4 Microeconomic Situations One Must Be In

Introduction

Microeconomics is the study of how individuals and firms make decisions when it comes to the allocation of the scarce resources and the prices of goods and services. Now, there are four economic situations that individuals can find themselves in and they all relate to the amount of income (Y), consumption (C), savings (S), and investment (I). These “microeconomic situations” are labeled with economic formulas and since this article is about personal finance, I will describe how you can manage your money or get out of the economic situation.

Y=0 Situation

To begin with, we have a situation where an individual has no income at all. Here, the person is either out of a job, has gone bankrupt, or he or she is a dependent on someone else who is earning income. When someone is not earning any money, it doesn’t mean that they do not eat. What they eat and spend is what we call autonomous consumption. If this state of consumption persists for too long, the person will often find himself in too much debt and hence it is important for someone to be careful. One should remember that, at Y=0, you are at the bottom of the pyramid because you don’t have income, savings, or investments. That’s too bad because you can slide into poverty very easily. So try to get some job to earn money even if it is for consumption before you consider savings or investments.

Y=C Situation

At this level, the individual has some income, but he or she spends it on consumption. That means there are no savings or investments. This situation is better than the first one because at least you are not dependent on someone else for your daily upkeep. And remember consumption encompasses all things to do with spending money like buying food and groceries, paying bus fare, going for a movie, and paying phone bills, among others. So when you can afford to pay for these expenses from your income, then you are slowly climbing up the ladder of financial success.

Y=C+S Situation

The third situation one can be in is whereby you earn money; spend some of it, and save the rest. At this level, I assume you have found a good reason to save maybe because you read somewhere or you realized that you spend too much money on trivial activities and shopping. You should know that saving is like postponing consumption because the money you have saved will be used later. This situation is better because you feel like you have a safety net just in case something happens to your income; if it reduced or zeroed.

Y=C+S; S=I Situation

This is the highest level one can reach in terms of their income, consumption, savings, and investment. At this level, one is earning income, using it in consumption and savings but now the savings are used for investment. The money saved in the bank is not idle; instead it is used in investments like starting a business, buying stock, or investing in real estate. These investments start generating income that once again repeats that whole cycle. At this situation is when you hear someone is financially stable even if not super rich because at least they have managed their income to the optimal level.

Conclusion

The four microeconomic situations do not depend on the amount of money that one earns from a job or investments. The key thing is how you manage it. This is because you can find a person with a small income but he is wise enough to save some of it and spend the rest. In another scenario, you can find someone earning a lot of money but he rarely saves or invests it. Instead, you find them only spending. However, it depends on someone’s priorities but in terms of personal finance management you should strive to master the four levels of economic situations.