Abstract
Economic principles provide an essential framework for understanding and analysing business. This framework can help you understand the business world and make better decisions. The research paper discusses three economic principles that affect businesses and organizations daily. The purpose of this paper is to illustrate how each of these three economic principles is reflected in real-world situations. I used the internet and my class textbook to research this paper. I found this information by searching the internet for “economic principles” and reading articles until I found one I liked. The results of this study can be used by students and teachers in introductory economics courses and by businesses in developing effective strategies to improve business performance. Economic principles help teach financial concepts because they provide underlying assumptions and rules of thumb that can explain complex economic phenomena. Educators who teach economics need to know what basic economic principles are, how they are related to each other, how they develop, how they are involved in real-world situations, and how they can explain complex economic phenomena. Economic principles can stimulate critical thinking because they raise questions about how real-world problems fit into the body of theory that makes up economics as a discipline.
Introduction
Certain economic principles will always apply, no matter what the conditions are. These principles are based on human behavior, which never changes and never falters. Understanding the forces that because a change in prices, supply, demand, and competition will help any business – large or small – understand how to succeed in a competitive marketplace. It’s essential to know how economics applies to your life. Those unfamiliar with economic principles might be surprised by how much they influence the decisions you make each day. Economics deals with the factors that move goods, services, and resources.
An economic principle is a law or theory in economics. In the social sciences, a guide is a kind of rule. Some economic principles are named after people, such as Stigler’s law of eponymy (Schubert, 2022). Other regulations are named after places (Gresham’s law), things (Say’s the law), or ideas (Bailey’s principle).
The people who are sensible, tend to compare alternatives and determine which option has more significant benefit than cost. Marginal analysis is used to determine if the costs of an action outweigh its benefits. Incentives are something that motivates a person to do something. Incentives could be positive or negative. For example, money is a positive incentive, while taxes are negative. Incentives always motivate people to make choices that help them achieve desired outcomes which might be counted as profit for any business. Prices rise when the government prints too much money: Prices rise when there is more money in circulation relative to goods and services. When there is less money close to goods and services, prices fall.
Literature Review
Economics is a practical science that studies how products and services are produced, distributed, and consumed. It investigates how individuals, corporations, governments, and nations allocate resources to meet their demands and needs, as well as how these entities should organize and coordinate their activities to maximize output. Three economic principles are discussed in the study.
- Rational people think at the margin economic principle
The economic notion of rational people thinking at the edge is based on people who adapt to changes in their environment. People frequently make decisions by weighing the marginal costs and advantages of a proposed change. Marginal cost is added when a person increases the quantity produced, while the marginal benefit is associated with increasing this quantity at the end of the 19th century (Sepulveda, 2020). It is based on rational choice theory, which assumes that people have a goal and use all available information to achieve it. Many scholars have modified this theory. For example, Herbert Simon introduced bounded rationality, which means that people are limited in processing information. Therefore, rational choice theory cannot optimize decisions as much as predicted. They choose between good options instead of the best ones.
The theory has many practical applications that can be seen in different areas of life. It is used in microeconomics where it helps to explain individual behavior, for example, how changes in price influence demand and public policy decisions like those related to health care or retirement savings. It can also be used in businesses where it helps managers to make better hiring or investment choices.
- People respond to incentives’ economic principles.
Incentives are the “carrot” or the “stick” used to influence behavior. Incentives can be positive or negative. A positive incentive might be a cash bonus for completing a project on time and under budget. A negative incentive might be an electric shock if you put your hand in a fire. A central component of economics is that people respond to rewards and punishments, also known as incentives (Vlaev, 2019). The following are more common incentives that operate in modern economies: Higher salaries and wages – Higher salaries are positive incentives for people to work harder. For example, workers may work harder if they know they will get a bonus at the end of the year.
On the other hand, lower pay is likely to lead to lower effort from workers. Tax cuts/increases – tax cuts are positive incentives for people to work harder or earn more money. Tax increases are negative incentives for people to work harder or make more money (because it means you keep less of what you earn).Interest rates – low-interest rates are an incentive for consumers and businesses to borrow more money and spend it on consumption or investment; higher interest rates make borrowing more expensive, so less spending. The principle is imperfect as people don’t always make decisions based solely on monetary considerations — sometimes, they are motivated by other values like altruism or adhering to social norms.
The principle requires that people have complete information and accurately predict how their actions will affect their lives in the future. Often that’s not possible, especially when making predictions about complex systems like economies. People respond to incentives because they have preferences. Whenever preferences change, people will change their behavior. If people’s choices are stable, it can be predicted how they will react to incentives by understanding how their benefits and costs will be affected by a given change in policy. It allows us to use economic analysis to predict how policy changes will affect behavior.
- Prices rise when the government prints too much money. Economic principle
Printing too much money is a problem for many reasons. The rise in prices is known as inflation, and a high level of inflation can damage the economy. Inflation is a general increase in the price level. In other words, it is a sustained rise in prices across the economy. If one goes back to the late 1990s, one will see that a loaf of bread cost about $1.50. Today it could be $3 or more. A gallon of gas cost around $1.10 in the late 1990s. Today it could be $2 or more. In other words, prices have increased over time. The problem with inflation is that it erodes your purchasing power. Let’s say an item costs $1, and you have $1, you can buy that item and still have some money leftover (a nickel). However, if the price of that item rises to $3 and you only have $1, then you can’t afford that item anymore. Inflation essentially takes away your purchasing power because your dollars become worthless over time.
Inflation also causes uncertainty in the economy because people don’t know what things will cost in the future or how much their wages will rise to compensate for inflation (Andre, 2021). This uncertainty discourages people from spending money on large items like homes and cars because they aren’t sure what their income will be like in the long run. The United States uses a central banking system called the Federal Reserve System, or simply the Fed
(Fernández-Villaverde, 2021). The Fed has many purposes and functions, but most importantly, it serves to curb inflation and keep the economy stable. The Fed creates this stability through its money supply and interest rates policies. Monetary policy is essentially how the Federal Reserve controls the money supply within the economy. This monetary policy stabilizes prices and money supply through managing short-term interest rates. For example, when inflation begins to rise, the Fed will raise interest rates to discourage borrowing, decreasing consumers’ money supply.
The leading cause of demand-pull inflation is expansionary fiscal policy – higher government spending or lower taxes increase demand in an economy and shift AD to the right; if AS is relatively fixed in the short term, then this leads to higher economic growth and increased pressure on resources causing firms to raise their prices. Thus we get rising aggregate demand leading to demand-pull inflation.
Analysis
How much would you pay for a glass of water? It depends on the circumstances. At home, you wouldn’t pay much. It may cost a dollar or two at a restaurant or bar, depending on where you are and how thirsty you are. In the Sahara desert, however, you’d probably pay as much as your wallet could hold for a bottle of water. Even though it’s the same substance sold in different quantities, people have different value perceptions of water in different situations. That’s because they’re making their purchasing decisions based on the marginal benefit they expect to receive from the transaction — they weigh what they will gain against the amount they must spend. When people make financial decisions that involve spending money, they do so at the margin. This fundamental economic principle helps them understand why people make confident choices when faced with different financial situations and options.
When people make decisions, they weigh the benefits of an action against the costs.
They compare taking action (incremental benefits) to taking action (total costs). These other benefits and costs are also known as marginal benefits and marginal costs. For example, suppose one think of buying a book at a bookstore. The first book they buy is $25. They think it is worth it, but they can’t compare the cost to any benefit if they don’t have any books yet. But suppose they consider buying a second book — another $25. Suppose that this second book adds more benefit than the first one did. Then the marginal benefit of their second book exceeds the marginal cost, and it makes sense to buy the second book too. However, suppose that this second book adds less benefit than the first one. Then the marginal benefit of their second book is less than the marginal cost, so you shouldn’t buy it.
The way people behave in a particular situation is influenced by their desires and how their actions will bring about the outcomes they want. People are known to be self-interested, so their decisions will be based on how it benefits them. When people have a particular incentive, they will always decide or act to bring them closer to achieving their goals. Incentives don’t just push individuals but also businesses and companies towards working harder to achieve the desired results. For example, major companies like Apple use incentives such as bonuses and extra compensation for employees who can meet deadlines or perform better than they were expected. This makes them feel appreciated, encouraging them to work harder to get promoted or get more bonuses. The second economic principle is rational people think at the margin. People do not usually make decisions based on all of their options but instead, make decisions based on each option available for every decision one at a time.
Synthesis/Integration
The United States economy has many strengths and weaknesses that help drive the economy. The economy is directly affected by factors such as unemployment rate, inflation rate, gross domestic product, interest rates, and purchasing power (Leasiwal, 2021). Major events can affect the U.S. economy positively or negatively. These events can be traced back to economic principles, which are discussed in this paper and will be used to write ideas for improving economic principles. According to the principles of classical economics, in a free market economy, the government should not intervene in any way with the market.
The free market should adjust itself to achieve long-term economic growth and correct any short-term fluctuations. In a perfect world, there would be no need for government intervention. The problem is that we do not live in an ideal world. Although the market’s invisible hand is supposed to regulate itself, it does not always work this way. The government must step in and bring order back to the market. Although taxes are often thought of as unfavourable, they can positively impact the economy by creating demand and increasing supply.
Conclusion
Economic principles are everywhere even when we don’t believe they exist, especially in our day-to-day lives. Enjoyment and cost, risk and reward; so many things can lead towards wealth and success. And while the economy is something that happens all around us, it might not be the only factor in how one becomes wealthy or successful. Economic principles are only but a procedure to determine an action which is considered cost effective. The importance of economic principles can be seen in almost all aspects of today’s society. Although, economic principles on one hand provide a more efficient process for the management of resources and limited supplies, this principle can also become a barrier that inhibits organizational growth and overall success if it fails to recognize importance of other variables such as culture and societal values. This is not to say that there should be compromise on economic principles, but introducing a little flexibility could enhance the efficiency of organizations by reducing costs and waste from unnecessary redundancy.
Reference
Andre, P., Haaland, I., Roth, C., & Wohlfart, J. (2021). Inflation narratives.
Fernández-Villaverde, J., Sanches, D., Schilling, L., & Uhlig, H. (2021). Central bank digital currency: Central banking for all?. Review of Economic Dynamics, 41, 225-242.
Leasiwal, T. C. (2021). A Longitudinal Analysis Of The Effect Of Wages, Inflation, Economic Growth On Unemployment Rate In Maluku Province, Indonesia. International Journal of Entrepreneurship, 25, 1-11.
Schubert, A., Glänzel, W., & Schubert, G. (2022). Eponyms in science: famed or framed?. Scientometrics, 1-9.
Sepulveda, C. F. (2020). Explaining the demand and supply model with the cost-benefit rule. International Review of Economics Education, 35, 100194.
Vlaev, I., King, D., Darzi, A., & Dolan, P. (2019). Changing health behaviors using financial incentives: a review from behavioral economics. BMC public health, 19(1), 1-9. https://www.uopeople.edu/blog/economic-principles/
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