With the current economic recession affecting most sectors of our economy, it is natural that many economic theories and practices have undergone profound changes. Nevertheless, a common thread running through all these economic theories and practices is their application to the reduction of total economic costs as well as the advantages they entail. There are several ways by which we can approach economics. Some of these include the market economy, government economy, personal economy and the circular economy. In this article, we will be focusing on the market economy. The market economy refers to an economy in which goods and services are sold and purchased directly through the marketplace.
As economic theory suggests, economics is based on two key principles. First, in the competitive economy, consumers will act in response to both the quantity and quality of available options. In the traditional economy, consumers make use of certain strategies, which, collectively, determine their relative advantage. A second principle of economics, called rational expectations, states that people are not optimally sensitive to price changes. Rational expectations also imply that people tend to understand the economy in terms of aggregate demand, which leads them to price their choices in terms of marginal benefit and, in so doing, anticipate future inputs as accurately as they do their input decisions.
Both of these principles, when combined with a range of different approaches, lead to economic analysis that is grounded on the facts. This is because economics is, above all, a method of discovering the facts about how people, individually and collectively, act towards their goals. It attempts to capture the essence of reality as it actually exists so that individuals can make informed decisions about how to improve the economy.
The three broad theories that underlie the methods economists use to analyze the economy are rational expectations, marginal cost, and rationalized expectations. Rational expectations are the beliefs, held by the majority of people, about the frequency and magnitude of increases in the market prices of their goods and services relative to their needs. For example, if the economy is growing at a steady rate of four percent over three years, the bulk of the population believes that the annual cost of purchasing new goods and services will increase by four percent. If this assumption is true, the quantity of purchases by consumers relative to their production, income, and technology will increase. In short, consumers plan their investments, and their level of consumption accordingly.
On the other hand, marginal cost theory is a variation on rational expectations. Here, the assumption is that a firm’s investment of resources in the long run will yield a definite return. For instance, if the marginal cost of a particular investment is equal to the value of one year’s production, then firms can invest in any manner they choose. If, however, the value of future production increases by three percent, the cost of investment for the firm must decrease by the amount of increase – one percent multiplied by the number of years in which the investment is made. This results in changes in the level of employment and output. The equilibrium condition is reached when the aggregate demand curve is such that the level of marginal cost is exactly balanced, and there are no deviations from this condition.
The third theory of economics, called market failure, is related to changes in the level of output and employment due to changes in market power. Market failure occurs when the prices of products or services fall below the level that would result in their production by businesses operating within the structure of the market. This situation can occur because of supply and demand conditions, the existence of monopoly power, the existence of inefficient competition, or changes in technology.
Although all of these theories may be useful in determining the overall direction and status of the economy, none can provide a consistent and comprehensive view of the economy. There may be some errors in the economic perspective that lead to incorrect conclusions regarding the state of the economy. One of the major errors made is the assumption that the price level set by firms operating in the market reflects the real value of their products or services. If that were the case, no changes in the prices of production would ever have an effect on the total economic activity of the economy.
The above mentioned are just a few of the many principles that economists use to forecast the state of the economy. Each of these principles has advantages and disadvantages. In order to understand which of these factors may help you gain an advantage over other business enterprises, it would be best to learn more about the various theories that are used in the economic field.