Ten economist, part of their language is “Supply, demand,

Ten Principles of Economics and the
Data of Macroeconomics

This report is developed to assist
the members of the strategic planning committee to become familiar with current
economic principles and thoughts. Our CEO is asking that explanation be given
to the thought that economists are both scientists and policymakers. Another
area that will be addressed is what principles society uses to allocate scarce
resources.

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Economists
are both scientists and policymakers

Economists
are considered to be scientists, because they create models, as well as
hypotheses, that can be analyzed by using facts. They spend a great deal of
time similar to a scientist collecting and analyzing data to prove theories. To
think like an economist, part of their language is “Supply, demand, elasticity,
comparative advantage, consumer surplus, deadweight loss” (Mankiw, 2015). Economists
form predictions when they create models and analyze data. This data helps
economists explain why people do what they do. These predictions are not always
accurate or correct. When economists are needed to find a way to improve
policies pertaining to economic results, they are considered policymakers. The
results of the economic study influences policies that are made. For example, if prescription drugs
that are addicting are taxed, will this affect the consumption to help prevent
addiction. If this data would prove positive results, policymakers would set a
new policy and start taxing these drugs.

Principles
society uses to allocate its scarce resources

Another
thing economists study is the allocation of scarce resources. This is called
economics. Scarce resources means there is limited availability to fill human
wants and needs and economists study how people make their decisions. The
decisions pertain to how they save, how they invest their savings, how much
they work, and what they buy. When economists study the interaction of this, a
price can be determined to sell a good for, as well as the quantity needed.

There
are ten principles of economics but society and economists use the first four
to determine allocation of scarce resources. The first principle is Trade-offs.

This is when something that you like is given up for something else that you
like. In order to make a decision, trading one goal for another is necessary.

As an example, a mother wants to spend as much time with her baby as possible, but
every hour she spends with her child is an hour less she has to do something
else.

The
next principle is The Cost of Something is What You Give Up. This is when a
decision is made after comparing the costs and benefits of different choices.

Economists use this principle to decide what to sacrifice to acquire the item
they want. As an example, more things could be purchased if they cost less
verses purchasing one thing that costs more.

Rationalization
is the third principle that society and economists use. This is when people
thoroughly and with determination do the best they can to reach their idea.

“Rational people systematically and purposefully do the best they can to
achieve their objectives, given the available opportunities” (Mankiw, 2015).  As an example, someone may want to buy a
specific item or save for a vacation so they will work extra hours to have the
money to reach their goal.

The
fourth principle is People Respond to Incentives. This is when someone reacts
because a reward is being offered or they are avoiding punishment.

“Incentives are crucial to analyzing how markets work” (Mankiw, 2015).

As an example, when gas prices rise people drive less and consume less. When
prices are lower, people will use more and drive more. Behavior is altered when
people face changes in costs and benefits.

Circular
flow model

The
economy has two key participants, households and firms. A circular flow chart
is used to provide a visual to simplify how the economy works. Millions of
people work, manufacture, buy, sell, hire, etc. and households and firms
interact with one another when people engage in these activities. When looking
at the flow chart, it shows two things: the flow of dollars (outer loop) and
the flow of inputs and outputs (inner loop). Inputs are things such as labor,
land and capital used for the production of goods, and outputs are households
selling the use of their labor, land or capital to firms.

The
inner loop shows the cycle of how the market for goods and services relate to
the market for factors of production. Firms produce and sell goods and services
for households to buy and consume. To meet the market demands and the
production of goods and services, households will sell factors of production
and firms will hire and use these factors. In this instance, households are the
sellers and firms are the buyers. Once the goods and services are produced,
they go into the market to be bought by the households. In this case, the
households are the buyers and the firms are the sellers.

The
outer loop shows the flow of money. The household will spend their money which
turns into revenue for the firm. The revenue for the firm is used for wage,
rent and profit. This revenue provides the source of income a household needs
to survive and have to put back into the economy. The circular flow chart is a
very simply diagram, but it shows how the economy is pieced together. The
economy works by supply and demand. The demand for a product is determined by
the buyer and the supply of the product is determined by the seller.

How
does the economy coordinate society’s independent economic actors

There
are four economic actors that interact in the market. These actors are
household, firms, government and the rest of the world. Households do two
essential things for the economy. They demand the goods and service and they
supply the labor, capital and land. Firms are the providers of goods and
services. The government plays a part by establishing regulations and enforcing
the rules that are set to make sure all actors benefit. The rest of the world
is everything else that can affect the economy. As an example, having cold
weather in warm states that produce fruit affects the economy. The cold weather
limits the availability of the crop, which increases the price.

Gross
Domestic Product (GDP)

Society
will use a method called the Gross Domestic Product or GDP to coordinate its
independent economic actors. The GDP calculates everyone’s income in the
economy to determine how well the economy is doing. This is done by looking at
the total income and the total spending on the economy’s output for services
and goods. Economist will study the various mechanisms of GDP. Gross Domestic
Product consists of consumption (C), investment (I), government purchases (G)
and net exports (NX). To calculate GDP the formula used is GDP = C+G+I+NX. All
of these figures are obtained and put into the calculation.

Consumer
Price Index (CPI)

Another
measurement that is important to the economy is the Consumer Price Index (CPI).

This measures, in general, the cost of goods and services a usual consumer has
purchased in each home. It monitors the changes of cost of living over time. It
is calculated by (1) find the price of a single item that was purchased in the
past (pick a year that will be considered the base year (2) find the current
price of the same item (keep in mind that the consumer buys goods and services
at a different point of time so it is important to find the new price at that
same point in time (3) divide the current price by the base price (4) multiply
the results by 100. To determine the rate of inflation from the previous year,
subtract 100 from the results in step 4, then multiply that answer by 100.

The
CPI is an imperfect measurement of the cost of living. Substitution bias is the
first problem. Prices do not change in a balanced way and consumers will buy
less of goods that have risen a large amount and substitute for something less
expensive. Consumer substitution is not considered in the calculation. The
second problem is the introduction of new goods. When new goods are introduced,
it creates more choices and reduces the cost of keeping the same level of
economic well-being.

Conclusion

The
strategic planning committee should take what has been talked about in this
paper very seriously. Economics is part of everyday life. The research that
goes into economics has proven to be helpful to identify and understand causes
of current economic situations. This information should help you become
familiar with current economic principles and thoughts.

 

 

 

 

 

 

 

 

 

 

Reference

 

Mankiw, N. Gregory (2015). Principles of Macroeconomics (7th
ed.). Stamford, CT: Cengage Learning

 

 

 

 

 

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