Economic reasoning is an important skill both for running a business and making everyday decisions. Thus, understanding basic economic principles is an important element of contemporary life. The following paper provides an overview of a number of economic concepts and outlines the areas where they can be applied in a real-world setting.
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Describe one recent choice you made and explain the logic of your decision-making process
In late 2017, I became interested in the cryptocurrency market. This was not the first time I heard about it – however, in all previous cases, the information came from sources that portrayed the phenomenon in a negative light. As a result, I was convinced that the entire thing was either a Ponzi scheme or, at the very least, a tool for making illegal transactions. Upon investigating the topic for some time, I was fascinated by the long-term economic and social implications of the technology behind it and decided that it was here to stay (and appreciate). As a result, I have decided to look into the opportunity of buying some of these currencies as a long-term investment.
After further inquiry, it became clear that even the people who strongly supported the idea were cautious in making recommendations regarding the investment and warned against spending more than one can afford to lose. However, it also looked like an attractive concept, especially considering the impressive growth demonstrated by the market in the past. After assessing all possible scenarios, I have decided to buy some of the currencies.
The rationale for my decision can be boiled down to the following statement. In the best-case scenario, I will derive significant marginal benefits. In the worst-case scenario, I will lose all of the invested money (which, in accordance with the advice, will not exceed the amount I am ready to lose). In the most basic terms, the opportunity cost of being able to buy a Lamborghini, in this case, is preserving the sum allocated for sunk costs (the purchasing of an asset) (Colander 9). Admittedly, the current situation on the market is more consistent with the worst-case scenario. Nevertheless, from my perspective, the estimated opportunity costs are still worth holding to my investment in the long run, which I intend to do.
Identify and describe one microeconomic and one macroeconomic issue. Explain why you consider the issue micro or macro
A recent macroeconomic issue selected for discussion is the record low of lob index observed in a small business domain. The index in question has been declining steadily for approximately seven years and has become especially apparent since 2016. At the same time, small business wages have demonstrated steady growth, increasing by more than two percent in the recent year. It is possible to assume that the latter can be attributed to the attempts by the employers to attract new talents by offering higher wages. I consider the issue to be macroeconomic due to its effect on the economy on a national scale.
Currently, small business is a major segment of the U.S. economy, both in terms of general financial wellbeing and as a considerable force in the labor market. In addition, it ensures the diversification of the country’s economic landscape, which can increase its financial resilience. Finally, and, perhaps, most importantly, small businesses are a major source of innovation. As can be seen, the issue has the potential to affect employment and growth in the long term.
The selected microeconomic issue is a recent commodity trade accomplished between China and Singapore using blockchain technology. The trade was accomplished by a major Chinese state-owned oil company. The technology was utilized to optimize the logistics and shipping processes. This is a microeconomic issue since the described event is based on an individual choice by a business entity influenced by economic forces.
Despite being in the early stage of development, blockchain technology already offers significant benefits in terms of cost savings and improved efficiency of logistics. Its use by a major company is an indication of its viability as a business solution and may lead to subsequent adoption on a global scale.
Does the fact that the production possibilities model tells us that trade is good to mean that in the real world free trade is necessary for the best policy. Explain
A favorable prediction offered by the production possibilities model should not be interpreted as evidence that free trade is the best option. The model accounts for a limited number of variables in the economic domain but does not (and cannot) acknowledge a multitude of social, political, and cultural factors existing in the real world (Keohane and Olmstead 48). Therefore, it does not constitute an objective and definitive measure and should be used as a useful tool in the decision-making process.
Describe the four main types of economic institutions. In the case of business, including a discussion of the different forms of business
The first main type of economic institutions are households, which can be described as a group of people living in a certain space and making joint decisions (Colander 59). Households are considered the most influential economic institution due to their capacity to control both governments and businesses. The former is made possible through voting systems. The latter is facilitated through a complex system of spending decisions, actions in the labor market, and capacity for supplying capital. Ultimately, the buying capacity of people is the main force that determines the directions taken by corporate entities and is the main reason behind massive marketing expenses. In addition, households supply the labor force to both corporations and governments.
The second type of institutions are businesses, which can be defined as privately owned entities responsible for production. The production is not limited to physical goods and often involves services. Several forms of businesses are currently recognized in most developed economies. The first is a sole proprietorship, which is considered the simplest to organize and run. Sole proprietorships are run by a single individual.
The second form is a partnership, which is created by two or more individuals in order to share the financial burden. Importantly, partnerships do not limit the liability of partners. The third form is a corporation, which is a business entity owned by stockholders and held responsible for its actions separately from the individuals who operate it. Corporations are less common than sole proprietorships but are more suitable for large-scale operations.
The third type of institution is governments. From an economic standpoint, governments can be viewed both as actors and as referees. The first role is manifested through collecting money (i.e. taxes) and spending them on various institutions, such as educational, military, healthcare, and social, among others. The second role involves creating laws and rules for interactions between households and businesses. These roles are expected to ensure economic stability and growth, establish a stable framework of rules, promote competition, decrease the impact of externalities, provide public goods, and minimize undesirable effects.
The fourth type of institution is global institutions. One example of such entities is corporations that operate on a major scale in more than one country. Global corporations are generally considered beneficial for stakeholders. Another example is international organizations created by governments, such as the World Bank and the International Monetary Fund. These entities are intended to assist developing countries and provide support to parties in crisis.
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As can be seen, the highlighted concepts are essential components of the decision-making process. In addition to contributing to the knowledge of the economic mechanisms, they can offer valuable insights into everyday life. The acquired knowledge is expected to improve the understanding of the events in the real-world setting.
Colander, David. Microeconomics. 9th ed., McGraw-Hill, 2013.
Keohane, Nathaniel O., and Sheila M. Olmstead. Markets and the Environment. 2nd ed., Island Press, 2016.