Final Project
The projects have been very informative and significant for personal development with regard to various combined aspects of economics. Theoretical aspects within the economics course, or rather in each learning discipline are held as highly important elements as they aid with the foundational part of understanding various phenomenon. However, the most definitive aspect lies in the ability of an individual to translate the given theories in acquiring solutions to different problems evident within the present economies of the world. The simulations offered the channel for connecting the theoretical information with real-world issues; combined with leading instructions as to what needs to be done in each of the given situations (McEachern 2).
I have realized that learning is different from real-life situations and lack of application often leads to a level of redundancy that is plaguing various professions; for instance, where a bright student is unable to solve easy problems due to lack of exposure to such application. The application part that changed my perspective concerns consumption in manner that enhances ones utility. It is true that we as consumers do not calculate the marginal utility factor in ensuring the highest utility is gained but by using the rationality factor we are actually trying to maximize utility. Therefore, the materials were very helpful in acting as links towards the translation of theories into real-life situations.
Economic Systems
Economic systems are structures that define resource distribution with regard to the ownership aspect in a given nation. Presently, there are three economic systems with the first being free enterprise economy (McEachern 97). In this form of structuring, resources are owned and managed wholly by the public and thereby termed as privately held. Production powers are therefore held by the public and this includes the determination of products to be manufactured, the prices accorded to each and the output levels. The second system is the command-based economy that vests economic resources – therefore control – to state authorities. A similar resource management as defined by production levels and pricing is therefore entirely transferred to the state thus reducing public power. The third type is the mixed economy that combines aspects of both free enterprise and command-based structures (McEachern 99). The free enterprise component is manifested in the private sector whereas the command-based aspects are noted in the public sector. However, state authorities still control factors like price ceilings and tariffs within the private component in a bid to offer consumer protection from market limitations like monopolies. Monopolies lead to consumer extortion through high pricings.
A price ceiling refers to a specific charge set by state authorities to limit sellers from taking advantage of consumers (Rittenberg and Timothy 99). The ceiling therefore ensures that sellers set their maximum charges at the given level or at a level below the accorded price. From this association, the command factor can be noted as imposed on the sellers by the government. Tariffs are a second tool employed within the commercial sector for government control as they permit the government into acquiring part of the monetary circulations within a nation into the economy. Economists view this practice as controlling since the supply and demand interactions within the economy are affected as opposed to a free enterprise setting where the same forces are uninterrupted.
Supply and Demand
The supply and demand model defines the interaction of demand and supply forces within a given economy, and is used as a tool for determining selling costs and output levels. Supply outlines the various product levels that manufacturers are capable and ready to offer for a specific price. Demand on the other hand encapsulates the quantity of products buyers are able to attain at a given price. Mapping the costs and quantity levels on a graph formulates demand and supply curves and hence the model (Arnold 55). Note that the curves move in opposite directions; the demand curve bearing a downward slant from left to right and the supply being upward slanting from the left to right. At a given point therefore, the curves overlap on the equilibrium cost and quantity. In cases where the demand surpasses the supply, a deficit is created and thus prices are enhanced leading to inflation within the economy. Conversely, when supply surpasses demand levels a surplus is created leading to low pricing levels.
Therefore, the model is quite useful in gauging whether the US economy is acting at the optimal level and if not (existence of surplus or deficiency) what needs to be done to correct the issue. The US economy is a mixed one as indicated by the various players involved. For instance, pricing of natural gas has to be determined jointly by commodity manufacturers, pipeline institutions, and distributors. Manufacturing occurs in the southwest region of the US with the largest markets being in central and northeast regions of the nation, therefore the pipeline requirement. The government plays a critical role within the gas industry by setting price ceilings through the Federal Power Commission, empowered by the Natural Gas Act implemented in 1938 (Rittenberg and Timothy 416). The Act was instituted following demand increases on the product that consequently saw the three players increase the prices beyond an affordable purchasing level. Therefore, with the price ceiling the prices were checked into a lower level for the consumers’ sake and thus acting as a form of protection and reflective of the government’s role in trading activities. Other than ceilings, the government can also offer price floors in areas like nominal wage levels in a bid to enhance consumer wellbeing.
Elasticity
Elasticity reveals the magnitude that the supply curve or the demand curve responds to a price adjustment within an economy. Elasticity indicates movements along the given curves and not shifts. In both instances, it captures percentages of both cost and quantity alterations at various points. When the percentage computations on the changes is more than one, meaning that it bears a higher magnitude to alterations, then the relation is regarded as elastic whereas if it is below one, then the association is inelastic in nature (Besanko and Ronald 45). Products deemed as necessities within the market such as sugar, flour and milk amongst others feature an inelastic association in terms of demand since individuals will tend to purchase them at the same or at nearly the same levels despite the price levels. On the other hand, less necessary items bear elastic demand as users tend to limit or stop purchasing the given product until a favorable price is attained.
A good instance can be noted by the occurrence where when prices for natural gas are increased by one percent leading to lower demands by 0.2 percent, then the association reflects an inelastic relation since the demand is less responsive to price modifications. In other words, the demands before and after the price adjustments will largely remain nearly at the same level; therefore despite the set price, the demand notes little impact (Hall and Marc 141). When gold items note one percent price increases leading to a subsequent 2.6% drop in purchases, then demand in this instance is elastic since large demand decrease indicates a high level of responsiveness within the given item. In this case, the demand after the price modification will be largely affected due to the high prices; low pricing will offer an inverse relation leading to higher demand levels. Presence of substitutes also determines the nature of the elasticity; high substitutes lead to elastic demand whereas substitute lack leads to an inelastic demand. The same applies to the supply curve by reflecting the producers’ capabilities with regard to price alterations.
International Trade
International trade offers products within the globally set prices and quantity and in most instances, the prices tend to be lower than those operating within a domestic setting as evidenced by local production thus reflecting costs within the practice. These costs are further increased by the fact that, as the number of producers and product levels is enhanced within the given economy, the selling prices are pushed downwards creating an adverse element for import-competing institutions. Producers will be forced to either reduce output levels in an aversion of high losses or lessen the prices of the present production level. Employees will also be adversely impacted, as domestic companies have to lessen the workforce due to lower output requirements noting another form of cost imparted by international trade. Additionally, if the present production levels are maintained then remuneration levels have to be lessened to overcome the cost challenge (Arnold 433). Export institutions on the other hand gain from international trade like incentive provisions like abolished tariffs in a bid to enhance investments on the recipient nations as a benefit of international trade. Domestic consumers have an advantage due to international trade, as the global price tends to be lower than the local prices thus according affordable items to the purchaser thereby enhancing the buying power. This improves consumer wellbeing, another notable benefit.
Consumer Behavior
It is true that consumers do make purchasing decisions on the utility acquired from a given product and therefore rationality behavior. Although it is quite uncommon to see a buyer compute the marginal utility attached to a given product, most users generally term items in broad categories as expensive, affordable or low-priced. If a product is rated as expensive then it simply means that the satisfaction (utility) a customer expects from the given product is little compared to the price attached to it and therefore, most individuals tend to refrain from purchasing the given product (Besanko and Ronald 74). Conversely, an affordable or low-priced item will be easily purchased as the utility acquired from each will be average or high respectively and this will lead proportionate purchases within each category. The consumption patterns are therefore an evidence of rationality behavior in buyers, swinging between decisions as to whether a purchase should be made or not, based on the satisfaction factor.
Consumption patterns for all consumers bear a maximization aspect reflected by spending behavior where the buyer aims at ensuring that the highest value is attained within each spending decision (Bowles 93). The consumer will therefore always at according the highest value in purchases with the least finances possible due to budget and income constraints. For instance, if a buyer has $20 dollars to spend between soda and a hotdog each priced as $10 and $5 respectively, then the hotdog purchase is likely to be made other than the soda purchase. This is because the given income only allows for two sodas as opposed to four hotdogs. Therefore, the consumer is likely to make the latter purchase as it increases the monetary value by acquiring more purchases and thus the utility acquired form each. Through this, the maximization and rationality factors are noted.
Production
The law states that when one production factor is varied upwards whilst the other production factors are held as invariable, then the output given by the changing factor will initially increase before a steady decrease is noted. This does not necessarily mean that the production levels reduce until the zero and negative levels but rather that lessened outputs are noted at various additional input levels. The reduction is attributable to the marginal output level that tends to increase until an optimal point is achieved and adding extra factors beyond the optimal level just leads to production ineffectuality as the marginal product rises (Arnold 172). A farmer may decide to plant tomatoes on an acre of land. After planting, the farmer has to maintain the crops through irrigation and weeding practices to ensure the highest output is attained. Suppose the farmer decides to enhance productivity by use of one kilogram of manure for enhancing the soil components within the same plot, then the extra production acquired is attributable only to the soil component resource as the land area is maintained as constant. Further varying the manure factor by a higher level say two kilograms will also lead to production variation as more tomatoes are gathered.
Three kilograms will also vary the output but now as the soil and concentration rations become unbalanced the extra production noted is much lower than the margins noted with the first and second applications. In fact, with the fourth kilogram the production noted may be lower than the preceding levels as the soil concentration is upset by the manure levels leading to a negative effect on the crops. As more manure is added, the production will gradually decrease at each successive level that evidencing the diminishing returns. The law is highly significant in production procedures as it aids manufacturers in highlighting the optimal combination level of workers with capital (machines) in a manner that leads to optimal outputs, thereby higher profitability. Settling for combinations that are higher or lesser than the optimal level leads to losses, as both workers and the capital are not fully utilized.
Competitive Markets
Within a competitive setting, profit maximization is achieved at the point where the price of a given product is the same as the marginal cost and marginal revenue. When the product price exceeds marginal cost then production is fixed at a level that is lower than the equilibrium point. Subsequently, this creates low production and in turn supply, meaning that as demand overrides the supply levels then production deficiency is noted. This means that the institution acquires fewer profits as reflected by market losses. On the other hand, when the price level is less than the marginal cost, the workforce tends to be in excess leading to a proportionate enhancement on the output factor. This creates an excess supply over the given demand forcing the prices to be lowered in a bid to induce more consumer purchases and therefore acting as a loss to the institution (Besanko and Ronald 204). This is done by placing the price at the level where the marginal cost and marginal revenue are equivalent that leads to maximization practices as production deficiencies and surpluses are checked. Note that, analogous to this price levels is the manufacturing level that denotes the optimal quantity that leads to profit maximization.
The relevance of profit maximization concept within competitive settings is highly noted within the determination of the production requirement. The term marginal denotes extra units and therefore at points where marginal revenue is higher than marginal costs the it means that the extra amounts of revenue being accrued by a company are higher than the extra costs noted. Therefore, creating more production will still lead to higher profit margins as the revenue noted at each subsequent level would note a gradual tendency. On the other hand, the reverse association holds as a true function in that as marginal costs surpass marginal revenues then the extra costs noted for each additional unit is in actuality expensive since the revenue acquired form it is lesser (Hall and Marc 78). Increasing manufacturing activities in this relation would lead to losses as the costs are much larger than the revenues. Therefore, by using both instances a company is able to determine whether inefficacies are noted through overproduction or deficit productions and thus lessen or increase the production until the marginal revenues and marginal costs equal for profit maximization.
Game Theory
Promotional activities bear a positive impact on the US economy as it leads to sales enhancement within various institutions. From the course work, engaging the celebrity in promotional activities for both Frantic and Fuse companies, each acquires a ten percent profit and market share increase in each institution. The profits denote the resulting level increase upon creating costs payments inclusive of the celebrity’s fees from the acquired revenue. Therefore, advertising is quite beneficial to the company as more sales are realized. Lack of promotional activity notes retention of the same profits and market shares thus evidencing the benefits attached to promotional activities. Refraining from advertising while other participants within the oligopolistic setting indulge in the same leads to a fifteen percent increase on profits and market share for the advertising company whereas the non-advertising company notes a twenty percent decrease in profits and market share.
As more sales are noted, the profit and return factors are heightened and so is the economic thrive attributed to monetary injections on investment practices. The sales enhancement is noted due to the high information dissemination that in turn mobilizes consumer’s knowledge towards the product. In fact, advantages attached to promotional activities are mutual in nature as they also create a similar aspect to the consumers. In institutions offering free information to consumers with regard to various items, a purchaser is able to gather important facts like prices and the presence of substitute products present within a given industry (McEachern 191). Through this, the consumer makes comparisons with regard to the same aspects in a bid to act rationally in purchasing activities. Additionally, through awareness, consumers are able to gather true information about a given product, which aids the consumers in overcoming problems like counterfeit products by noting the official outlets or dealers.
Monopoly
Since life itself is inequitable to monetary possessions, pharmaceutical companies should be allowed to charge high prices for life-saving drugs. Life consists of both direct costs as defined by monetary requirements comprising of needs like medical prescriptions given towards curing a given ailment. Intangible costs are attached to the demise of an individual and the effect that the same directs to relatives and friends in terms of grief and other adverse issues. Note that, intangible costs surpass direct costs in terms of health management. Medical production comprises of monetary costs comprising of capital employed for drug researches, extra costs arising from failures and the need to restart the research project severally and the remuneration accorded to scientists (Arnold 246). Production costs are actually enhanced by the aforementioned elements as the active components in medicines are affordable.
However, since the pharmacies need to recoup the monetary assets, then high pricing should be allowed to act as a production incentive, otherwise, abandoning of such investments would be very costly as noted by the demise analysis; money can be manufactured and multiplied within a given duration but life cannot be experienced again once lost. The society acquires health benefits for the given production arrangement and as more research is directed towards pharmaceutical productions, superior drugs are realized for the societal well being. For the service, the society has to bear the financial weight attached to the research processes and the unsuccessful ventures involved in drug creations (Bowles 17).
Conclusions
The monopoly topic, specifically patents within the pharmaceutical industry was most informative from a subjective viewpoint. I always thought that medical products were highly priced due to expensive inputs within the production procedures yet in dealing with the 9th part of the project, I was able to realize that the heightened prices were solely due to the research requirement. This is in conformity to the economic function that defines total costs as comprising both of fixed and variable aspects, be they tangible or intangible in nature. As the industry aims at profit creation, then the costs must be covered by the revenue and hence the high pricing. The profit maximization topic as discussed in the hiring constraints in the eighth part of the project was also quite informative as I was able to comprehend that employing a larger workforce does not necessarily mean that gathered profits are considered highest within a given level. In fact, higher profits may even be realized by having a smaller workforce due to complete resource utilization (McEachern 107).
Works Cited
Arnold, Roger. Microeconomics. Belmont: Cengage Learning, 2010. Print.
Besanko, David, and Ronald Braeutigam. Microeconomics. San Francisco: John Wiley and Sons, 2010. Print.
Bowles, Samuel. Microeconomics: behavior, institutions, and evolution. Princeton: Princeton University Press, 2006. Print.
Hall, Robert, and Marc Lieberman. Microeconomics: Principles and Applications. New York: Cengage Learning, 2009. Print.
McEachern, W. Microeconomics. Independence: Cengage Learning, 2010. Print.
Rittenberg, Libby, and Timothy Tregarthen. Principles of Microeconomics. Irvington: Flat World Knowledge, 2008. Print.
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