Examples of Economics
The following economic example outlines the most common economic factors and systems. It is impractical to provide a complete specimen set that addresses every variation since hundreds of economic theories and factors exist. Instead, each economics example states the topic, the relevant reasons, and additional comments.
Economics is a branch of social sciences that studies the forces that determine the optimum use of scarce resources. It is a process whereby the strengths and weaknesses of an economy are analyzed. The study of economics concerns every factor and entity that contributes to and benefits society. Factors include product distribution and consumption of goods and services and organizations, which involves individuals, business entities, governments, and nations.
Since the resources are scarce, the entities need to organize and coordinate their efforts to allocate the available resources to reach maximum satisfaction.
Let us discuss the top 5 real-world examples of Economics: –
Table of contents
Key Takeaways
- The economic example shows the most prevalent economic systems and factors. As hundreds of economic theories and influences exists, it is impossible to present a complete specimen collection that addresses every variance. Instead, each economics example contains the subject, pertinent justifications, and further comments.
- High tariffs increase the prices of imported goods, decreasing the demand. Moreover, with low demand, supply reduces, which results in low production. As the production is low, production costs rise, again inflating prices. In addition, employees losing their jobs creates unemployment.
- The harsh economic condition creates uncertainty among investors (both domestic and foreign) to wait some time and look for future opportunities. Therefore, investments decrease.
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Real-World Examples of Economics
EconomicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society.read more 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 determine the right price for a good or service. E.g. a start-up company desires to introduce a fresh product into the market and wants to find the right price for its creation. The product costsProduct CostsProduct 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 5,000 units. So, the company surveyed to measure the demand for the product at different prices, as shown below, and calculated 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.
We can see in the graph that demand decreases upon price rise.
The best price is $190, where the company makes the highest profits.
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Example #2 – Opportunity Costs
When a particular course of action is chosen by forgoing, another is referred to as opportunity cost. i.e., when you select something, you have to pay the price of not liking the next best alternative. E.g., Martha has $20,000 that she could either invest in fixed deposits, or earn an annual return Annual ReturnThe annual return is the income generated on an investment during a year as a percentage of the capital invested and is calculated using the geometric average. This return provides details about the compounded return earned yearly and compares the returns supplied by various investments like stocks, bonds, derivatives, mutual funds, etc.read more of 10% compounded annually, or use the amount for higher studies. Martha chose to invest the money in her studies. The opportunity costOpportunity CostThe 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
One cannot recover any sunk cost Sunk CostSunk 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 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 developmentResearch And DevelopmentResearch and Development is an actual pre-planned investigation to gain new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading, resulting in a business advantage.read more programs for its new product. The study shows that treatment has multiple side effects. Hence, it cannot be marginally produced. The $5 million spent 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 employing an additional factor of production causes a relatively smaller increase in output at a certain point.
Example of Economics: John, a soybean farmer, decides to apply the law of diminishing returns Law Of Diminishing ReturnsThe 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 their farm. He finds usage of fertilizers will 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:
John makes an economic analysis and tables down the following result:
As we can see, the usage of fertilizers increases the productivity of soybean crops. However, the marginal production diminishes upon using 30kg fertilizer; adding 10kg more causes production to drop from 170 to 90 tons. After that, however, the total soybean production continues to increase to 50kg fertilizers, after which John observes a fall in returns. Thus, marginal returns become negative.
Example #5 – The Trade War
When a nation protects its domestic industry and creates jobs, it starts imposing higher tariffsTariffsA tariff is levied by a government on the import of goods or services from another country. The charges increase government revenue, restrict trade with other countries, and protect domestic manufacturers from stiff competition.read more 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 government, the conflicting situation thus created is referred as a trade warTrade WarA trade war occurs when one country raises its tariff on imports, and the other country responds by raising its own tariff to restrict imports.read more.
The US-China trade war is the hottest economic issue worldwide, where the USA initiated a series of protectionist measures, and China retaliated back. The economic war between the two large economies affects their economy and greatly influences the global economy.
Some facts about the two nations: –
- According to Wikipedia, in global exports, China ranks first with a $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 only amounted to $120.3 billion.
GDP
- The USA is the world’s largest economy, with a GDP of $19.39 trillion.
- With exponential growthExponential GrowthExponential 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 the past decades, China 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 increase, decreasing the demand. With low demand, supply reduces, which results in low production. Due to low production, the production cost rises, again inflating prices. Employees losing their jobs creates unemployment.
- The overall GDP depends on both domestic sales and exports. Domestic production decreases because required goods are available at high rates, and export decreases because other countries also increase their tariffs, decreasing demand. Thus, GDP falls.
- Due to financial distress in the country, federal banks increase interest rates under their monetary policies Monetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more to manage GDP decline, price rise, and inflation conditions. Higher interest rates increase the cost of capital to businesses.
- The stressful economic 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 growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more may decline from 3.9% (as previously predicted) to 3.7%.
- American and Chinese economies have to face significant falls. For example, 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 CrisisThe 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.
- The IMF warned that the US-China trade war makes the world a “poorer and more dangerous place.”
Frequently Asked Questions (FAQs)
An economic system’s output is goods and services. Services are tasks carried out for the benefit of the recipients, whereas goods are physical commodities offered to clients. Automobiles, home products, and apparel are a few examples of goods. Legal counsel, housekeeping, and consulting services are a few examples of services.
Economic growth can be influenced by changes in capital goods, labor force, technology, and human capital. Using estimates like the GDP, economic growth is frequently calculated as the rise in the total market value of newly created products and services. A rise in the labor force, human capital, and capital goods are examples of economic growth.
High illiteracy rates, enhanced productivity, and superior public education are examples of economic development.
Creating new products by recycling old materials and paying more incentives to workers based on human capital and benefits are examples of economic efficiency.
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This article is a guide to Economics Examples. Here we discussed various examples of Economics like supply-demand, opportunity costs, trade war, etc. You can learn more about financing from the following articles: –
