Economics
Economics is not the study of money or the stock market, but rather the study of our society and how consumers make choices to satisfy their needs and wants. There is a scarcity of resources and companies must determine how to supply enough of a product or service to meet the demand in the middle. This is essentially the foundation of economics. There are several subtopics within economics, including macroeconomics, microeconomics, and opportunity costs.
Right now, you have decided to read this article on our website. This means you’re implementing economics! You could have procrastinated and played golf or watched TV, but instead you chose to learn about business philosophy and concepts. This is an example of an opportunity cost. You outweighed the costs and benefits of the actions and ultimately decided to educate yourself. Macroeconomics looks at supply and demand on a grand scale such as countries and cities while microeconomics surveys individuals, families, industries and companies. There will be other concepts to understand, but these are some of the key foundations that will help you comprehend the complex field of economics.
Right now, you have decided to read this article on our website. This means you’re implementing economics! You could have procrastinated and played golf or watched TV, but instead you chose to learn about business philosophy and concepts. This is an example of an opportunity cost. You outweighed the costs and benefits of the actions and ultimately decided to educate yourself. Macroeconomics looks at supply and demand on a grand scale such as countries and cities while microeconomics surveys individuals, families, industries and companies. There will be other concepts to understand, but these are some of the key foundations that will help you comprehend the complex field of economics.
Supply and Demand
Business owners should be able to understand at least the fundamentals and vocabulary of economics and how it pertains to their business and industry.
To start, the backbone of any market economy is supply and demand.
Demand refers to how much (quantity) of a product or service is desired by buyers. This is the amount of a product people are willing to buy at a certain price and reflects the relationship between price and quantity.
Supply represents how much the market can offer, or the amount of a certain good producers are willing to supply when receiving a certain price. This correlates the price and how much of a good or service is supplied to the market. Price, therefore, is a reflection of supply and demand.
The end result of this is that resources are allocated in the most efficient way possible through the relationships of supply and demand.
First, let’s start by discussing the law of demand. According to this principle, the higher the price of a good, the less people will demand the good. Graphical demonstrations of this concept are very common; you can visit Investopedia description and see the graphs to see an example demand curve.
Next, law of supply states that the higher the price of a good, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. Time is important for supply because suppliers must react quickly to a change in demand or price. A good example is an unexpected seasonal change, such as more rain than expected increases the demand for umbrellas.
An example of the laws in action, Investopedia gives a splendid example,
“Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.”
Economics studies how society allocates the limited resources of the earth to the insatiable appetites of humans. Supply and demand shows those forces at work.
Microeconomics
Microeconomics deals with the supply and demand equation for individuals, families, companies, or industries. It shows a smaller, or “micro,” view of the economy through a more practical approach. Here, we find the opportunity costs that arise when we determine how to allocate limited resources. Increasing production of a good or service requires a cost or sacrifice be incurred. Every company seeks to maximize their profits while minimizing their costs.
For example, if a business can sell an additional unit at a profit, then it should produce it. The marginal revenue (MR) from the sale should exceed the marginal cost (MC) to produce one more unit. A company will continue to produce until MR = MC. This equilibrium will take effect on the next sale, which causes the opposite effect for profit to continue.
Utility is a term used to describe the value of a product to a consumer. Marginal utility (MU) means the usefulness or utility of consuming or possessing an additional unit of a product. Once a buyer is fully satisfied, then any additional unit is of no further value to that particular consumer.
Understanding price elasticity of demand is also important for running a business. This is when the price is low, which causes the demand to be high. The opposite is true when the price is high and demand is low. This is what is known as elasticity. If consumers are sensitive to price changes, then a company’s brand could be affected. This is good to know as a business owner in general. The same concepts hold true to the supply side. Higher prices allow more production while decreasing consumption; and, vice versa.
Market structures are competitive and drive supply, demand, and prices. The greater the competition in a given market, the more sensitive the market prices will be to changes in supply and demand. Four examples would be:
Microeconomic theory governs when specific conditions of a market, whether it be an industry, company, or buying behaviors of individuals. Equilibrium price controls industries producing the quantity that meets demand based on market structure. Marginal revenue equals marginal costs controls companies’ quantities. Individuals purchases are based on the elasticity of demand.
Macroeconomics
Macroeconomics concerns itself with the economies of cities, countries, or the world. It presents the larger view of the economy and projects whether inflation is coming, a recession on the horizon, or if interest rates are rising. There are many theoretical approaches to how to view the economy and many methods of measurement. Sometimes, it becomes a political power and very opinionated. Here, we will stick to how it affects business decisions and will lead into the international economy.
Understanding the gross national product (GNP) is a key component of macroeconomics. GNP is the total market value of all final goods and services produced by an economy in a year. This is how one measures the health of an economy. GNP falls during depressions and recessions and grows during booms. The consumer price index (CPI) measures the price changes of a specifically defined basket of consumer goods and services that people buy most often. The producer price index (PPI) measures price changes of a collection of raw materials used most often by producers.
Now, let’s talk about an acronym we all know, gross domestic product (GDP) and net national product (NNP). NNP considers the cost of using machinery, factories, and equipment in production. GDP is produced within the country’s borders and is a smaller component of GNP.
What is Money? By definition, money is the medium of exchange used to buy and sell goods and services. Money in macroeconomics is an avenue used to measure money supply in the economy. It includes cash, checking, money market funds, and savings. Velocity is the speed at which money changes hands.
Monetary policy Three tools are used to control the money supply in the economy and are governed by the Federal Reserve. They can change the discount rate, trade government securities, and change the reserve requirement of financial institutions. This grants them the ability to control interest rates and manage the economy.
These ideas demonstrate basic macroeconomic theory in action. I’ll refrain from providing the many graphs and detailed explanations to keep things simple here.
International Economics ‘Global macroeconomics’
Wikipedia’s Definition states:
“International Economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequence of transactions and interactions between the inhabitants of different countries, including trade, invest and transaction. “
This is both straight forward and confusing at the same time for most. Let’s see if we simplify this.
The economies of the world keep track of their activity using balance of payments accounting. If they are doing things well, inflation remains low, economic growth remains steady, foreign reserves stay high, and the local currency maintains its value.
Balance of payments is similar to an accountant’s cash flow statement. Foreign exchange is the balance of liquid assets such as cash and gold reserves that can be used to make international payments.
Companies looking to create a global portfolio should follow this simple 4 step process when analyzing a country in the international economy:
Business owners should be able to understand at least the fundamentals and vocabulary of economics and how it pertains to their business and industry.
To start, the backbone of any market economy is supply and demand.
Demand refers to how much (quantity) of a product or service is desired by buyers. This is the amount of a product people are willing to buy at a certain price and reflects the relationship between price and quantity.
Supply represents how much the market can offer, or the amount of a certain good producers are willing to supply when receiving a certain price. This correlates the price and how much of a good or service is supplied to the market. Price, therefore, is a reflection of supply and demand.
The end result of this is that resources are allocated in the most efficient way possible through the relationships of supply and demand.
First, let’s start by discussing the law of demand. According to this principle, the higher the price of a good, the less people will demand the good. Graphical demonstrations of this concept are very common; you can visit Investopedia description and see the graphs to see an example demand curve.
Next, law of supply states that the higher the price of a good, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. Time is important for supply because suppliers must react quickly to a change in demand or price. A good example is an unexpected seasonal change, such as more rain than expected increases the demand for umbrellas.
An example of the laws in action, Investopedia gives a splendid example,
“Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.”
Economics studies how society allocates the limited resources of the earth to the insatiable appetites of humans. Supply and demand shows those forces at work.
Microeconomics
Microeconomics deals with the supply and demand equation for individuals, families, companies, or industries. It shows a smaller, or “micro,” view of the economy through a more practical approach. Here, we find the opportunity costs that arise when we determine how to allocate limited resources. Increasing production of a good or service requires a cost or sacrifice be incurred. Every company seeks to maximize their profits while minimizing their costs.
For example, if a business can sell an additional unit at a profit, then it should produce it. The marginal revenue (MR) from the sale should exceed the marginal cost (MC) to produce one more unit. A company will continue to produce until MR = MC. This equilibrium will take effect on the next sale, which causes the opposite effect for profit to continue.
Utility is a term used to describe the value of a product to a consumer. Marginal utility (MU) means the usefulness or utility of consuming or possessing an additional unit of a product. Once a buyer is fully satisfied, then any additional unit is of no further value to that particular consumer.
Understanding price elasticity of demand is also important for running a business. This is when the price is low, which causes the demand to be high. The opposite is true when the price is high and demand is low. This is what is known as elasticity. If consumers are sensitive to price changes, then a company’s brand could be affected. This is good to know as a business owner in general. The same concepts hold true to the supply side. Higher prices allow more production while decreasing consumption; and, vice versa.
Market structures are competitive and drive supply, demand, and prices. The greater the competition in a given market, the more sensitive the market prices will be to changes in supply and demand. Four examples would be:
- Pure Monopoly is only one seller with a unique product
- Oligopoly is when there are only a few suppliers for a product for which there are few substitutes.
- Monopolistic Competition is there are many producers with products that can be differentiated.
- Pure Competition there are many competitors selling similar, substitutable product.
Microeconomic theory governs when specific conditions of a market, whether it be an industry, company, or buying behaviors of individuals. Equilibrium price controls industries producing the quantity that meets demand based on market structure. Marginal revenue equals marginal costs controls companies’ quantities. Individuals purchases are based on the elasticity of demand.
Macroeconomics
Macroeconomics concerns itself with the economies of cities, countries, or the world. It presents the larger view of the economy and projects whether inflation is coming, a recession on the horizon, or if interest rates are rising. There are many theoretical approaches to how to view the economy and many methods of measurement. Sometimes, it becomes a political power and very opinionated. Here, we will stick to how it affects business decisions and will lead into the international economy.
Understanding the gross national product (GNP) is a key component of macroeconomics. GNP is the total market value of all final goods and services produced by an economy in a year. This is how one measures the health of an economy. GNP falls during depressions and recessions and grows during booms. The consumer price index (CPI) measures the price changes of a specifically defined basket of consumer goods and services that people buy most often. The producer price index (PPI) measures price changes of a collection of raw materials used most often by producers.
Now, let’s talk about an acronym we all know, gross domestic product (GDP) and net national product (NNP). NNP considers the cost of using machinery, factories, and equipment in production. GDP is produced within the country’s borders and is a smaller component of GNP.
What is Money? By definition, money is the medium of exchange used to buy and sell goods and services. Money in macroeconomics is an avenue used to measure money supply in the economy. It includes cash, checking, money market funds, and savings. Velocity is the speed at which money changes hands.
Monetary policy Three tools are used to control the money supply in the economy and are governed by the Federal Reserve. They can change the discount rate, trade government securities, and change the reserve requirement of financial institutions. This grants them the ability to control interest rates and manage the economy.
These ideas demonstrate basic macroeconomic theory in action. I’ll refrain from providing the many graphs and detailed explanations to keep things simple here.
International Economics ‘Global macroeconomics’
Wikipedia’s Definition states:
“International Economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequence of transactions and interactions between the inhabitants of different countries, including trade, invest and transaction. “
This is both straight forward and confusing at the same time for most. Let’s see if we simplify this.
The economies of the world keep track of their activity using balance of payments accounting. If they are doing things well, inflation remains low, economic growth remains steady, foreign reserves stay high, and the local currency maintains its value.
Balance of payments is similar to an accountant’s cash flow statement. Foreign exchange is the balance of liquid assets such as cash and gold reserves that can be used to make international payments.
Companies looking to create a global portfolio should follow this simple 4 step process when analyzing a country in the international economy:
- Analyze Past Performance
- Identify the Country’s Strategy
- Analyze a Country’s Context
- Make a Prediction
