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Real World Examples And Applications of Economics

by Altaf Shaikh
Real World Examples And Applications of Economics

Economics deals with how to use available or accessible resources to the optimum level. The economics studies many factors that affect society, consumer’s utilization of goods & services, the involvement of individuals, countries, businesses, and governments. Economics tries to identify and analyze ways to allocate resources so they may be used to the best. Many examples to define the concepts of economics are as below:

Sunk Cost

A sunk cost is the price that has been incurred by the business and cannot be recovered. It’s the past price made by the Company and is excluded from the future decisions taken by the Company for the business. Sunk prices don’t change while taking future business decisions. Hence, the Company doesn’t take into consideration in decision making. Consider a Company that makes bats to play cricket. It prepares cricket bats at $ 50 as well as sells them at $ 90.

The bats thus made by the Company are basic and don’t compete with the other premium bats available in the market. If the Company has to make premium bats, it’ll price it another $ 20. Hence, during a decision, if it needs to make premium bats or not, the Company will think about the additional cost that is $ 20 to make the bats. The price of a factory or warehouse etc. isn’t considered because it has invested money on these items and they’re a sunk price even if the Company produces or doesn’t produce premium cricket bats.

The Trade War

Each nation tries to protect its own economy, local businesses as well as local industry. As the local industry creates jobs, they will like to protect the interest of the Country’s businesses. Hence, Countries impose high tariffs, taxes when the goods are imported from other parts of the globe. By doing so the other countries retaliate with even high tariffs.

This creates a conflict situation popularly called trade wars. A good example of it is, the current trade war between the United State and China where the United State initiated a high tariff on the goods imported from China and China retaliated with same tariffs on United State goods. Since, both the United State and China are big economies of the world they don’t only impact their own countries but have an effect on the worldwide trade and global economy.

There is no free parking

One example of an opportunity price is that no one will like to pay for parking, but if we will be better off if the parking was free overall? Most probably not. If parking was free, demand can be greater than supply causing people to waste time driving around looking for a parking spot. Free parking will encourage people for driving into city centers instead of using less environmentally friendly forms of transport. It will increase congestion; therefore, though we will pay less for parking, we would face less obvious prices.

Supply & Demand

Supply & Demand is the basic law in economics. Supply is several goods the producers float in the market whereas Demand is the amount market participants are willing to purchase. In an effective market, the point where the supply curve and the demand curve meet are known as the equilibrium point and it’s the point where the supply and demand are enough for each other to be met.

Example: Consider a luxury handbag maker that sells luxury handbags and sells them at a cost of $ 1000. If the cost is below $ 500 it will get orders of 10,000 per month. But the brand produces only 1000 quantity each month such that it receives the same number of orders each month and it clears its inventory in a month itself.

Diminishing returns

If we like chocolate cake, why do we not eat 3 per day? The reason is diminishing returns. The 1st chocolate cake can give us 10/10. The 2nd cake 3/10. The third cake can make us sick and give a negative utility. People can have different opinions about when diminishing returns set in. Few students can feel this’s after the 2nd pint, other students only after considerably more. There are diminishing returns to money. That’s why we do not spend all our time working more money gives increasingly less satisfaction and decreases leisure time. This is a difficult concept to grasp but you can learn more through publications such as IB Economics Paper 1 Sample Answers.

Behavioral economics and bias

Traditional economic theory assumes that man is rational. But the work of behavioral economics advises we can be prone to bias as well as irrational behavior. For example, we can be prone to a bias where we overrate pleasure in the short-term instead of long-term implications. For instance, consuming demerit goods such as alcohol or not saving sufficiently for retirement. The insight of present bias suggests we make decisions our future self won’t make. If we become aware of these bias and irrational behavior, then we can make great decisions which improve our long-term welfare.

Goods which offer high satisfaction for the price

This’s common sense, but in economics, we give it the term of marginal utility theory. The idea is, a rational person will assess how much utility goods or services give him when compared to the cost. To maximize your welfare, you’ll use goods where total utility is maximized given the budget of you. For instance, is it worth paying more charges by airlines like paying for more leg-room? Or pay to get priority boarding? Economics suggests we want to evaluate the marginal benefit of these services compared to the marginal price.

Externalities

Economics can feel we’re promoting selfish ends firms maximize profits, customers maximize their personal utility. Adam Smith claimed pursuing selfish goals ended up in improving the good. But, in economics, we try to consider the effect of our actions on other people. If a firm produces a chemical, it can make a profit, but cause an external price of pollution.

To ignore this external cost will be to create an inefficient outcome. We should make the firm pay the price of its pollution so that it has the incentive to minimize or halt external prices. Externalities are everywhere. Even your decision to study economics can have positive externalities in the future. For instance, you can wind up being an economics teacher facilitating others to learn through Econs Tuition.

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