Microeconomics

Microeconomics deals with economic issues at a low level. This subject refers to the analysis of individuals and groups decisions, the factors affecting those decisions and how these decisions affect others. A good example of a recent microeconomic event is the recent economic slag in the United States of America. This slow down in the growth of the economy affected consumer spending by lowering the amount of money they spend on goods and services. In addition, this reduction in economic growth affected the capacity of borrowing and investment in the country. This paper will discuss four microeconomic principles in relation to the reduction in economic growth. It will also entail the challenges involved and what government policies will help solve the challenges.

Economic recession has an effect on the consumer spending and purchasing decisions. This is generally because the recession reduced the amount of money available for the households to dispose. In addition, the consumers choose to hold on to their money due to the uncertainty that may exist. At the same time, the price of commodities was relatively higher than normal thus reducing the purchasing power of the households. As a consequence, they cannot afford the same basket of goods that they used to before the recession.

It had been predicted that the economic recession in the United States would have a permanent effect on the purchasing power of the public. It was expected that the consumers would have to adjust downwards their spending to reflect the poor state of the economy.  In some respects, this was true as some households were left in a poor state during the recession. However, some have managed to recover to the previous levels of consumption once the economy managed to recover.

In addition, the recent recession had the effect of reducing business spending. As a result, the amount produced is relatively lower. The cost of raw materials usually has the effect of cutting down the amount of products produced by the business. Fewer products in the market have an effect of increasing their prices. This is because generally because the business are forced to increase prices to cover their cost and also as a result of demand and supply forces. The demand exceeds the supply of the commodities in the market thus making the prices to shoot up.

In addition, due to the increased costs of production, the businesses have two options if they are to remain profitable. Unfortunately, they all involve the workers or workforce. Because the businesses cannot adjust other costs such as the raw materials, the only viable option is to adjust the labor. They can opt to reduce the wages of the labor force or downsize it. During the recession, quite a number of workers took a wage cut in order to reduce the cost production for the businesses. As a result of reduced incomes among the households, further reduction in consumer spending followed. This only acted to worsen the situation thus deepening the recession further.

In addition, a substantial number of households lost their jobs in what was a mass downsizing process. The unemployment level was higher than it had ever been in the recent past. With the downsizing of employees, the remaining workforce faced worse working conditions without complaining. Since no one wanted to be fired, they never complained for working longer hours and less pay. Employees fortunate enough not to lose their jobs were forced to reduce their spending due to the level of uncertainty that existed.

The cost of living during the recession was also high due to the after effects of inflation. During the period, all essential commodities were almost out of reach for the households within the country. The consumers have to be more frugal during the period. Even movement during the period was greatly reduced due to the high cost of travel.

            During a recession, the borrowing capacity of households and businesses is greatly reduced. Most consumers and businesses are heavily in debt with very little in savings let alone to spare. As a result, not all credit-extending institutions are willing to extend any loans to individuals with little to offer as guarantee. In addition, the cost of credit is substantially high making it unaffordable for a large section of the public. The after effect of high cost of credit is reduced investment. All involved parties have little to spare in the way of investment. Reduced investment had the effect of prolonging the recession.

            In order to combat the economic situation in the country, the government introduced a number of policies and programs. Such programs included the reduction of the tax rate on goods and incomes of households. Reduced tax increases the amount of money in the hands of the public. The households are able to spend more, which can only act to resuscitate the ailing economy. Increased spending avails funds to households and businesses to finance their expenditures and investment activities. This creates more job opportunities for the public and even better pay. The same results could be attained by increased government spending and lending to the public. With time the cyclic effects of increased spending and lending avails funds to the economy.