Economics in Everyday Life

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This law analyses the relationship price has with the quantity consumers demand and the quantity supplied by producers. As price increases, quantity demanded decreases and quantity supplied increases. For example, if the demand for coffee is higher than the supply, the price per coffee will go up in order to maximise profit. Whereas, if the demand for it is lower than the supply, coffee shops will have to lower their prices in order to make sales. A change in the supply situation can also affect prices. For example, you would pay dearly for a cup of coffee on a tiny island in the middle of nowhere – where the supply of coffee is minimal.

In contrast, macroeconomics studies economic activity in aggregates and helps us understand how the economy as a whole affects our lives. Some of the issues include: unemployment, taxes, government spending and international trade. By looking at society as a whole, economist Adam Smith believes that the economy is guided by an ‘invisible hand’ that keeps the economy functioning (The Wealth of Nations). Smith’s idea assumes that buyers and sellers will make decisions based on their self-interests, and thus a point of equilibrium will be established. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is equal to the amount of goods being demanded. At the equilibrium price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. In other words, everyone is satisfied with the current economic condition.

As a university student with little income, I will only buy a new TV at a price that is worth it to me. Harvey Norman will only sell me a TV at a price that is worth it to them. No one is making me buy a TV from Harvey Norman. This transaction will only occur if it is in both our best interests to do the deal. The price at which I’m willing to buy and the price that Harvey Norman is willing to sell should be an efficient allocation of economic resources.

The degree to which the demand or supply reacts to a change in price is known as its elasticity. Elasticity varies among products because of: the definition of the market, the time horizon, whether the product is considered a necessity or a luxury, and the availability of close substitutes. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. These kinds of products tend to be readily available in the market and a person may not necessarily need them in their daily life. A price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. For example, an overseas holiday is an elastic product. Although holidays are enjoyable, you will survive if you don’t go on one. On the other hand, an inelastic good or service is one in which changes in price result in minimal changes to the quantity demanded or supplied. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Examples of inelastic products include: medication and emergency doctor visits. These are considered to be a necessity, and as such, the quantity demanded stays relatively the same during fluctuations in cost.

For example, EBay is a website on which auctions are held for both new and second hand items. People bid on an item for a given period of time, and when time expires, the person with the highest bid wins. Normally, we would not pay more money for something that’s of inferior quality. In other words, an item that’s second hand and of ‘inferior quality’ will sell for less. As a student, your budget tends to be lower and higher quality products aren’t affordable or entirely necessary. Therefore buying second hand furniture online or home brand products from the supermarket are viable alternatives. As long as the quality of the products satisfies your needs, spending less on these products can be a smart economic decision as it gives you more money to spend on things you value as more important. This can only be done for products that are not a necessity or with a high number of substitutes.