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Economics Essay

1295 words - 6 pages

Final Analytical Application of Current Microeconomic events
Introduction
The article ‘Financial crisis in the living room’ written by Renan Bourdeau on the 8th of September 2013 featured in the Khaleej Times. It questions the ramifications ascribed to the fact that the populace’s salaries are not increasing in congruence with housing costs. The article cites that the recovery of the residential estate in Dubai has featured in the news for quite some time and the prices of houses have soared, and have been accompanied by high rental costs for properties. As a result of the drastic increase in the housing prices which is bound to extend until the year ends, utility costs have flared up in ...view middle of the document...

Since the lender is only reliant on the borrower’s promise to repay the loan, there is a great risk, and consequently a higher interest rate Bourdeau, n.d).
As established by the economic domain, microeconomics focuses on consumer decisions and procedures employed to address conditions principal to bad customer decisions by the government. The economy has suffered a serious setback form the current global recession with the government taking on a nominal part in trying to address these issues. The most notable recent microeconomic event is the global credit crisis that has wrecked the current economy. Although there are other economy-crushing issues facing the current economy, the credit crisis seems to be a more eminent threat as we approach the third quarter of the year.
This paper explores the credit crisis ascribed to the emirates. The paper explains the underlying economics of this event and describes the main challenges involved, and in conclusion, proposes the appropriate role of government policy in relation to the event.
Credit Crisis
Contributions from micro-economists support the existence of market failures that influence the regulation of markets. In the current economy, the market failure that has generated a chain of other economic crises finds its roots in the swift augmentation of subprime mortgages and the inability of many buyers and investors to comprehend, and properly weight threats related to credit (Beck, 2008). This, in turn, leads to deleverage in the banking system, causing a crash in the entire system. Raising interest rates make cash more valuable, the system essentially leans towards necessitating and promoting lower rates. However, the instituted leverage eventually becomes farcical. The surplus credit compels an upward movement on the prices of asset until the risks of acquiring these assets are not justifiable from their earnings (Perlman, 2012).In the current economy, banks continue to misjudge the likelihood of a decline in the cost of housing, and trust that they can quantify the interconnection of the credit menace. Together with consumers, banks fail to account for any low-probability events, which may turn out to be adequately necessary. Subsequently, this leads to a wave of failures, hence, impairing the economy (Perlman, 2012).
Underlying Economics
To understand the underlying economics of the current credit crisis, one must consider the economic theories aimed at explaining economic problems in relation to products and resources. Microeconomic theories mainly focus on the premise of supply and demand, aggregating the quantity demanded to the quantity supplied at every achievable price per unit. As compared to other microeconomic theories, the classical school theory best explains the underlying economics of the impending credit crisis. The ideas proposed in this school of thought support the concept that an individual inadvertently facilitates the best possible outcome for all by looking out for...

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