Economics
Opportunity Costs
Opportunity costs can be defined as the best alternative between two mutually exclusive choices. The relationship between the two choices if fundamentally between scarcity of economic resources and the availability of choice. This means that opportunity costs are not just financial or economic; they also include forgone pleasure, social change and lost time. In the example provided, the free tickets represent an economic and pleasurable opportunity for the individual. However if the person was to engage in some activity on the same weekend such as studying or working, going to the football game means foregoing the time available to study and therefore falling behind on assignments and notes. This means that on return you will have to put in more effort than the others in studying. So taking the opportunity to enjoy the free tickets costs time and effort, and the opportunity to earn more money by working. Combining this costs one may consider the tickets costly.
On the other hand the other hand refusing the tickets means that the individual will not engage in what he considers an enjoyable spot. He will loose the pleasure of being in the midst of other cricket lovers. The possibility of the individual accessing the tickets ever again is low, so he looses on a once in a lifetime opportunity.
Scarcity Of Resources
Scarcity of resources can be defined as the existence of human needs and wants or demands for a product or service that seem unlimited compared to the resources available to fulfill them, (Sowell, 2007 Pgs 14 & 15). The united states has been producing an increasing number of high school; graduates, yet the universities are not increasing at the same rate. This means that some students do not get the opportunity to enter the campuses.
Universities have all sighted lack of proper staff, lecturers and professors as the reason why some competitive courses are not included in the curriculum. The university may be willing to include some courses in their outline but lack of teaching staff means that the courses have to be done away with.There are some courses that require special resources in learning institutions such as labs and training equipment. Lack or scarcity of such requirements means that the courses may not be offered. For example forensic science courses and medical courses require resources that some universities cannot afford; therefore they do not offer the courses. For those that offer the courses, the resources are not enough for all who want to participate; therefore the chances of pursuing these courses are for few very competitive students.
It may not seem like a big issue but is the courses offered by a campus are on high demand, the university requires rooms that can fit the increasing number of students. If such rooms are unavailable then the course either begins setting high requirements to cut off some students or the university divides the students to groups. The latter resolution may be difficult because it requires more staff lecturers and professors. Lack of qualified staff, rooms and equipment are just some of the few forms of resource scarcity faced by universities when considering the courses to offer in their curriculum.
Market Equilibrium
A market equilibrium is created when the quantity of goods and services demanded is equivalent to the quantity of goods and services supplied. It refers to a state where the competition forces in the market are what determine prices without the influence of external forces. The demand of a product refers to the amount of goods that consumers are willing to purchase at a certain price. If consumers at one point or another due to some external reasons and forces begin demanding a certain product, the demand goes up. Sometimes the demand may be more than the supply in which case suppliers often increase the prices of goods. As the demand goes higher the prices also go higher. Once the demand goes down however the prices also change drastically. If the market prices are left to determine themselves then price fluctuations will be high.
Ping (2010), economists have offered solutions that included producing surplus goods that are in turn let in to the market for high demands and buying off surpluses for storage when demand is low. This keeps the question of price fluctuation at bay (Pgs 53). Sowell (2007) industries sometimes set price regulators, deciding how high prices can go during high demand and how low the price can go when the supply is too high, (Pgs 16). McGuigan, Moyer and Harris (2007), it is important for suppliers to be sensitive to consumer demands. Once demand increases the supply should increase at a steady pace so that goods do not flood the market causing serious price drops. In the same way once demand starts decreasing, suppliers should start decreasing their supply at steady paces. This means that at any one time the demand and supply of goods will be as near to equilibrium as possible.
Price Elasticity
Cars and bicycles: the elasticity of price in the cars and bicycles is slightly greater than zero. Although the demand for cars has increased, their maintenance and affordability has decreased, therefore the high demand has been brought lower by the price of maintenance and purchase. Bicycles on the other hand have increased demand because of their ability to transport and provide exercise. However people living in large towns and cities find them inconveniencing therefore again bringing the demand a percentage lower.
Metros and Barinas: the demand for metros and brains has remained pretty much the same although it is steadily increasing. However the ability of the metro for example to serve many people has reduced and equalized the demand that comes from people abandoning private cars which are costly to maintain. This brings the price elasticity to zero.
Cars and petrol: the elasticity of the cars and petrol is slightly greater than zero. The supply for petrol sometimes is very low which means that prices increase constantly. The price fluctuations are usually very high. The demand for petrol goes hand in hand with the prices of cars, the higher the price for petrol, the lower the demand for cars.Sugar and cars: both are elementary products today. The price elasticity is slightly less than zero. The demand for cars is mostly affected by the maintenance and purchase costs, while the demands. The demand for sugar and the prices thereof have also been affected though slightly by new health diets that offer alternatives to sugar.Cars and trips to Perth: the price elasticity of the two products is zero. This is because they are considered luxuries and their demand rarely exceeds the supply.
Law Of Demand And Income Effect
The law of demand is referred to as an economic law that states that consumers but more goods when the prices are lower and that the purchase or market of goods decreases significantly when the prices increase. The consumers demand for a product is determined by its price and other factors. For example the demand for the product is clearly determined by income and affordability. The ability of a consumer to afford a product comes from the income they possess. How much do they earn? And of that amount how much can they spare for the goods?
The income of an individual provided them with the power to purchase. Evans, Foxall and Jamal (2009), the amount of income received by an individual for services provided determines closely what the individual is able to afford and the amount they can afford. In turn this determines the price of a product by setting the demand. The income of a person will determine the type of product they can afford, the amount of the product they can afford and the number of times they can afford the product.
Chen (2010) if the people have low incomes, they are unable to purchase the products that they want. Of the most affected goods are the luxury products. The income determines the living standards of people and the goods they can afford. If people have low income they are unable to afford luxury products such as cars and holiday services. This in turn reduces the demand for such goods and services.
Income can be used to determine the price elasticity of goods. By understanding the average income of targeted consumers, a company or manufacturer can easily determine what the target market is and what they can afford. Through this the manufacturer can predict the demand for products and match these with the supply in turn manipulating the price. In the same way manufacturers can predict income increases and as such reduce supply for a product that will be in demand therefore effectively causing the price increase.
However, though people may have high incomes, the affordability of a product may also be influence by its importance. The basic needs goods are rarely affected by the income of people. The income of people only affects goods that are not luxury.
Substitution Effects
Chen (2010), a substitution effect is where a consumer creates a substitute for a product or service following price changes. The consumer will always look towards lower prices. If the consumer is given a substitute for a product that is lower in price then the consumer demand will shift towards the new substitute product even though it may be of lower quality. The substitution effect normally comes to affect a normal good.
For example if consumers are using a liquid toilet cleaner, whose price suddenly increases becoming a bit higher. The consumers may shift towards the purchase of solid toilet cleaners and scents which although maybe of lower quality are cheaper. The result is that the demand for liquid toilet cleaners goes lower and may infact have to be reduced, while on the other hand, the demand for solid toilet cleaners becomes higher.
MC and AC
- marginal costs and average costs are determined by the resource supply. For example if a company invests its resources in manipulating the price through increasing demands it follows that profits will be higher. In the same way advertising resources will create an open opportunistic market and increase the demand for consumer products which in turn increases the market. Increase in demand means that the market price is also increased and as such the profit from the product.
The average cost is determined through the market price and the demand for the product. Products in high demand are often sold at higher prices. The result is that the profit significantly improves and the company enjoys high priced goods. However the theory does not take into account external forces that may influence the profits of a company such as the presence of substitute goods.
P and MC
Profit maximization is determined by marginal costs. The only problem with these assumption is that there is a general assumption that the costs incurred is fixed and that profit is determined through competitive markets. Although marginal costs may be infact fixed such as through rent, wages and maintenance, there are other costs that may not be easy to determine such as office expenditure. The result is that if companies and manufacturers determine price through marginal costs, the profits will be severely affected. Friedman (2009), prices set through marginal cost theory have less success than others in the field. Manufacturers set what they think will be the best price to maximize their profit but the profit is significantly reduced by other costs that were not accounted for and that were lower when pre-determined.
It is therefore more advisable to collect and research the demand for a product widely before embarking on profit maximization strategies.
References
Chen Ping (2010). Economic Complexity And Equilibrium Illusion: Essays On Market Instability And Macro Vitality, (Pgs 53-56). New York, Routledge Publishers.
Evans Martin, Foxall Gordon And Jamal Ahmed. Consumer Behavior. New Jersey, John Wiley And Sons.
McGuigan James, Moyer Charles And Harris Frederick (2007). Managerial Economics: Applications, Strategies And Tactics. Oklahoma, Thomson Corporation.
Sowell Thomas (2007). Basic Economics 3rd Edition: Common Sense Guide (Pgs 14-18). New York, Basic Books.
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