Economic Examples

Examples of Economics

The following economics example provides an outline of the most common economic factors and systems. It is impossible to provide a complete set of examples that address every variation in every situation since there are hundreds of such economic theories and factors. Each example of economics states the topic, the relevant reasons, and additional comments as needed

Economics is a branch of social sciences that studies the forces that determines the optimum use of scarce resources. It is a process whereby the strengths and weaknesses of an economy are analyzed. The study of economics is concerned about each and every factor and entity that contributes to and benefits from society, where factors include product distribution, as well as consumption of goods and services and entity, involves individuals, business entities, governments and also nations.

Since the resources are scarce, the entities need to organize and coordinate their efforts in order to properly allocate the available resources to reach maximum satisfaction.

Let us discuss the Top 5 real-world examples of Economics –

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Real World Examples of Economics

Economics can be better understood using some general or real-world examples:-

Example #1 – Supply and demand

This example of Economics is the most basic concept of free-market economics that helps in determining the right price for a good or service. E.g. a startup company wants to introduce a fresh product into the market and wants to find the right price for its product. Let’s say the product costsProduct Costs Product cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.read more $100 to the company and the production capacity is 5000 units. So the company surveyed to measure the demand for the product at different prices as shown below and calculates the profits.

We can see in the graph that demand decreases upon price rise.

The best price is $190 where the company makes the highest profits.

Example #2 – Opportunity Costs

When a particular course of action is chosen by forgoing other is referred to as opportunity cost. i.e. when you choose something, you have to pay the cost of not choosing the next best alternative. E.g. let’s say Martha has $20000 that she could either invest in fixed deposits, earn an annual return of 10% compounded annually, or use the amount for higher studies. Martha chose to invest the money in her studies. The opportunity costOpportunity Cost The difference between the chosen plan of action and the next best plan is known as the opportunity cost. It's essentially the cost of the next best alternative that has been forgiven.read more is the 10% return (that gets compounded annually).

Example #3 – Sunk Cost

Sunk costSunk Cost Sunk costs are all costs incurred by the firm in the past with no hope of recovery in the future and are not considered while making any decisions since these costs will not change regardless of the decision's outcome.read more cannot be recovered back. It is an irretrievable cost. E.g. a pharmaceutical company wants to launch a new medicine. It spends $.5 million to conduct research and development programs for their new product. The study says that medicine has multiple side effects and hence cannot be marginally produced. The $5 million spends on R & D is a sunk cost and it should not affect the decision making.

Example #4 – Law of Diminishing Marginal Returns

It says that at a certain point, employing an additional factor of production causes a relatively smaller increase in output.
Example of Economics – John a soybean farmer decides to apply the law of diminishing returnsLaw Of Diminishing Returns The law of diminishing returns refers to a state when the manufacturing process reaches an optimum level. Any increase in the input will no longer increase the marginal quantity of output. All other elements are assumed to be constant in this law.read more to measure the number of fertilizers to be applied on its farm. He finds usage of fertilizers will definitely inflate the production up to a certain limit after which the productivity begins to fall because extensive use of fertilizers makes the crop poisonous.

John makes an economic analysis and tables down the following result:

As we can clearly see the usage of fertilizers increases the productivity of soybean crops. The marginal production starts to diminish upon using 30kg fertilizer adding 10kg more cause production drop from 170 to 90 tons. However, the total soybean production continues to increase till 50kg fertilizers after which John observes fall in returns and thus marginal returns become negative.

Example #5 – The Trade War

When a nation in order to protect its domestic industry and create jobs, starts imposing higher tariffs or raises its current tariffs (taxes imposed while importing goods and services) on a particular exporting country and the other (exporting) country retaliate by raising tariffs on imports by the former country, the conflicting situation thus created is referred as a trade war.

The US-China trade war is the hottest economical issue worldwide where the USA initiated a series of protectionist measures and China retaliated back. The economic war between the two large economies does not just affect their own economy but has greatly influenced the global economy.

Some facts about the two nations:-

Exports

According to Wikipedia in global exports, China ranks first with $2.3 trillion export value followed by the USA with the second rank.
The largest importer of Chinese products in the USA with an import value of $539 billion
While US exports to China amounted $120.3 billion only

GDP

USA is the largest economy of the world with a GDP of $19.39 trillion.
China with exponential growthExponential Growth Exponential Growth refers to the increase due to compounding of the data over time and follows a curve representing an exponential function. Exponential growth formula: Final value = Initial value * (1 + Annual Growth Rate/No of Compounding ) No. of years * No. of compoundingread more over past decades stands next to the USA with a GDP of $12.01 trillion.

Impact on Economy of Rival Counties

Due to high tariffs, the prices of imported goods increases which decreases the demand. With low demand, supply reduces which results in low production. Due to low production, the cost of production rises that again inflates prices. Employees lose their jobs creates unemployment.
The overall GDP depends on both domestic sales as well as exports. Domestic production decreases because required goods are available at high rates and export decreases because other countries also increase their tariffs that decrease the demands. Thus GDP decreases.
Due to financial distress in the country, federal banks increase interest rates under its monetary policies to manage GDP decline, price rise, and inflation conditions. Higher interest rates increase the cost of capital to businesses.
The stressful economical condition creates uncertainty among investors (both domestic and foreign) to wait some time and look for future opportunities. Thus investments decrease.

Impact on the Global Economy

According to the IMF, the expected world economic growth will fall from 3.9% (as previously predicted) to 3.7%.
Both American and Chinese economies have to face significant falls. As per IMF, the Chinese economic growth might drop from 6.2% to 5.00%.
Inflation in Venezuela (a country under economic and financial crisisFinancial Crisis The term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more) may hit 10-million-% next year.
IMF warned US-China trade war is making the world a “poorer and more dangerous place”

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Economic Examples