Complex Web of Macroeconomics: Navigating Scarcity, Equilibrium, and Choice
Introduction:
Economics is part of our everyday life. Even though we do not notice, many actions and decisions we take are related to economics. Our need for goods often exceeds the actual things that we are able to attain. All of us, rich, poor, or wealthy, live in a state of scarcity. The poor need more than what they have. They need shelter, clean clothes, and food. The middle class, even though they are able to get what the poor don’t have, they try to collect wealth to get more things that they want, like expensive clothes, properties, and vacations. The rich, on the other side, want to get richer and get things that they don’t have. And even though they have wealth in abundance, they still wish to get some other things they are not getting at the time being.
Microeconomics and the Division of Labor:
Division of labor, an idea first introduced by Adam Smith, has to do with specializing the employee at a certain task so that the worker can become trained and focused on his or her duty without being overwhelmed with multiple tasks so he or she can produce more of that specific article. By specializing in different employees to produce specific parts of a final product, the production of the merchandise will increase significantly compared with the case where one employee produces it himself or herself from A to Z.
Macro vs. Micro: A Tale of Scales:
Microeconomics has to do with personal and family spending. It has to do with employees and businesses at a minor level. Macroeconomics is the field of study that focuses on how the economy of the entire population and the country is doing. The entire production with exports and imports. Comparing Microeconomics with Macroeconomics is like comparing an apple tree with its ruts, trunk, branches, leaves, and fruits being Microeconomics with all the apple trees of a huge plantation being Macroeconomics.
Economic Systems:
Scarcity’s Architects:
Economic systems are organized differently. One of them, and the oldest, is the traditional economy. In this group, we notice that society tries to be self-sufficient in production and consumption. They keep their skills and production methods internally by inheriting generations. This method nowadays is found to be used mostly among farmers. Another type of economy is the command economy. In this system, the government or the ruling power sets up the rules and objectives to be reached by the economy. They set up production goals without being influenced by business free will.
What is going to be manufactured in the fabrication business, what kind of crops should be produced, and also, they make trade agreements with other countries for import exports. This kind of economy is established today among communist countries. On the other hand, the market economy is based on business free will. Entrepreneurs produce what sells mostly. Goods manufactured or produced in agriculture, imports, and exports depend on demand and supply. The government has a minimum intervention. The US economy leans toward a market economy even though it has some rules similar to the command economy imposed on business.
Opportunity Cost and Consumer Rationality:
In our everyday lives, we face moments where, due to scarcity, we have to choose between the goods that we need and the most important ones. If there was no scarcity, we could afford all the things we might think of. This statement stands not only for good but also for services and activities in our lives.
For example, A family of four has a budget constraint of $4,000.00 net income a month. Among their spending, they have $2,200.00 in rent, $500.00 in car spending, $200.00 phone bills, $100.00 TV and internet service, an average of $100.00 ConEdison bill, and on top of all this, they spend about $900.00 on grocery shopping. In addition to this spending, they wish to go out for dinner once a week. They also want to take a $5,000.00 vacation once a year. In order for this family to afford other wishes, they have to give up their basic expenses. So, they might have to give up car spending in order to have enough money for dinner out and vacations. The above-mentioned choice is what the economist calls opportunity cost.
From another point of view, if this family decides to give up the car payments and, with the money saved, go out every other night for dinner. The first dinner out gives much more pleasure than the other upcoming dinner out. This is what is called the law of diminishing marginal utility. So, in their best interest is to choose fewer dinner outs and have some money left for vacations.
Some of the spending we make cannot be recovered. For example, If we go on vacation in a beach resort and, unfortunately, we get rain most days. We face the decision to stay until the end of our booking or go back home. Our spending, which is gone and cannot be regained, is called sunk cost.
Government Intervention and Equilibrium:
Similarly, with individuals or families, society as a whole can not have all it wants. In the face of scarcity, they have to make choices. For the government of a country, there is a specific amount of money collected from taxes and natural resources that will be spent on goods for the society. The government has to choose, among others, to spend more on the army or infrastructure. The opportunity cost, in this case, has restrained their spending, and the ruling power has to choose which one is more needed in order to allocate the larger amount of money.
“Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price.”
Demand is strictly related to price. When the price is high, the quantity demanded is low because people are not able to afford the goods at that given price. When the price is low, the quantity demanded is high. For example, when the market has seasonal fruits and vegetables that come from local farms, the prices are low, and people buy more than when the price is high. In this case, we have an excess in demand.
On the other side, producers supply different amounts of goods for a given price. Let’s take the example of airplane tickets. If we check the prices offered by airlines, we will notice that the price of tickets is more expensive during the summer and holiday season than during other periods of the year. This is due to the high demand in this period. People, especially families with children, travel mostly during holidays to join their families for celebrations and during summer when children are off school for summer vacation.
When the demand is high, the prices increase. In addition to that, when the price is high, we notice that the airlines increase the supply by adding extra flights. In the case the airline continues to supply additional flights during the off-season when the quantity demanded has decreased, we will have an excess supply. If the excess supply tickets do not sell, then the airline will not be able to pay its employees and make a profit. This is why the companies try to keep their production within the equilibrium.
But there are some other factors that change the equilibrium. For example, if the weather is good, the production of vegetables is higher than usual; when the price of gas is low, the cost of transportation is lower, and with these two factors, we will have a higher equilibrium quantity for vegetables supplied.
Conclusion: Mapping the Economic Realm:
On some occasions, we see the intervention of the government to control the prices of certain goods. The ruler sets up a price ceiling to prevent the increase of the price above a certain level so the population can afford to buy that particular good. For example, the government sets up a certain price for heating oil so the population can afford to buy this necessity. Also, the ruler sets up the price floor to aid the population, like the movement that is going on today in the USA about minimum wage. Even though in disagreement with businesses, the government of some of the US states has decided to set the minimum wage at $15 per hour in order to aid this class of population in affording a decent living.
References:
- “Macroeconomics” by G. Tyler Miller and Kristin L. Pitt, OpenStax, CC BY 4.0: https://d3bxy9euw4e147.cloudfront.net/oscms-prodcms/media/documents/Macroeconomics2e-OP_08uAIKN.pdf