Ten Principles of Economics and How Markets Work
In Week 1, students are introduced to the ten fundamental principles on which the study of economics is based. Throughout this course, the students will use these ten principles to better develop their understanding of economics and how society manages its scarce resources. Students will see how markets work using supply and demand for a good to determine both the quantity produced and the price at which the good sells. The concepts of equilibrium and elasticity are used to explain the sensitivity of quantity supplied and quantity demanded to changes in economic variables. Students will see how government policies impact prices and quantities in markets.
Resources: Principles of Microeconomics, Ch. 1, 2, 3, 4, and 6.
Prepare an 875-word research paper as part of a marketing research committee for your organization about current microeconomic thought and theory.
Identify the fundamental lessons the Ten Principles of Economics teaches regarding:
How people make decisions
How people interact
How the economy works as a whole
Explain the following to help the committee members understand how markets work:
How society manages its scarce resources and benefits from economic interdependence.
Why the demand curve slopes downward and the supply curve slopes upward.
Where the point of equilibrium is and what does it determine?
The impact of price controls, taxes, and elasticity on changes in supply, demand and equilibrium prices.
Format consistent with APA guidelines.
Ten Principles of Economics and How Markets Work
According to Mankiw (2014), an economy is described as a booming arena where distribution, production, and trading of goods and services take place. As such, the study of economics primarily focusses on how individuals and the society as a whole manages and utilizes the available scarce resources efficiently in the environment. The ten principles of economics stipulated by Gregory Mankiw can be utilized in understanding the dynamics of economic principles. As such, Mankiw (2014) suggested that there are three analogies that integrates the ten principles, which includes; how individuals make decisions in an economy, how they interact in an economy and how the economic system works. This essay transcends a research
To copiously comprehend how individuals, make decisions, four economic concepts should be analyzed extensively. First, individuals face trade-offs in such a way that the cost of one item is what an individual gives up to access or get. As such, this analogy articulates that decision maker are the determiners of their cost of actions as well as the pathway they endure to prefer another item. Second, the rational nature of individual predisposes them to think at the margin (Mankiw, 2014). As such, when an individual is rational they will tend to analytically attempt to attain their objectives. Third, individual actively respond to incentives. Responding to incentives entails that individuals will be motivated to attain their objectives for the rewards at the end of it all. Last, people make a decision primarily based on the necessities and wants they articulate in their budget.
Interaction of Individuals in an Economy
The interaction of people in an economy is solely dependent on their respective needs and wants. According to Mankiw (2014), it is evident that three principles are associated with how people interact in the economy. As such, individuals react to trade in that through trade each player within the dynamics of trade is made better off. Additionally, through trade, individuals have the capacity to evaluate their comparative advantage as well as a benefiting specialty. As such. Trading entails that individuals can purchase a significant assortment of goods and/or services.
Second, Mankiw (2014) suggests that market initiated interaction of people in the economy as it is a virtuous way to shape economic activities. Prices in the market reflect both the values and costs of resources needed to produce an item. As such, markets are utilized as a guide to self-interest that promotes the society’s economic status and well-being.
Third, Mankiw (2014) articulates that people interact in the economy through the government. As such, research suggests that the government has the ability to worsen as well as improve the market outcomes through policies which are stipulated in regard to market failure. Furthermore, the government can regulate price stability and taxes that entire affects the nature of markets. It can be said that decision-makers should not just assume that the government can aid their preferences but they can also worsen the situation.
The Economic System
Regarding Mankiw’s ten principles, three of the principles explain the dynamical function of the economic system as a whole. First, the standard of living of a given nation is dependent on its capability to produce goods and services. Arguably, the government will stipulate policies that regulate the actions individuals undertake if it has an influence on economic growth and development as the nation’s prosperity. As such, the governments will tend to set policies that boost productivity which will, in turn, improve individuals’ living standards.
Second, Mankiw (2014) suggest that when there is a decrease in money value when governments print out a lump sum of money. Arguably, when the government produces too much money within a specified period, money value drops leading to the significant circulation of money in the economy that will dictate increases in prices of the commodity. Hence, inflation will occur in a short-run (McLeay, Radia, & Thomas, 2014). Third, the tradeoffs in the society in a short run lies between inflation and unemployment. As such, with more money circulating in the economy individuals will spend and demand significant amounts of goods and/or services. Consequently, the unemployment rate will reduce as more jobs will be created to cater for the increasing demand for good and services.
The forces of demand and supply pay a vital role in the economic growth, as such, if supply moves laterally to the demand curve, prices will fall and quantity of goods and services produced will sky-rocket (Adil, 2006). Alternatively, if the demand curve moves laterally to the supply curve there will increase in price and quantity of goods and services will fall. Therefore, the amount of demand and supply of a given commodity determines the market equilibrium either by raising prices or lowering prices. The point of equilibrium is where demand and supply meet at a specified price. As such it is affected by several factors within the economy. Markedly, if the supply of goods and services decreases if prices are set above the price equilibrium point, and it increases when prices are set below the equilibrium price.
It can be concluded that the economy depends on the
activities of the government, companies and purchasing behaviors of
individuals. As such the decision made by an
individual as well as their actions influence the economy on a daily
basis. With governments intervention in the regulation
of policies and taxation, the market
economy is affected significantly.
Adil, J. R. (2006). Supply and demand. Capstone Press.
Mankiw, N. G. (2014). Principles of Macroeconomics (7th ed.). New York: Cengage Learning.
McLeay, M., Radia, A., & Thomas, R. (2014). Money Creation in the Modern Economy. Bank of England Quarterly Bulletin, (Q1), 1–14.