Heather Kist

Final Project
3/10/14
When I first received the handout for the final project on the first day of
class I was instantly overwhelmed. Write five pages on economics really. But, in all
honesty I did take away a lot more than I originally anticipated. Through the lessons and
discussions in class I have better knowledge of why I make choices to buy and not to
buy products and how to get the best price for what I want. This class helped me
understand what affects the prices of products as well as how the government also
affects these prices.
There are four different economic systems that have developed as different
societies have placed different highlights on different goals and priorities when
answering the three key economic questions, what it wants to produce, whom it will be
produced for, and how it will be produced. First there is the communist economy also
known as the command economy. It is a centrally controlled economy where the
government makes all of the decisions. Then there is market economy, an economy in
which decisions regarding investment, production and distribution are based on supply
and demand, and prices of goods and services are determined in a free price system.
Next is traditional economy which is a family and community based system that
depends on customs and rituals to make choices. Lastly there is mixed economy, which
is what we have here in the United States. A mixed economy allows a level of private
economic freedom in the use of capital, but also allows for governments to interfere in
economic activities in order to achieve social goals.

Supply and demand is possibly one of the most important models of economics
and it is the pillar of a market economy. Demand refers to the quantity of a product or
service is wanted by buyers. The quantity demanded is the amount of a product people
are willing to buy at a certain price; the relationship between price and quantity
demanded is known as the demand relationship. Supply represents how much the
market can offer. The quantity supplied refers to the amount of a certain good producers
are willing to supply when receiving a certain price. The relationship between price and
how much of a good or service is supplied to the market is known as the supply
relationship. Price, therefore, is a reflection of supply and demand.
Now elasticity by definition is a measure of a variable's sensitivity to a change in
another variable. In economics, elasticity refers the degree to which consumers and
producers change their demand and amount supplied in response to price or income
changes. Elasticity is used to measure the change in consumer demand as a result of a
change in the good's price. When the value is greater than 1, this suggests that the
demand for the good/service is affected by the price, whereas a value that is less than 1
suggest that the demand is insensitive to price.
International trade increases the number of goods that domestic consumers can
choose from, decreases the cost of those goods through increased competition, and
allows domestic industries to ship their products out of the country. While all of these
seem beneficial, free trade isn't widely accepted as completely beneficial to all parties.
Some times tariffs, a tax imposed on imported goods and services, are used to restrict
trade, as they increase the price of imported goods and services, making them more
expensive to consumers. The main factor of whether a country imports or exports a

product is price. World price is the price dominant in world markets and is the price at
which we can sell or buy goods. Domestic price is the price in our country without trade.
If the world price is greater than domestic price before trade, then we will export the
good. Trade allows us to buy goods more cheaply from international businesses and
sell them at a higher price than if we were restricted to the domestic market only. The
economy benefits from trade because we can import goods more cheaply than we can
produce them, and can sell our exports for more than people would pay. However,
consumers are sometimes hurt in the process. Look at an export like wheat, domestic
price will rise to the world price since less of the product will be available for domestic
consumption. Therefore, domestic producers benefit from higher prices but domestic
consumers are worse off because of higher prices. For the opposite side of the
equation, with goods which we import, domestic prices fall and consumers benefit while
the producers of wheat are hurt by the lower pricing. Lowering the price reduces
producer surplus, which is transferred to consumers while consumer surplus is
extended. Thus with imports, domestic consumers are made better off while domestic
producers are hurt, but overall surplus is increased. Since the gains of the winners are
larger than the losses of the losers, this would allow the winners to compensate the
losers and still be better off. In practice, this compensation may not happen, but can be
a justification for government intervention to help those groups hurt, by taxing those
groups who benefit (How).
As far as consumer behavior goes there are three common mistakes that people
make when deciding to make a purchase are ignoring non-monetary opportunity cost,
failing to ignore sunk costs, and being unrealistic about the future behavior. Utility theory

is often used to explain the behavior of individual consumers. In this case the consumer
plays the role of the decision maker that must decide how much of each of the many
different goods and services to consume so as to secure the highest possible level of
total utility subject to his/her available income and the prices of the goods/services.
Everyone has to make decisions and sometimes and one of my most important
decisions was to return to school full time. Which in turn is an example of ignoring nonmonetary opportunity costs when I decided to go back to college full time I give up the
opportunity of earning money from working. Even though I am paying money for
college, this is because of non-monetary opportunity costs. Because I place a higher
value on college much more than working, because it will create more opportunities to
earn much more and a better quality of life for myself and my family in the future.
The law of diminishing returns that states that as more investment in an area is
made, overall return on that investment increases at a declining rate, assuming that all
variables remain fixed. To continue to make an investment after a certain point is to
receive a decreasing return on that input. This is important to determine when an
investment has reached its peak to prevent a decline in returns.
In a competitive market a firm decides how much output to produce through the
theory of profit maximization. Perfect competition arises when there are many firms
selling a homogeneous good to many buyers with perfect information. Under perfect
competition, a firm is a price taker of its good since none of the firms can individually
influence the price of the good to be purchased or sold. As the objective of each
perfectly competitive firm, they choose each of their output levels to maximize their

profits. The key goal for a perfectly competitive firm in maximizing its profits is to
calculate the optimal level of output at which its Marginal Cost = Market Price.
Now advertising I feel is an important part of our economy. It is manipulative and
not always good for the consumer on the short end; however advertising reduces selling
costs, increases company profits, and creates jobs. Not to mention productivity needs
advertising to speed up consumer consumption. So it all adds up to the fact that mass
consumption makes mass production possible and mass production means more jobs.
Advertising, because of its ability to speed up the regular acceptance of new products
and to lift the level of acceptability of well-known products, unleashes a huge overflow of
new demand, and new employment.
Monopolies however, I feel have a negative impact on everything. A monopoly is
a situation in which a single company or group owns all or nearly all of the market for a
given type of product or service. By definition, monopoly is characterized by an absence
of competition, which often results in high prices and inferior products. In the case of
the pharmaceutical companies, they possess product patents that enable medicines to
be sold at prices that are artificially high due to the curbing of competition. Product
patents provide for absolute protection of the product. Process patents, on the other
hand, provide protection in respect of the technology and methods of manufacture. With
process patents, generic versions of medicines may be produced through alternative
processes, allowing for competition from other producers. Product patents, however,
prevent generic production (Patents).
When I reflect back to what I have learned in this course, I feel that there wasnt really
one thing that I learned that I implemented into my everyday life, there were many. The

most important being sunk costs. I never calculated sunk costs into my budget. Also I
found game theory and advertising interesting. Supply and demand I was taught in
grade school, however a more in depth look into the topic explained a lot of different
cost increases I have been experiencing lately.