Opportunity Cost:Opportunity cost is what is sacrificed in order to attain another item. For example, when we go to class every day we sacrifice going to work and getting paid, staying at home and sleeping, or partaking in a number of other leisure activities that one may enjoy. However, we are putting all that aside to get an education and further our understanding of economics because the benefits of that, outweigh the potential substitutes. A company may also use opportunity cost to determine whether it is worth producing more of a certain item. Adam Smith’s concept of the invisible hand:The invisible hand is led by people’s self-interest and the natural competition that occurs in a free market.
The government does not intervene unless it is absolutely necessary. Due to this, the market regulates itself and adjusts to changes. Both leading forces come together to work in benefit to the whole nation. Market failure:When the market cannot allocate its resources effectively to produce what consumers want while using the least amount of resources posible, it fails. A market can fail if communication between consumers and producers fails.
This can happen when consumers fail to realize the importance of a product, sellers advertise products that do not benefit the consumer, or when products demanded by the consumers are not being produced. The Business Cycle:The business cycle is the changes in the economy over a period of time. The cycle has four set stages. The first is expansion in which the economy grows at a rate of 2-3%, unemployment is low, and inflation is at its target. When investors get too confident in the growth of the economy and begin to seek even higher profits, the economy reaches the peak stage. The peak stage is a transitional stage for what is to come. After you get hit with the third stage- contraction.
GDP falls below 2 percent and unemployment rate rises. This stage usually includes a recession of sorts. Stocks begin to lose value and investors try to sell as much as possible to not lose profits. The final stage is trough. Like the peak stage, trough is a transitional stage and marks the transition between contraction and expansion.Today, the United States has an unemployment rate of 4.
1%, a GDP growth rate of 1.6%, and an inflation rate of roughly 2.1%. We find ourselves in an expansion phase.