Introduction to Economic Examples
The economic examples provided in the article give an outline of the economic system and factors affecting the economic system. There are a lot of such factors which affect the economy and not all variations could be provided, however, these examples give relevant reasons and concept of economics.
Economics is the study of how to use available resources to the optimum level. The economics studies various factors which affect the society, the use of goods and services, the involvement of individuals, businesses, countries, and governments. Economics tries to identify and analyze ways to allocate resources so they can be used to the best.
Various examples to define the concepts of economics are as below:
Real World Examples of Economic
By using some general or real-world examples, economics can be better understood:-
Example 1 – Opportunity Costs
Opportunity costs refer to the benefits of an individual or a business loses out when it chooses another alternative. Usually, not all options are considered while making a decision and hence, various opportunity costs are missed or overlooked.
Opportunity Cost = Return of Best Foregone Option – Return of Option Chosen
Consider a business that could invest its extra capital in stock markets to get an annual return of 15% or could invest in updating its equipment which can generate a return of 12% over the same period. Here, if the Company chooses to invest and upgrade its equipment to produce better quality products it is foregoing a return of 3% (15% – 12%) which it could have gained by investing in stock markets. This 3% is the opportunity cost for the Company.
Example 2 – Sunk Cost
A sunk cost is the cost that has already been incurred by the business and could not be recovered. It is the past cost made by the Company and is excluded from the future decisions taken by the Company for the business. Sunk costs do not change while taking future business decisions. Hence, the Company does not take into consideration in decision making.
Consider a Company which makes bats for playing cricket. It makes cricket bats at $ 50 and sells them at $ 90. The bats thus prepared by the Company are very basic and do not compete with the other premium bats available in the market. If the Company has to make premium bats it will cost it another $ 20. Hence, while making a decision if it needs to make premium bats or not, the Company will consider only the additional cost i.e. $ 20 required for making the bats. The cost of factory or warehouse etc. are not considered because it already has invested money on these items and they are already a sunk cost even if the Company produces or does not produce premium cricket bats.
Example 3 – The Trade War
Every nation tries to protect its own economy, local businesses and local industry. As the local industry creates jobs, they would like to protect the interest of the Country’s businesses. Hence, Countries impose higher tariffs, taxes when the goods are imported from other parts of the world. By doing so the other countries retaliate with even higher tariffs. This creates a conflict situation popularly known as trade wars.
The best example for this is the current trade war between the USA and China where the USA initiated a higher tariff on the goods imported from China and China retaliated with similar tariffs on US goods. Since, both the USA and China are large economies of the world they do not only impact their own countries but have an impact on the global trade and global economy.
Example 4 – Supply and Demand:
Supply and Demand is the basic law in economics. Supply is the Number of goods the producers float in the market whereas Demand is the amount market participants are willing to buy. In an efficient market the point where the supply curve and the demand curve meet is called the equilibrium point and it is the point where the supply and demand are sufficient enough for each other to be met.
Example: Consider a luxury handbag maker which sells luxury handbags and sells them at a price of $ 1000. If the price is below $ 500 it would get orders of 10,000 per month. But the brand produces only 1000 quantity every month such that it receives the same number of orders every month and it clears its inventory in a month itself.
Example: When a Corn crop production increases the farmers decrease the price of the crop so that they can sell off their produce. If the supply is too high then the demand i.e. the amount of corn needed to feed the people of the Country, the produce had to be wasted and farmers lose their cost of production.
Conclusion
The above examples gave an overview of various concepts and laws of economics which include the law of supply and demand, opportunity costs, sunk and the trade wars. While these examples may not include all types of variants but they provide a good insight into economics.
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