Running head: ECONOMICS FUNDAMENTALS 1

ECONOMICS FUNDAMENTALS 5

Economics Fundamentals

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Economics Fundamentals

Each product in the conditions of market economy has its own demand and supply. There are equilibrium price and equilibrium quantity of product at the point of intersection of the demand and supply curves. The demand law can be expressed by the following way: the higher the products price, the lower its demand. Obviously, people would buy more quantity of products for lower price. On the other hand, if the price is increasing, a person losses the stimulus to buy such product and will search the possible substitutes of such product. Aggregate demand is a quantity of goods and services, which consumers are able and want to buy. Aggregate demand includes demand of four main economic unions such as households, firms, state and foreigners. In addition, aggregate demand depends on many factors such as a products price, consumers income, countrys populations, substitute products price, consumers preferences, consumers habits and traditions, etc.

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According to the presented figure, the equilibrium quantity of a product will be eight units, while equilibrium price will be $5 per unit of output.

Table 1

The Calculation of Total, Marginal, and Average Revenues

Prices, $

Quantity

Total Revenue (Price*Quantity)

Marginal Revenue

Average Revenue

100

200

20,000

-

-

90

250

22,500

50

90

80

300

24,000

30

80

70

350

24,500

10

70

60

400

24,000

-10

60

50

450

22,500

-30

50

40

500

20,000

-50

40

30

550

16,500

-70

30

20

600

12,000

-90

20

Table 2

The Calculation of Marginal, and Average Revenues

Prices, $

Quantity

Total Revenue (Price*Quantity)

Marginal Revenue

Average Revenue

100

1

100

-

-

95

2

190

90

95

88

3

264

74

88

80

4

320

56

80

70

5

350

30

70

55

6

330

-20

55

40

7

280

-50

40

22

8

176

-104

22

Supposing that the marginal costs of producing the good in the previous exercise is a constant $10 per unit of output, it should be answered of what quantity of output would the firm sell. As it is known, there are two methods of maximization of the companys profit: the method of comparison total cost and total revenue, and the method of comparison marginal cost and marginal revenue. According to the method of comparison marginal cost and marginal revenue, a company is able to maximize its profit, when the marginal costs per unit of output are equal to marginal revenue. However, according to the data provided in Table 2, there is no marginal revenue that is equal to $10 per unit of output. In fact, there is the marginal revenue that is equal to $30 per unit of output. That is why the company will sell five units of produced good, since such output means that marginal revenue is positive, the companys total revenue and average revenue are maximized. Therefore, there is no reason to produce more than five units.

In fact, there are four main economic subjects such as households, companies, state, and foreigners. In order to improve the economy state, the entire range of produced goods should be sold. In fact, equilibrium GDP means that all produced goods in the country are sold or, in other words, total spending are equal to total revenue. Moreover, total spending include spending of the mentioned four economic subjects: households spending, companies investments, government spending, and net export. Therefore, if households want to save and do not use all of their income for consumption, the total spending will be reduced. Basically, households spending is the most important part of the total spending. That is why decreasing of households spending will lead to reducing total spending and, thus, a countrys GDP. It means that there will be an economic recession in a country. In fact, it is very important to find an optimal interrelation between saving and spending, since savings can be considered as a good for the countrys economy, but if households want to save more and reduce their consumption spending, it will lead to economic recession. Graphically such situation can be represented by moving the demand curve to the left.

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In order to calculate the level of unemployment, it is needed to calculate the number of unemployed persons and labor force. It should be noted that persons who are under 16 years of age and pensioners are not included in the labor force. The whole countrys population can be divided in four groups such as persons under 16 years of age, those persons, who do not belong to the labor force, employed, and unemployed persons. Unemployed persons are those, who do not have a job, but they are actively looking for it, as well as those persons, who temporarily unemployed. In fact, employed and unemployed persons are considered as the labor force, while people, who are under 16 years of age and pensioners, are not included in the labor force. Consequently, according to the considered case, labor force includes:

- 450 persons, who are working full-time;

- 20 full-time college students;

- 25 persons, who are actively looking for a job.

That is why 495 of the 550 surveyed are in the labor force.

Additionally, the unemployment rate can be calculated by dividing the number of unemployed by the labor force.

Unemployment rate = [(labor force employed) / labor force] * 100 = [(495 450) / 495]*100 = [45 / 495] * 100 = 9.09%

According to the provided calculations, the unemployment rate will be 9.09%.

Any country uses monetary and fiscal policy to achieve certain goals. The problem of setting goals means that achieving some goals excludes achieving other goals. For example, achieving stable tempos of economic growth and low inflation are impossible task, since economic growth is possible with bigger tempos of inflation. Accordingly, any country is faced with a choice between two calamities of national economy economic recession and inflation. Therefore, economists distinguish two kinds of fiscal policy tight and expansionary fiscal policies. However, it would be reasonable to give a clear definition of fiscal policy. Fiscal policy is related to forming of a state budget, which means the process of purposeful regulation of taxes and public spending in order to achieve certain economic goals. Therefore, taxes and public spending are the main instruments of fiscal policy.

The main differences between fiscal policy in industrial countries and that in developing countries should be considered. First, fiscal policy in developing countries is characterized by strong regulative government force and limitation of financial resources. Developing countries usually need to invest a lot of money in order to reform the economic system and stimulate economic growth. However, financial resources are usually limited. That is why in order to increase the budget income, the governments of developing countries increase tax rates and, as a result, paces of economic growth are decelerated. On the other hand, developing countries usually have large GDP and budget income allows them to simulate economic growth.

References

Demand. (n.d.). Investopedia. Retrieved from

http://www.investopedia.com/terms/d/demand.asp

Economics basics: Supply and demand. (n.d.). Investopedia. Retrieved from

http://www.investopedia.com/university/economics/economics3.asp

Fiscal policy in developing countries: Multiplier maths. (n.d.). The Economist. Retrieved from

http://www.economist.com/blogs/freeexchange/2013/08/fiscal-policy-developing-

countries

Jha, R. (2007). Fiscal policy in developing countries: a synoptic view. Crawford.anu.edu.au.

Retrieved from

https://crawford.anu.edu.au/acde/asarc/pdf/papers/2007/WP2007_01.pdf

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