Economic Examples

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: -

• 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.

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 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 costs $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.

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 of 10% compounded annually, or use the amount for higher studies. Martha chose to invest the money in her studies. The opportunity cost is the 10% return (that gets compounded annually).

Example #3 - Sunk Cost

One cannot recover any sunk cost 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 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 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 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 government, the conflicting situation thus created is referred as a trade war.

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 growth over the past decades, China stands next to the USA, with a GDP of $12.01 trillion.

• 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 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 growth 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 crisis) may hit 10-million-% next year.
• The IMF warned that the US-China trade war makes the world a "poorer and more dangerous place."

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: -

• Examples of Sunk Costs
• Lagging Indicators
• What is Behavioural Economics?
• Formula of Microeconomics