World Recession and Inflation Microeconomic Issues
This paper will analyze the world’s economy in terms of microeconomics concepts and models. The basis of argument is Keller’s article in “Boston Globe Business Journal” and Washington’s feature in “The Economist.” The articles talk about the global recession that hit the world a few years ago. The writings relate to inflation, which is a subject of research in economics from a microeconomic point of view. Before criticizing the article or supporting it, it is essential to understand the meaning and difference of micro and macroeconomics. Posner argues that economics refers to the study of how individuals and firms use their limited resources to satisfy their limitless needs (2). Economics as a whole has two branches of study namely microeconomics and macroeconomics. Microeconomics is the field that deals with how people satisfy their limited resources at a personal level. On the other hand, macroeconomics is broad and looks at the national economy and gross development of the country. This paper speaks of inflation as an economic issue.
The main economic issue that Keller discusses in the work is the global recession. Inflation is the persistent increase in costs with no accompanying increases in earnings. This lowers the living conditions of people because the costs are too high to meet with the current money. The global recession refers to a period of world’s economic slowdown. The International Monetary Fund (IMF) states that there are many factors that determine whether a slowdown qualifies to be a global recession or not, but an economic growth below three percent is equivalent to a global recession. This article shows the effects of recession to Europe which are similar to impacts in other nations. Apparently, because of the continued recession in Europe, Organization for Economic Cooperation and Development slashed the forecast of its economy saying it will probably shrink by 0.6 percent, this year, after another drop of 0.5 percent in the year 2012. This is clear evidence that the inflation in Europe has made the economy of Europe feeble. The drop is most likely because many investors either pull out or avoid further investments in the Euro zone because of fears that their businesses may fail to peak. To them inflation and recession are a threat to their businesses.
Inflation is an issue that closely relates to microeconomic concepts and models such as the concept of supply and demand, price-setting models among other microeconomic concepts. Inflation connects to microeconomics in that it affects how people satisfy their unending needs with little resources. This closely interlinks with the laws of market demand and supply, which influence the monetary decisions people make. This is an essential microeconomics concept, which helps persons understand what influences their behavior economically. A persistent increase in prices results into individuals’ purchasing few products. This is because they cannot buy the same quantities they purchased earlier at a lower price. This affects suppliers and manufacturers who reduce their production as the costs of production are high. At the microeconomic level, the impact is on an individual.
Issues of inflation also relate to microeconomic issues of the flow of money and production resource in the economy. This is how resources move from household (individuals) to the market and then to businesses and later to the labor force before the household gets the ready to use services and goods and vice versa. For the circular flow of resources to occur, the prices should favor all the parties in the economy. During the recession, people reduced consumptions and businesses laid off some workers to cut down the costs. Other business owners decided to halt production with the anticipation of a reduction in the production costs and the cost of raw materials. This only serves to increase inflation and financial crisis since resources are not flowing in the economy, as they should be. Through deductive thinking, it follows that inflation relates to microeconomic concepts and models.
Washington argues in his article that inflation relates to unemployment. While unemployment is a macroeconomic issue, it interlinks with microeconomics issue since it directly affects the living conditions of individuals in a country. The fact that it affects their earning means it lowers their living standards and their purchasing power. This is among the issues that Washington discusses in his article (Washington).
Keller’s article suggests that perhaps banks should consider revising their interest rates. Though it is a macroeconomic approach to resolving inflation issues, its effects are microeconomics because such a move will affect household spending. This is among the monetary measures that a country ought to take to reduce inflation. Decreasing the lending rates encourages borrowing; this is hazardous to the economy of any country because when people borrow too much the money supply rises. A high money supply leads to the increase in prices of commodities because the supply and demand forces in the market operate through the purchasing power of people. High borrowing means increase in the purchasing power of people; this occurs with no rise in the supply and, as a result, persons demand more. The consequence of a rise of demand is a growth in the costs of commodities and services. With the global recession in place, the best solution is to increase the lending rates. This will discourage heavy borrowing and control the inflating of goods and services’ prices in the market. This is a logic approach to the issue because when financial issues suppress people, their next alternative to solve their money issues will be to borrow (Keller).
I agree with the arguments on the determinants of the recession since it is factual that demand and provide factors have an allotment to do with the topic. The aggregate demand dropped because of higher interest rates, which decrease borrowing and buying into dropping real wage rate, dropping buyer self-assurance, Credit crunch, which determinants, a down turn in bank lending and smaller buying into a long period of deflation (Washington). The impacts of inflation are clear on the microeconomic issues such as market demand and supply, individual choices and value decisions. This is because as Washington argues recession and inflation (stagflation) affected the spending habits and choices of people because it caused unemployment and increases in costs without any accompanying increases in earnings. This made it necessary for people and small businesses to consider revising their spending habits and choices they made in the economic markets.
As an economist, I would argue that inflation has certain impacts in microeconomics and economics as a whole. This is because all the branches of economics relate closely and as such, an effect on one will most certainly influence other sections of the discipline. This means that a persistent rise in prices of commodities will have an effect on the household spending and people’s savings. Microeconomics deals with these issues, which affect citizens of a country at an individual level or businesses at their level, but not at the national level. The world recession made businesses reconsider their decisions, and people to change their lifestyles and spending habits. With the costs of products and services rising, people could no longer save enough because saving comes last in the priority expenditure cycle. The first is spending on the necessities, and other important things to one’s life, investing follows and lastly saving. Since people can, only save the surplus after spending and investing and the first was already taking a lot of money, as a result, making investing almost impossible, people did not have a lot to save.
I would also argue that the market demand and supply rely heavily on the economic situation. In times of inflation, the raw materials are costly, and many producers will pass the costs to suppliers and wholesalers. The suppliers will pass on the costs to the retailers who will then pass them to the end users of the products. This makes the consumer to get goods at extremely high costs. In some cases, businesses may consider sharing the inflated costs in t5he market, but this will be after considering a number of factors. The customers who suffer most from times of recession and inflation are those of monopoly markets because such market operators pass the whole cost to the end user. In a perfectly competitive market, the market operators will reconsider doing this because of the competition in the market and may choose the alternative of sharing the costs.
In conclusion, as much as inflation and world recession are a topic covered in macroeconomics the impacts are clear in microeconomic issues. This is because through its effects of price and cost rise people and businesses have to change their economic behavior. The market demand and supply suffer because people no longer demand as much as they used to demand. This is especially, the case when they are not willing to supply goods and services at the current market rates because of the high costs of production they have incurred, or they would incur if they were to supply at the market price.
Keller, Smith. “OECD Says Europe Remains a Threat to the World Economy.” The Boston Globe Business Journal. 29 May 2013. Web. 30 May 2013.
Posner, Richard A. Economic Analysis Vol. 5. New York: Aspen Law & Business, 1998.
Washington, Rowe. “How Does Inflation Matter?” The Economist, 23 Apr. 2013. Web. 30 May 2013.