Effects of the Government on the Economy

This essay articulates the principles, relationship between micro economic and macroeconomic by doing research in regard to this essay we can assume that government play a major role in economics such as price control, policies, increasing wages of employees and making decision in the market place however we can also assume economic policies are not influenced if they are not almost generally determined by acceptance of some of these mistakes. Perhaps the shortest and surest way to an understanding of economics is through segmentation of such errors, and particularly of the central error from which they stem. In addition economics is all about policies how society decides what, how, and for whom to produce.

INTRODUCTION

Human being intend to be able to solve living basic problem such as what goods and services to produce, how to produce these goods and services and for whom to produce these goods and services.

Economics is the study of how society decides what, how, and for whom to produce. Economics is also about human behaviour we also could describe it as a science rather than a subject within the arts or humanities. This reflects the way economics analyse problems, not the subject matter of economics.

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Economist aim to develop theories of human behaviour and to test them against the facts moreover good economics retains an element of art, for it is only by having a feel for how people actually behave that economists can focus their analysis on the right issues. But what exactly is economics?

Task1:

Most modern definitions of economics involve the notions of choice and scarcity. Possibly the earliest of these is by Lionell Robbins in 1935: “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” Virtually all textbooks have definitions that are derived from this definition. Although the exact wording differs from author to author, the standard definition is something like this: “Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.”

Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as man power, machinery, and natural resources) fix a maximum on the amount of the goods and services that can be produced.

b) Concept of opportunity cost:

This concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what you must give up when you make that choice. Another way to say this is: it is the value of the next best opportunity. Opportunity cost is a direct implication of scarcity. People have to choose between different alternatives when deciding how to spend their money and their time. Milton Friedman, who won the Nobel Prize for economics is fond of saying “there is no such thing as a free lunch.” What that means is that in a world of scarcity, everything has an opportunity cost. There is always a trade-off involved in any decision you make.

The concept of opportunity cost is one of the most important ideas in economics.

Consider the question, “How much does it cost to go to college for a year?” We could add up the direct costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require a money payment. However, these costs are small compared to the value of the time it takes to attend class, do homework, etc. The amount that the student could have earned if she had worked rather than attended school is the implicit cost of attending college. Implicit costs are costs that do not require a money payment. The opportunity cost includes both explicit and implicit costs.

C) Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into income taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and better compete in its industry.

Macroeconomics, on the other hand, is the field of economics that studies the behaviour of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation’s capital account or how GDP would be affected by unemployment rate.

While these two learning of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product’s price charged to the public.

http://www.investopedia.com/ask/answers/110.asp

Task2:

In this particular task I am going to explain the existing relationship between demand and price also will be giving more detail related to market demand curve and factors affecting demand.

According to some researchers demand can be defined as the quantity of a good buyers wish to purchase at each conceivable price, market demand could also be defined as a set of arrangements by which buyers and sellers are in contact to exchange goods or services.

The relationship between demand and price describes the behaviour of buyers at every price at every particular price there should be quantity demanded the term quantity demanded makes sense only in relation to a particular price for example in everyday language we say that when the demand for a football match tickets exceeds their supply some people will not get into the ground.

Demand curve shows the relation between price and quantity demanded the other things relevant to demand curves can usually be grouped under three groups: the price of goods, the income of consumers and consumer tastes or preferences.

Price controls are government rules or laws that forbid the adjustment of prices to clear market for example high food prices mean considerable hardship for the poor the government would prefer to impose a price ceiling on food in order to help the poor to continue purchasing adequate food quantities. In order to be effective a price ceiling must be imposed below the free market equilibrium price therefore it is going to reduce the quantity supplied and lead to excess demand unless government itself provides the extra quantity required. The main factor affecting demand is consumer revenues; consumers intend to purchase a product in order to satisfy their due to their incomes however quantities of demand could increase as consumer incomes rise for example low income people satisfy their needs for clothes by buying low quality clothes as their incomes rise they switch to better quality clothes.

Market demand curve is the sum of the demand curves of all individuals in that particular market by asking, at each price, how much each person demands. it also could the horizontal addition of individual demand curves

Individual Demand Curve

By looking at the graph we could what an important role price plays in the market therefore we can conclude in this demand of goods or services depend on the price and also on consumer incomes the graphs summarise the demand responses to changes in incomes it also show us the effect of income increases although income rises increase the quantity demanded of goods by consumers.

Task 3:

In this particular task I am going to explain how an equilibrium price and equilibrium quantity can be achieved and also the effects of excess supply, demand on market equilibrium.

According to David Begg “economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. It is the point at which quantity demanded and quantities supplied are equal, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers”.

Price controls are government rules or laws that forbid the adjustment of prices to clear market for instance we can assume that when price controls are maintained for many years they may have further repercussions. For example many countries have imposed rent controls limiting the rent a landlord can charge for accommodation. Countries such as the UK have had price ceilings for many years in the rental market in also failed to raise insignificant amount with the inflation therefore many private landlord have quit the business.

There are many reasons why government wish to intervene in a free market to set prices as a result prices are set the market forces ( where demand and supply vary) but in some cases government will need to set prices for different products. For instance the European Union EU has used minimum prices for farmers it is also could be argued farmers’ incomes are too low therefore minimum prices can be used to increase prices above the equilibrium however the government decided to have price controls in farming to encourage farmers to supply as much as possible.

This graph show us the existing relation between equilibrium price and demand and also how an equilibrium price and equilibrium quantity can be achieved however we could conclude on this task that equilibrium price is the price at which the quantity demanded by consumers and the quantity at which companies offer services and goods .

Task 4:

Perfect competition: Economist definition of perfect competition is different from the meaning of competition in everyday usage in economic theory a perfect competition can be defined as a “description of markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets say for commodities or some financial assets may approximate the concept”.

Economic markets in many sectors can be described by the term oligopoly this is where few producers dominate the majority of the industry and the market, perfect competition operate on a number of different assumptions. Economist also assumes there a number of a different buyers and sellers in the marketplace this could lead to a perfect competition in the market which could allow price to change in demand and supply.

Perfect competition can be characterized by many sellers and buyers, many products that are similar in nature and as a result of many substitutes, for example in a perfectly competitive market a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, affecting any firm that increases its price to lose market share and revenues.

According to Stanley Fisher “An oligopoly is a market dominated by a few producers, each of which has control over the market. It is an industry where there is a high level of market concentration. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure”.

Characteristics of oligopoly can be by competition other than price. Price wars , cutting prices in the market where all large firms tend simply to lead to lower profits, changing little market shares, instead , oligopolistic companies intend to charge relatively high prices but also compete through promotion and advertisement but existing firms can be safer from new companies entering the market because entry barriers to the market are high, for example existing successful brands have a number of a products considerably promoted in the other hand it will be difficult for a new company to establish its own new brand in the market.

This graph show us how important perfect competition is in the market in order to launch new product firms will need to follow some entry barriers and have some requirements and follow government policies such price control.

Task 5:

In this particular I am going to give an explanation and evaluation of what is meant by Keynesian, Monetarist economics:

According to Keynesian theory, “some microeconomic-level actions if taken collectively by a large proportion of individuals and firms can lead to inefficient aggregate macroeconomic outcomes, where the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut”.

Keynesian economics: during recession periods when aggregate demand is insufficient, monetary and fiscal expansion can boost demand, product and employment in 1930 Britain was partly pulled out the slump of Keynesian policy of government heavy spending on rearmament as the threat of war loomed however in the three decades after 1945 governments of both political parties in Britain attempted to implement the Keynesian policy in order to manage the level of aggregate demand but some of the policy did not work perfectly . In the decade after 1965 both inflation and unemployment grew fairly steadily which build up inflation proved to be a costly after effect Keynesian policies. Today we are more doubtful about the success of the activist period of 1950 and 1960.

Keynesian economics proceeds on the assumption that price level given but what can happen if the price level change for example when the economy is near full employment and there is no longer space capacity to make companies think before raising price of products or increasing wages of their employees. On the other hand Keynesian government should be able to tackle unemployment issues otherwise effects of unemployment could reduce production of goods.

According to Monetarism theory “the government’s proper economic role is to control the rate of inflation by controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over longer periods and that objectives of monetary policy are best met by targeting the growth rate of the money supply “.

Finally we can conclude that there is much about which all economists agree but there are some important differences of opinion, both in the positive economics of how the world we are living actually works and in the normative economics of how the government should behave in the market. Due to market power economist intend to play a role in the market by solving problem faced by consumers such as price rises therefore they intend to have price ceiling for each product and I have learn economic is just not a science subject it is there to reconcile the conflict between people virtually unlimited demand with society limited ability to produce goods and services to fulfil these demands.