An economy is a set of interaction processes, which include production, circulation and distribution of goods and services, and the allocation of economic value to various activities by other agents. In simple terms, it can be defined as ‘a social domain, wherein the practices, discourses and material expressions related to the production, management, and distribution of goods and services are characterized by the operation of the decision making procedures guided by social norms.’ It is useful to think of economics in terms of three distinct areas: microeconomics, macroeconomics and economic sociology. Microeconomics studies the interactions of individuals within limited markets; macroeconomics looks at the economies of nations as a whole; and economic sociology describes the methods and practices of choosing a business opportunity. In this article we’ll look at some interesting ways you can use economics to guide your business decisions.
In a simple economy, households create their own wealth through their production and employment. In such a system, all the decisions about what to produce and how to produce it are made by households. A household can also save its income or wealth, if it has saved enough over the years. Then again, a market system produces consumer goods and consumes household goods, which are purchased by households and their immediate families.
In a complex economy households, corporations and governments operate through the process of exchange, where the production and distribution of goods are based on the exchange of one form of scarce resource for another. It is a system that tends towards coordination rather than pure specialization. For instance, all the products that enter into the markets are produced and marketed by households, but only those that don’t need to be replaced can be stored away. This means that any spare resources are used to add to the general level of wealth.
Simple market-based economies tend towards coordination. There is no room for differentiation between the good and bad. Households cooperate to make goods that all households need and enjoy, without having to distinguish between types of good and bad, whether it is money shelter, health care or wealth. Profits and losses are established through the prices that households set for their goods. There is no room for savings. In such an economy, it is impossible to make money to save in any way, since every dollar spent is added to the national income or wealth.
Complex economy operates through economies of scale. In such cases, the economies of scale come from the fact that large businesses buy large quantities of good and sell them to consumers at a higher price. In this case there is no room for trade. Businesses buy raw materials, which are in plentiful supply, from producers at a wholesale price, then sell the same goods at a higher price to customers.
A clear example of such a society is the Apple Computer Company. The Apple computer industry is so huge that it is a clear example of a market economy that operates without government intervention. Since there are no taxes for businesses to pay and there is no demand or supply dynamic, Apple is able to charge a relatively high price for its goods and pass the resulting gain on to customers. Such dynamics make economies like Apple’s highly complex and efficient, since businesses can make a lot of money if they save and invest efficiently.
A major problem with many people in business today is that they believe that their own personal economic decisions will affect the economy. This is called the Barometer Theory. According to the Barometer Theory, when the economy moves in the direction that you would expect from your decisions, you will feel happy, satisfied and prosperous. If the economy takes the contrary direction, you will feel miserable, anxious and worried. Economists disagree with this theory because they believe that your personal decisions have very little effect on the state of the economy.
In recent years, some leading economic thinkers including; John Taylor, Dean Baker and Larry Winget have spoken against the concept of Barometer theory and its possible negative effects on economic growth. These three economists believe that, even if the economy follows a particular path that you would expect, personal economic growth will eventually be stimulated by something else, either from increased consumer goods produced by businesses or higher investment or consumption by households. As the economy grows, wages will rise and consumers will be able to afford more goods and services.