Key Principles of Economics

3 Key Elements of Economics There are many key factors that make up the economic system all which must work together in order to effectively direct scarce inputs into wanted outputs. For this purpose the focus will be on 3 of those key elements. this includes the idea of no such thing as a free lunch, transactions as an obstacle to trade, and how the invisible hand directs buyers and sellers toward activities that increase general welfare. All three of these elements are essential for a greater understanding of how the economy thrives. In our market, resources are limited yet humans desire for goods and services is nearly infinite.

Because of this there is no such thing as a free lunch. The sacrifice most commonly thought of in receiving lunch is the monetary cost however there are other sacrifices as well. Productivity, which provides the money for that lunch, is a large sacrifice when we stop to take a lunch break as in this explanation. However, the main sacrifice to focus on is the cost that we pay for any good or service. This sacrifice is something both consumers and producers must face. To say that you did not pay for the lunch you received still does not make it free to you or the person who paid the bill. It simply shifts the cost, it does not reduce it.

As consumers we are always looking to get more for less. Yet what we do not see so directly, is how the cost of any given good influences us on what we choose to purchase. With out comparing the cost advantage of given products we as consumers would end up using the money we had intended for groceries perhaps on other items that are not of equal value. Therefore, if Sally goes out shopping with the intent of buying only a few essential items that her daughter will need for the winter weather and does not consider the cost of what she is buying she could easily over spend and have to sacrifice at the grocery store.

Or maybe Sally will then not be able to heat her house effectively. Both of these are examples of items that are more essential to Sally and her daughter’s well being than the brand name of her daughter’s clothing. This shows how by purchasing the more expensive clothes for her daughter Sally is no longer able to direct her resources as effectively as she could have had she perhaps taken her daughter to Goodwill and gotten clothes that are just as effective for less money. For producers the cost that most effects them is of the resources they use to make any given product.

If a paper mill produces only two types of paper type A and type B Then in order for the paper mill to produce 500 bundles of each type of paper the mill must accrue the cost of only being able to make 500 bundles of type A because they must also make 500 bundles of type B instead of 1000 of type A and none of type B. This also shows cost because 1000 bundles of type A is the cost of 0 bundles of type B. Trade is a voluntary exchange of goods of services however, trade cost the consumer and the producer.

The producer must pay things like time effort, shipping, and negotiations in order to make the sale. These cost then get reflected on to the consumer in order to create a profit. Transaction cost are effected by several factors physical obstacles, lack or information, government taxing and regulations, and middle men. Physical obstacles such as rivers, mountains, and oceans all increase transaction cost because they increase the difficulty of getting the product from the shipping point to the destination. This can be seen in the cost of nearly anything.

If John orders a new muffler for his Toyota motor cycle and it has to be shipped from Japan he will incur a much larger transaction cost than if he had ordered the part locally because that muffler must travel across the ocean and possibly some other land barriers. Lack of information is costly in the way of the producer and consumer. If the producer of an anatomy book is looking to find a consumer they producer must spend valuable time looking for a consumer because they are unaware of where they might find the consumer.

The same goes for the consumer who must look for a producer or other student who has the book he or she needs. This could also involve finding multiple sellers of the right book in order to compare price and get the most value for his or her dollar. This all takes time in which the producer and consumer could be doing more productive things therefore bringing in more income. As most people are well aware of the government increases transaction cost in varying ways including taxes, licensing requirements, price controls, tariffs, and quotas.

Every time I go to the grocery store I can look at my receipt and see where I was taxed. Some things only have a 2. 5% tax others have a 5% tax. This increases my cost of trade by the percentage of tax on every item I purchase in a given transaction. Government also increases transaction cost on other nations by enforcing tariffs in which a tax must be paid in order to import the goods shipped here to the U. S. Another example is in licensing. If I want to go fishing legally I must first buy a fishing license. Therefore I must pay in order to go and fish for the good of potentially catching my dinner.

The final element of economics that will be covered is the invisible hand, how market prices direct buyers and sellers toward activities that promote general welfare. Every person is out for his or her own gain however, what he or she does not realize is that the “invisible hand” or market prices promotes the goals of others which leads to greater riches for everyone. For producers the actions of the consumer allows them to know how to adjust to meet the demands of the consumer. It reflects information about a consumers preferences in regards to cost, timing, location and circumstances.

For example if people are able to get canned pumpkin all year at the super market but around thanksgiving the demand for canned pumpkin sky rockets in Louisiana then the producer can then tell that they are able to raise the price of the pumpkin in Louisiana and because they raised the price they can also afford to supply more cans of pumpkin with out the fear of the canned pumpkin expiring on the shelf. For the consumer to buy a product the consumer must feel they are getting at least the monetary value of the good they are buying.

Therefore, if the pumpkin is priced too high the consumer will reduce the amount that they buy causing spoilage and costing the producer. However, if the price is too low the producer will see a great increase is the purchase of the pumpkin because the consumer now thinks they are getting more for their money than before. This is how the “invisible hand” directs prices by showing when there is a surplus or shortage allowing for the market to self adjust to cross over clearing where there is very little excess or shortage in the real world.

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