Student Publications
Author: Hansel DSouza
Title: Economics

Area:
Country: United States
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Avialable for Download: Yes

Introduction

Economics is a Science of Wealth; and also the Social Science of man's action in society, which deals with man’s efforts to satisfy his Wants, as long as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money.

Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of an individual’s social action that’s most closely connected with attainment, and with the use of the material requisites of well-being. Thus it is on the one side a study of wealth; and on the other, and more important side, the study of man.

Human character has been formed by their every-day work, and the material resources that human’s procures, more than by any other influence unless it be that of religious beliefs. The two great forming agencies of the world's history have been religion and economic. There was a time when the military or the artistic spirit had been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than economic, but their direct action seldom extends over a large part of life.

For the business by which a person earns their livelihood generally fills their thoughts during the greater part of those hours in which their mind’s are at its best; during those hours, their character is being formed by the way in which they uses their faculties in their work, by their thoughts and their feelings, and by their relations with their associates in work, their employers or their employees.

The old age definition of economics described it as the science that is concerned with the productivity, the distribution, the exchange, and the consumption of wealth.  And very often the influence exerted on a person's character by the amount of his income is hardly less, if it is less, than that exerted by the way in which it is earned. It may make little difference to the fullness of life for a family whether its yearly income is $2000 or $5000; but it makes a very great difference whether the income is $50 or $150: for with $150 the family has, with $50 it has not, the material conditions of a complete life.

Wants in Relation to Activities

Human wants and desires are countless in number and very varies in kind: but they are generally limited and capable of being satisfied. The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things; he desires a greater choice of things, and things that will satisfy new wants growing up in him.

As a man's riches increase, his food and drink become more various and costly; but his appetite is limited by nature, and when his expenditure on food is extravagant it is more often to gratify the desires of hospitality and display than to indulge his own senses. The need for dress, which is the result of climatic causes, varies with the climate and the season of year, and has little to do with the nature of a person's occupation.

In many of the earlier stages of civilization the mandates of Law and Custom had rigidly prescribed to the members of each caste or industrial grade, the style and the standard of expense, and up to which their dress must reach and beyond which they may not go; and part of the substance of these mandates remains now, though these customs are now rarely followed with the every changing fashion and design clothing which is part of the economic change that has take place and in direct relation to society.

The same is the case with housing, gone are the days when houses were thought of as an imperative need as shelter from the weather, but that need, plays very little part in the effective demand for houses, as now days it is a big part of the economic prosperity of humans. And therefore relatively large and well-appointed houses are, even in the lowest social ranks, a necessity for the most convenient and obvious way of advancing a material claim to social distinction.

Broadly speaking, although it is man's wants in the earliest stages of his development that give rise to his activities, but later on in life each new step upwards is to be regarded as the development of new activities giving rise to new wants, rather than of new wants giving rise to new activities.

When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipation of the profits that will be derived from it. However, these profits depend, on speculative risks and other causes, which will need to be considered. But in the long run the price which a trader or manufacturer can afford to pay for depends on the prices which consumers will pay for, or for the things made by aid of it. The ultimate regulator of all demands is therefore consumers' demand.

It has been argued that desires cannot be measured directly, but only indirectly by the outward occurrence to which they give rise, and that in those cases with which economics is chiefly concerned, is where the measure is found in the price which a person is willing to pay for the fulfillment or satisfaction of their desire.

 The person may have desires and aspirations, which are not consciously set for any satisfaction. It is assumed that the resulting satisfaction corresponds in general, fairly well to that which was anticipated when the purchase was made.

The New Law of Supply and Demand:

Historically, sellers have dominated nearly all markets, today buyers dominate nearly all markets, and therefore business that cannot adapt to this change will not have lasting future. From the time of the industrial revolution to the end of the twentieth century, companies competed for most part, by supplying what they assumed their market demanded. This approach was very successful in the past, because the world economy was able to observe virtually all the supply that was created, but in today’s market this is no longer applicable and many economist and business leaders recognize this change.

Business have always noted their customers desires, as Lawrence A Bossidy, Chairman of Honeywell International Inc. stated: “I doubt if there is a single company in this country that will not tell you that its first priority is satisfying customers”. The question does arise though do companies behave that way? understandably not many do.

Today as new competitors boldly and at times blindly enter nearly every market place and this causes supply to be in excess of its demand, which results in companies finding themselves in a price war, therefore there is little choice but to compete on price alone, which then results in loss of profit. The current market forces requires companies to realign their approaches to the market to reflect the realities of the demand or suffer the consequences as many have during the past 5 years.

It is important to note that in order to alter the way a company acts, we must first address how its leaders think, as the economic, technological, and societal forces have combined to create changes of such scope and magnitude that business leaders must rethink what they do in order to compete successfully in the ever changing market in order to win.
To be successful requires a change in how to market and compete with your products. Competitive advantage and continuous growth are possible by making changes that will have an enormous impact in the market place, as companies can prosper in the demand economy by using proper demand strategies.

From the book - The revolutionary new DEMAND STRATEGY for faster growth and higher profits by Rick Kash, we learn that customers are a critically important part Demand strategy, as it goes far deeper and involves many factors that the customers alone can supply. Listening to a customer has enormous value, but there must be a system of checks and balances through which you can validate all that you are being told by customers.

However, in the past much of the world’s economy troubles, were a result of companies who listened only to their customers and built as much as product they thought their customers needed. This has become a textbook account in business history, Senior Managers in the telecommunication industry especially, were essential told by their customers to keep making more equipment and more bandwidth. As a result on listening to their customers and failing to put the information in context, the supply of telecommunication capacity exceeded its demand, as the suppliers leaders failed to validate what their customers said by putting it in the context of other available information.

Unfortunately there are many other industries that suffered the same fate, customers spoke convincingly about how much they wanted of a particular product, but once the manufacturers followed their advise, those same customers some how disappeared and the products were failures.

The importance of Context pertains to every issue and question in order to fully understand customer opinions, experience and demand. For example, when asked the isolated question “ Would you buy more environmentally friendly products if they were conveniently available in your favorite grocery store? Consumers overwhelmingly said yes all the time. However, the cost of producing environmentally friendly products is quiet expensive and therefore many products introduced failed, because those products cost was significantly higher than the products consumers were used to purchasing. Had the price differential been a part of the earlier question, many companies would have saved a lot of time and money.

Therefore it is important to note that when we say we have learnt from our customers we must always ask the following:

In other words customers have different values to business managers, and so does the information they provide, meaning that the customers information is absolutely necessary but insufficient if it stands alone as the primary source of information and guidance.

Adam Smith’s  “The wealth of nations” set the terms for modern economic thinking. His, best known principal is the law of “Supply & Demand”. While the name of law placed “supply” before “demand” smith in fact didn’t consider either element more important than the other.

Buyers drive demand, refers to the number of customers who are able and willing to buy a product at a given price, when the price of the product increases the demand for that product decreases. It is the producers who drive the supply, the total supply depends on the number of producers who are selling the product at a specified price and the amount each producer is willing to supply at that price. In most cases when the product’s price increases the number of producers supplying it also goes up, which generates an increase in supply available in that product in the market. If the demand can’t absorb the additional quantity the price starts to drop as producers try to unload the excess inventory.

Adam Smith, established another vital principal, which of scarcity or nonsubstituteable, where he noted that products that are scare relative to demand, and for which there are no close substitutes, command a higher price and this price mechanism holds the demand and supply in balance.

In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his “Wealth of Nations”. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history. This  was referenced by Alan Greenspan in his speech to the NABE (National Association for Business Economics- 9/27/2005).

Paul Samuelson’s the Nobel Laureate of the MIT –1948, wrote his notable and widely used text book,  “Economics” where he asked the 3 fundamental questions:

Paul Samuelson’s in his 2001 edition continues to put forward his views on economics of the old “Every society must have a way of determining what commodities are produced, how these goods are made, and for whom they are produced” while the questions remain to be right, the economic value is no longer appropriate for business that seek to prosper.

In the demand economy of the 21st century, the first question to be raised is “for whom are the products intended, and which of their demands are we attempting to satisfy?” The next question, “ what should be produced to meet demand” followed by “How should they be produced”?.

Today’s demand economy is marked first and foremost by an oversupply in virtually every business category, as a result each competitor must first select target groups of customers, then create supply that more fully satisfies them than the supply offered by their competitors..

The 20th century, saw the advent of mass production, leading the way was Ford motors, as people moved from rural communities to cities, many farms and cottage industries collapsed. In industrialized countries, the standard of living improved tremendously, and the middle class expanded, giving form to a very sophisticated consumer society. Though the basic needs were still there, there was the desire for material things, as people began to have the capacity to buy them, which created a great demand, and the industries could not keep pace with the demand, as a result mass markets developed for new products and services e.g cars, washing machines, telephones, & television just to name a few.
There was fierce competition within the mass markets, resulting in lower prices, but production efficiencies made it possible to drop prices and still be profitable, as lower prices attracted more customers, making majority of the 20th century a sellers market.
In the 1990’s, the world economy shifted, the supply economy was dead, killed by the producers themselves.

Frederick, W Smith, Chairman, CEO, and President of FedEx Corporation, said in his view described the transformation this way:
“It is still the case that the vast majority of businesses continues to focus more on the supply side of the business equation than on the demand side. The traditional business question has always been “How much product can we make and how fast can ours workers make it? “ But today, it is very clear that pushing product out the door certainly will not create competitive advantage.

Today most businessmen who are successful are asking a very different question, and that is simply: “What does my customer need, and when does that customer want it?” That ladies and gentlemen, is a major shift of historic proportions. We are in the midst of a change of the entire flow of commerce. The flow of all commercial information and all goods must now meet a new standard for demanding customer requirements.

FedEx remade itself in response to demand, by recognizing and then exploiting the demand for worry free package delivery on part of anxious business people and individuals who are willing to pay a premium for reliable, timely service. Over time, FedEx has earned its leading position by keeping its promise that every package will arrive positively overnight.

How Economics impact’s my line of business – Logistics – Transportation:

International trade causes transportation of goods by sea, land & air, where goods are transported from one country to another, both in Bulk and now in the late 20th century via Containers. Ocean transportation has been the key link from the beginning of time which fostered trade between two countries, which started with the economic principal requirement of  “supply & demand” trading of bulk shipments viz grain, coal & Iron ore to Europe who were able to purchase raw materials from countries that were rich in natural resources, and did not have the means to process the raw materials. Europe in turn was one of the main industrialized nation that were able to produced finished goods with the raw materials that they imported and then exported those finished goods back to the countries that needed those products.

Today, transportation of goods is undertaken to all corners of the world making trade possible with any country from any part of the world, as most of the trading takes place internationally thru various trade treaties and exchange houses that govern and control the trading policies and the pricing of commodities. However the demand for trade is constant and therefore transportation in any form has to be available to enable trade to take place, as without moving goods from one place to another there would be no trade.

The overall cost of logistics on a macro basis will increase with growth in the economy, as if we produce and consume more products and services, there will be increased cost associated with all the logistical activities of each and every organization. To determine the efficiency of the logistics system, we need to measure total logistics cost in terms of gross domestic product (GDP), which is a widely accepted barometer or metric used to gauge the rate of growth of the economy.

Logistics cost as a percentage of gross domestic product, have declined since the 1980’s from about 16% down to under 10%, in fact the logistics cost in the 1970’s was closer to 20% of the GDP. Therefore logistics cost on a relative basis has declined over the course of the last 20 years, the reason being is that there has been significant improvement in the efficiencies of the overall logistic systems of the various companies operating in the economy.

The reduction in relative cost, allows companies to be more competitive since it directly impacts the cost of producing goods, as there are 3 major categories of cost that effect the price and they are:

The decline in transportation cost was mainly due to the deregulation of transportation and open trade policies, allowing private operators to participate in the transportation of goods and services, bringing in flexibility for carriers to adjust their rates with increased competitor partaking in the transportation industry. The other factor is also due to better management of assets and time, and providing the suppliers choices to enable them meet their customers demand and stave off competition accordingly.

From the brief information on the role logistics plays with economic and trade, it important to note that transportation play a very important role in the industry of trade and commerce, and therefore good management in handling the movement of goods to and fro will help determine the ultimate cost and also plays an important role in the supply and demand factor, as timing the movement of goods is very important as final cost of the goods take into to consideration the transportation, storage and the availability of the products.

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