The aim of this study was to look at the implications and consequences of microeconomic terms on the US economy in terms of competitiveness and the unseen hand, market imperfections, game theory, and public policy economics. A survey and analysis was undertaken on two economic timeframes and their effect on institutions, public policy, and regulations. The scale of economic recession and the effects on GDP, wages, business decision making, government responses, and study of the pressures of shifting economic circumstances on economic thought were used to compare the two cases. Raising the price of a product in microeconomics spontaneously reduces its demand. This means that the seller who has increased the prices of his good will lose customers to the ones who have not (Guiso, 2017). This seller gets controlled by the invisible hand in that he has a choice to make loses or reduce prices to maybe, lower than the original. In some cases, businesses may collude or form cartels, legally or illegally, to raise prices (Game theory). The governments react by formulating public policies aimed at protecting the citizenry from such kinds of exploitation (Kollman, 2017).
This report seeks to explore the contributions and impacts of these terms on GDP, unemployment and other economic variables during challenging economic times. This report views microeconomics as a social science that studies decisional and behavioral effects of demand and supply.
The research was conducted by questionnaires distributed to random anonymous citizens and business owners, voluntary interviews with economists, and investigations carried out on economic records with focus on 2007/2008 economic recession.
The economists stated that economic crises are foreseeable but in the 2007/2008 economic recession, the signs were blatantly ignored, and instead hailed as the ushering in of a new era. Most questionnaires recounted the hard economic times during the times, the inflation, the reduced purchasing power, escalated crime rates, reduced supply of key goods among others and most said they would be more vigilant of the signs in future by observing certain aspects of macroeconomics such as bubbles and booms. Business owners reported reduced purchases and increased cost of doing business, massive borrowings from financial institutions, low sale volumes and they too vowed to be wary of telltale signs of recessions.
Discussion/interpretation of results
As with the 2007-2008 economic recession, financial, housing institutions and firms encourage household borrowing and spending beyond means (Guiso, 2017). This resulted in an increase in purchasing power of households and individuals at a time when the Government employed the financial deregulation and loose monetary policies (McCombie, 2017). The financial markets crashed due to Governments refusal to bail them out owing to the prevailing public policies. The results were recessions coupled with banking, inflation, external debt and currency crises. This had a devastating effects on individuals due to rising unemployment as inflation rose, wages dropped, there developed food and energy crisis and poverty levels surged (Kollmann, 2017).
The United States, being at the center of these crises, its economy was affected directly by the mortgage market meltdown, financial crisis and credit crunch. As a result, the economy shrunk with reduction in Gross Domestic Product, inflation, increased public debt and increased taxation (McCombie, 2017). The same scenarios were replicated in 1929 post war times (Guiso, 2017). The 2008 financial crisis and the subsequent Great Recession brought the need for new economic thinking. This included the exclusion of financial system (capital markets and credit relationships, both lenders and borrowers and sellers and buyers of iniquities) from the Dynamic Stochastic General Equilibrium and reinstatement of distribution, backing off from intellectual imperialism and learning from history.
A free market devoid of regulations and restrictions imposed by the governments has both positive and negative effects on microeconomics, depending on the kinds of practices employed by the market players (Kollmann, 2017). If a seller or a service provider decides to charge less, most customers are attracted to him. Competitors have to lower their prices or offer higher quality. When there’s a demand for a good in a normal situation, the market supplies it and every player is satisfied, however, as in some cases, when some businesses decide not to play by the rules by colluding to manipulate prices to widen their profit margins and prevent new entrance into the industry, customers are left with no choice but to shift their demands with the with the shift in new prices and supply (McCombie, 2017). The government may or may not react by formulating policies that are aimed at checking the market behavior. If the government fails to check these behaviors wisely, crises might follow that impact greatest on businesses, individuals and households (Guiso, 2017),
Stronger policies should be put in place to prevent future economic crises in future.
Limiting government’s debts.
Abolishing central banks and allowing a free competition in banking by allowing them to produce both currency and deposits.
Guiso, Luigi. “The Microeconomics of Trust.” Social Economics: Current and EmergingAvenues (2017): 109.
Kollmann, Robert. “The Post-Crisis Slump in the Euro Area and the US.” (2017).
McCombie, John, and Marta Spreafico. “On Income Inequality: The 2008 Great Recessionand Long-Term Growth.” The Crisis Conundrum. Springer International Publishing,2017. 41-63.