Understanding 5 Concepts of Economics Via Real Life Examples
Supply and Demand
One of the most important and basic fundamentals of economics. The relationship between supply and demand results in many decisions like a price of an item. This principle is used to understand and learn about allocating and generating resources in the most practical and productive way.
Example for supply:-
Example for supply:-
- Banana fruits are extremely ample through the span of the year and there is more banana than individuals would ordinarily purchase. To dispose of the overabundance supply, agriculturists need to bring down the cost of banana fruit and in this way, the cost is driven for everybody.
- During dry spell/draught which takes place in India every year. A larger number of individuals need the particular crop. Let’s consider for Maharashtra i.e. soybean. The cost of soybean increments significantly.
Example for demand:-
- Michael Jackson died in 2009. According to Forbes, the artist still comes under top-earning dead celebrities. Interest for his music has been incremented considerably because of rarity and exceptional. Since the demand for his music is increased hence Sony still produces his unreleased songs.
- When the availability of OLAcab in a certain place is low but the number of reservation is more from that place then demand goes up and the price for cab hikes.
The Law of Diminishing Return
The total output initially increases with the increase in variable input like labour, material, inputs and energy at a given time but after some duration, it starts decreasing.
Example:-
- Your first chomp of a dessert may taste delicious. Consequent chomps may taste more pleasant. Be that as it may, subsequent to eating a specific sum, the dessert doesn’t taste as delicious as it was before. Keep eating and soon you fell rebuffed by it!
- If you amend and optimize any work you get diminishing gains. Invest more energy and you get negative returns. Over-tweaking diminishes as opposed to enhancing the work.
Economic Efficiency
Sir Peter F Drucker (1901-2005) defined Economic efficiency as doing things right. Getting the maximum output with minimum input by taking into consideration the present state and focus on the process & work with consistency.
Example:-
Efficiency= Output/Input
SHOP 1 is more efficient i.e. least amount of wastage
Production Possibility Curve
Production Possibility Curve is the conceivable trade-off of creating blends of goods with consistent innovation and assets per unit time.
Example:-
- Imagine an electronic company. Let’s put the principle of Bread Vs Tablet. To produce 50 tablets, we give up 500 pieces of bread. Production of each tablet consumes a certain amount of bread. We have limited resources and we need to use that effectively to obtain a maximum quality. The number of bread is used on workers so the quantity of bread decreases and the quantity of tablet increases exactly an inverse relationship. The graph curve indicates the best production possible for two commodities. If the workforce is mediocre then instead of the curve we will get straight line i.e. first end line at 500 bread and another last end of a line at 50 tablets. Using highly skilled workforce makes the output more efficient and result in the formation of a curve instead of a straight line.
- Suppose I want to feature sets of T-shirt as a giveaway on my YouTube channel. This given chart shows my production possibilities. It shows me the different combinations of T-shirts and videos I can make using all of my resources. It’s showing scarcity, trade-offs, opportunity costs and efficiency. It shows the idea of scarcity because videos on T-shirts cannot be produced anywhere beyond the curve. The graph shows trade-offs because if I decided to start producing videos, I have to give up T-shirts. Opportunity cost is shown by a specific number of T-shirts I give up when I make a video. If I use my resource as fullest the graph will form a curve and this is the idea of the law of increasing opportunity cost. Remember: a straight line production possibilities shows constant opportunity cost and a bowed-out curve shows the idea of increasing opportunity cost.
Externalities
Externalities are defined as the 3rd party effects that arise from the production and consumption of a good for which no compensation is paid. Externalities can be either positive or negative.
Example:-
Negative Externality
- Negative externality in production. If your house is next to a factory there will be air, water and land pollution.
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| Image Source Wikipedia |
- Negative externality in consumption. Every day when people use their cars they incur private costs like the cost of petrol, wear & tear and so on. Third party effects would be non-user suffering from car exhaust congestion and noise.
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| Image Source Wikipedia |
Positive Externality
- Positive externality in production. Wadhwani foundation tie-up with IBA Bangalore & IBA student's have access to all the entrepreneurship courses, so the benefits of course, extend beyond the firm that finances it.
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| Image Source Wikipedia |
- Positive externality in consumption. Our education provides a no. of benefits. Student receives the private benefits of higher potential income in future. External benefits include an increase in occupation mobility of the labor force which should help to reduce welfare spending.
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| Image Source Wikipedia |
Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life.
~Tyler Cowen
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