What is the Economy

Important Insights Gained during Principles of Microeconomics The principles of microeconomics deal with how houses, organizations and governments spend their money—and how their decisions and transactions impact the overall market economy. One of the principal assumptions of microeconomics is that people are rational and make rational decisions by weighing the pros and cons, costs and benefits of their financial decisions. This is straight out of rational choice theory (Frank, 2008), which states that people make decisions in their economic lives by comparing the costs with the perceived benefits.

This is why consumers and organizations tend to respond favorably to economic incentives. The incentive to make a purchase or an investment decision appears like a greater benefit than the cost of doing so: they recognize that they are getting something positive in return for their transaction.

Incentives help, whether it is a tax credit from the government for consumers who purchase an electronic vehicle (EV)—which is something that certainly helped Tesla sell thousands of Model 3s over the past year (Capparella, 2018)—or a higher ROI given by a bank looking for consumers willing to open a CD. This paper will reflect on the three most valuable and important insights I obtained during ENCU 202 and discuss the importance of the insights to me as a manager and consumer.

It will also look at the implications of my learning and how my behavior and thinking has changed to integrate my learning. Finally, it will look at specific actions I plan to take to apply insights to enhance my professional and personal effectiveness. The first most valuable insight I gained into microeconomics during ENCU 202 was the idea that people face tradeoffs and that trade has the potential to make everyone better off.

This idea was really insightful to me especially now as we found our nation in a so-called trade war with China. This is something that undoubtedly is going to impact a lot of people in a lot of different ways. The idea of this principle is that there is always going to be a tradeoff no matter what helps me to understand the current economic climate and how politics can be used to color and shape it and even to distort the economic reality.

The current trade war has been said to be important because China is taking advantage of the U.S., which has a large trade deficit. But there is a tradeoff here is many things that people buy at Walmart or Amazon are made in China, while a lot of other things, like homes or cars or appliances or food are not. So this idea that everything we buy is made in China and that China is taking advantage of the U.S. consumer is not the whole story.

If we were to put high tariffs on goods coming from China, it might raise the prices of some items, but there would be a tradeoff to the tariff that would have to be considered. Since trade can make everyone better off, what has to be considered is what is being traded for what. Here, we essentially trade our labor for goods or services—so our time is valued at x amount of dollars (our wages), which are then traded for a good or service.

If the good or service is priced higher because of tariffs, we are likely to look elsewhere for that same or a similar good or service. This is how all things are ultimately connected and how the big macro events at the global level can impact decision making at the micro level. As a consumer, I need to be mindful the tradeoff of my interactions—I may pay a lot for a quality item, or a little for a less quality item and need to replace it sooner.

My time is money, basically, so I need to assess whether I want to work now and save or spend now and work later. As a manager, these same questions have to be answered because you are basically making these considerations for an organization and not just for yourself. The second most valuable insight I gained into microeconomics was the idea that governments can sometimes improve market outcomes—but not always.

The fact that there are so many different kinds of economic models was interesting to me because it helped me gain some insight into how to think about our economy and what to expect. It is important to be able to understand the market and how it works, how it is controlled or how it is supported, in order to make good economic decisions as both a manager and as a consumer.

There are centrally planned economies, in which the government determines the prices of things; market economies in which consumer demand determines prices; and mixed economies, which is what we have in the U.S., as some prices are regulated by the government and some are regulated by the market. Understanding how this impacts the price movement of goods and services allows you as a manager and consumer to plan ahead, to save, or to invest accordingly.

As Haitsma, Unalmis and de Haan (2016) have shown, command economies (centrally planned economies) may try to control prices but eventually there are free market principles that have to be considered—i.e., the natural laws of economics, supply and demand, and so on. Trying to control an economy at any sizeable level is like trying to control the weather.

Maybe it can be done on a small scale, but the economy is too diverse and consists of too many parts (i.e., human involvement, which can only be controlled when enslaved—and even then nothing is certain, as various slave uprisings through history indicate) for it to be totally controlled in a command economy. Thus, as a manager and as a consumer it is important to be aware how a country is shifting. There is a lot of talk today about socialism coming to America.

If this occurs, it will mean more of a shift towards a command economy, which will impact prices and wages and the value of money all the way around. As a consumer or saver, I need to be prepared for such an outcome and consider putting my money into real assets, such as precious metals or real estate—something that should retain its value.

As a manager, I have to be mindful of budgeting, of being in conformity with regulations, and of what the economy may be doing under such future conditions, as it will impact sales, jobs, and consumption patterns. The third most valuable insight I gained was that prices rise when the government prints too much money and floods the market with excess liquidity, as it did in the wake of the 2008 global economic crisis.

The Federal Reserve engaged in unconventional monetary policy known as quantitative easing, which saw the central bank creating trillions of dollars out of thin air so as to buy up the mortgage backed securities and treasuries that no one wanted.

The Fed stepped in as the buyer of last resort, and all the money it printed went into the economy, propping up the stock market and sending it to all time highs, leading to inflation across various asset classes (from gold to equities to real estate), higher rents, higher food prices, and so on (Heller, 2017).

As a consumer, the worry of inflation is one, again, that makes me think it is necessary to get my money into real assets because the dollar is going to lose value as more money is printed. As a manager, I want to be sure to keep an eye on what the central bank is doing so that I myself can make informed decisions as a manager. My behavior as a consumer has changed substantially because now I am more attentive to what is going on in the marketplace.

I find myself reader more and more economic blogs and reading economic news, whereas before this was not the case. I find myself coming upon so many different ideas and opinions that it is difficult to juggle them all, but I want to understand what people are thinking about the way our economy is working, the way it is heading, and what consumers are doing.

I look at articles on debt, what my own debt-to-income ratio is, and whether it is wise to really be spending so much using credit cards. I have recently made the decision that getting out of debt would be the best thing for me, so I am working to pay off credit card bills rather than to consume.

I have been wanting a new car for some time but I think the car I currently have will last a few more years without giving me any problems, so I will put that “luxury” purchase on hold so that I can pay off my car and pay off my credit cards and then begin saving for the future because it is unclear what kind of future we are going to have.

With socialism coming into vogue, the economy may be very different and I want to ready financially for any inflation that may occur. I am thinking now more as a saver than as a consumer. As a manager, I am thinking that I need to be more aware of what is in the best interest for my organization economically speaking and making plans for a rocky future, just in case.

The specific actions that I will take to apply insights that I have gained to enhance my personal effectiveness include getting out of debt and beginning to save. For too long I have been of the opinion that there is no need to save right now, that it can all wait, that life is short and that I am here to consume. I have been caught up in this concept of consumerism (Frank, 2008).

I think that to get out of this concept that I am just a consumer, I need to re-think the way I approach the concept of money. I have to look at money itself as a tradeoff because really it is. I trading my time and labor over for Federal Reserve notes (aka money), which if one really looks at the data over time are actually losing money. A Federal Reserve note in the 1950s bought a lot more than it does today. That shows the note has lost value.

So here I.