Economics can be easily comprehended with the help of some common or real-life illustrations.
- Opportunity Costs – When one plan of action is selected at the expense of another, this is called an opportunity cost. This implies that when you choose something else, you must accept the cost of not preferring the second-best option. For example, suppose Martha possesses $20,000, which she can opt for investing in fixed deposits, gaining a 10 percent increased annual return, or otherwise utilize it for further education. Martha decided to put the money toward her education. The opportunity cost is equal to the 10% yield.
- Sunk Cost – Any sunk cost cannot be recouped. It is a cost that has already been borne. Sunk cost is actually an unrecoverable overhead. For example, a pharmaceutical firm may wish to introduce a brand-new drug. It invests $5 million in experimentation for its latest medicine. However, research reports that medicine possesses a wide range of side effects. As a result, it becomes very difficult to manufacture the medicine on a small scale. So here, the $5 million paid for R&D will be a sunk cost that should have no bearing on decision-making.
- The Trade War – Every country strives to safeguard its economy, domestic trade, and domestic industry. As domestic industry generates employment, they desire to preserve the interests of the nation’s trade. As a result, when products are shipped from other parts of the globe, nations enforce greater duties and charges. Due to this, other nations will have to reciprocate with even greater charges. This results in a clash circumstance referred to as trade wars.
The classic illustration of this is the recent conflict in war among the United States and China, in which the United States imposed greater charges on Chinese imports and China counterattacked with the same charges on the goods of America. As the United States and China are both major world economies, their actions have an effect not only on their respective nations but also on worldwide business and the world economy.
- Supply and Demand – The broad range of products that manufacturers float in the open market is referred to as supply. The amount that the people who are engaged in the system of purchasing and selling assets or liabilities in their own market are prepared to purchase is referred to as demand.
For instance, a plush handbag manufacturer sells his/her product at a cost of $1,000. If the cost is less than $500, it will receive 10,000 orders every month. However, the label only manufactures1000 units per month, ensuring that it gets an equal quantity of orders per month and that its inventory is depleted within a month.
- Law of Diminishing Marginal Returns – A good example of this is a soybean agriculturist, John determines to use the law of diminishing returns to gauge how many fertilizers to utilize in their farming. He comes to know that the utilization of manure may increase manufacture up to a specific point, later which productivity will start to decline as the crop will become toxic due to the extravagant utilization of manure. Due to this, marginal profits will tend to become negative.