. In command economies, government committees of economic planners, production experts, and political officials establish production levels for goods and designate which factories will produce them. The central planning committees also establish the prices for shirts and blouses, as well as the wages for the workers who make them. It is this set of central decisions that determines the quantity, variety, and prices of clothing and other products. As the number of people living in the command economies increases, along with the number and sophistication of new products, it becomes harder and harder for central planners to avoid or eliminate shortages of the many things consumers want or surpluses of the products they don’t. With more products, more people, and rapidly changing production technologies, the central planners face an explosion in the number of decisions they have to make, and in the number of places and ways where something could go wrong in their overall plan for the national economy.
There are strengths and weaknesses to a command economy. The command economy prevents abuses of the market, and supposedly distributes equality. On the other hand, this kind of economy does not allow for individual initiative and does not respond to market forces. The reason for this is because the government has so much control over the market that there can be no demand or profits because the government chooses what is to be produced and what people want to buy.
A mixed economy is an economic system in which characteristics of both capitalism and socialism can be found. In a mixed economic system, both public and private institutions exercise a degree of economic control. In most free world industrial economies, a mixture of governmental industries and private industries exist in varying degrees. Even in the U.S., where free enterprise dominates the economic system, many forms of government enterprise and direct control can be found. The Post Office and the Tennessee Valley Authority are both operated by the federal government, and public transportation facilities are owned and operated by state and local governments. Federal, state, and local regulatory agencies exercise direct control over the operation of much of private enterprise, substantially restricting its freedom of action. Mixed economy is defined as the economic system that operates partly under free market principles, in which business ownership is in private hands and prices are set by supply and demand, and partly under government ownership or control. A mixed economy combines elements of free and command economies.
I believe that the mixed economy is best suited for today’s societies because it is a compromise between the Laissez-faire economy and the command economy. It is better for societies to have partial government control and partial private control than to have either one extreme or the other.
Markets are the means by which buyers and sellers carry out exchange at mutually agreeable terms. Markets may be physical places, such as the supermarket, department store, and shopping mall, or markets may consist of the arrangements by which buyers and sellers communicate their intentions, such as letters, phone calls, classified ads, and radio and television ads. These market mechanisms provide information about the quantity, quality, and price of products offered for sale. A market exists whenever and wherever there is a mechanism for buyers and sellers to meet and do business. It is in the marketplace that individuals and corporations, acting in their own best interests, will determine what to produce, how much to produce, and for whom to produce. When consumers decide to buy a particular product, they are “voting” for that product in dollars. When the dollars are counted, producers will know what consumers want and that is what they will produce.
The laws of supply and demand also apply to the market economy. People demand goods and services, businesses supply goods and services, and the balance of supply and demand determines the prices of goods and services. The law of supply states that business will provide more products when they can sell them at higher prices and fewer products when they must sell them at lower prices. The law of demand states that buyers will demand more products when they can buy them at lower prices and fewer prices when they must buy them at higher prices.
Market economics are flexible and are responsive to change. A shift in consumer preference will result in a shift in the products produced. Change is gradual and not coerced, nor is it discouraged. Freedom of choice is available to all and it is the market that determines the choices available. Other than assuring that abuses are minimal, there is a lack of significant government interference in the market economy. The decision making process is decentralized. Literally countless economic choices are made every day and it is the aggregate of these decisions that determines the allocation of resources. Everyone is a participant, in a sense, in how the economy is run. There is a very large variety of goods and services available. If there is demand for a product somebody will produce it and bring it to the market. It is possible for almost everyone to satisfy his or her wishes and tastes.
The strength of an economy is based on spending. An economy of any nation revolves around spending, how much money people have, how many have it, and how willing they are to spend it. The higher the demand is, the more spending is going on, and vice versa. Either way, the economy is expanding. When the demand level is high, businesses must work to meet the demand by increasing the supply of goods, services, and production. This will often result in the necessity of more labor. When people are hired to produce more goods, they now have money to spend which increases the level of spending to an even higher level.
Some weaknesses of the market economy are that the companies do not always produce products of demand at a lower cost, companies may distribute income unevenly, and periods of unemployment and inflation can be expected to recur so often. Many people think that government involvement would lessen or stop these problems, but government decisions are made by people who, like the rest of us, act in their own self interest.
Government intervention may also be necessary because private decision-makers can make bad decisions from society’s point of view. The market provides a reason to produce a product if, and only if, people are willing to spend more for the actual product than the cost of the resources needed to produce it. This works to society’s advantage as long as the resources costs reflect the full cost to society of producing the product. For example, if a company damages the environment in the process of producing a product, like polluting, and does not spend money to clean it up, then the buyers (society) will pay for it. This makes the product more expensive and gives the company more profit. This works against society’s advantage. Governments involved themselves in the free market to make sure that decision-makers consider all the benefits and cost of their decision.
(1) McEachern, William A., Economics: A Contemporary Introduction, South-Western Publishing Co., Cincinnati, p.7
(2) McEachern, William A., Economics: A Contemporary Introduction, South-Western Publishing Co., Cincinnati, p.12