Most Important Basic Concepts of Economics You Need to Know

Just recently, it has been reported that the total assets held by U.S households are over $113 trillion. If this number were divided up by the total population of the United States, it would equal out to over $343,000 for every person.

However, this isn’t how the economy works. The economy is much more complex than that and doesn’t provide every individual with the same benefits.

An economy is a dynamic system that is ever-changing to keep up with the demands of society. 

If you are interested in learning more about the basic concepts of economics, keep reading this guide to learn more about the transfer of money and how it can benefit you.

What Is an Economy?

To better understand the basic economic concepts, it’s critical to understand precisely what an economy is and what purpose it serves. 

An economy is a system that revolves around three vital functions of society; these include:

  • Production
  • Distribution
  • And consumption

Without one of these functions, the rest become meaningless, and the system falters. 

An economy deals with the resources that a particular society has, and how those resources are distributed to benefit the members of that society.

Economics can be broken down into two subcategories – macroeconomics and microeconomics.

Macroeconomics

Macroeconomics takes a look at the economy on a larger scale, or “as a whole.” It deals with topics such as:

  • Inflation
  • Gross Domestic Product (GDP)
  • Unemployment
  • Economic growth
  • And global markets

The study of macroeconomics takes a look at aspects that make up the structure of an economy and the driving factors behind it. It can be useful in forecasting and predicting what policies make the most sense at certain times of need.

Microeconomics

Microeconomics, on the other hand, takes a look at the economy on a smaller scale and is more focused on the details. It involves topics such as:

  • Consumer behavior
  • Pricing
  • Utility
  • Production
  • And incentives

As opposed to macroeconomics, the study of microeconomics takes a look at individual components of the economy. One of the main objectives behind microeconomics is to determine what drives consumer behavior when pertaining to changes in price, incentives, etc. 

Supply and Demand

Supply and demand are basic economic terms that many people don’t fully understand. 

It involves the relationship between buyers and sellers of a particular resource in terms of quantity. Supply and demand are generally regarded as one of the main determinants of price. 

A perfect example of this relationship can be seen with the price of gasoline. When the demand is high and the supply is low, the cost of gas goes up. But when the demand is lower, and the supply is high, the price of gasoline goes down. 

Think about when you typically see the highest gasoline prices, during the times when people travel the most, usually around holidays.

Supply

Supply is the amount of a specific resource that a supplier is capable of producing.

The law of supply explains that sellers are willing to increase supply at higher prices to increase profits.

Demand

Demand is focused on consumers, and how much of a resource they are willing to buy at a specific price. 

The law of demand explains that consumers will buy less of a product at higher prices. 

The Law of Supply and Demand

The law of supply and demand is one of the most fundamental economic concepts and is essential in determining the price of resources. 

The law of supply and law of demand directly complement each other and are used to find price equilibrium. Price equilibrium occurs when consumers and sellers are satisfied with the price and quantity of the resource.

Scarcity

Scarcity is another fundamental concept of economics that should be understood.

Scarcity is a term that can be applied to many different things. When it’s applied to economics, scarcity is referring to the limited number of resources with an unlimited desire to consume those resources. 

This concept is one of the main drivers behind an economy, its what gives resources value.

For example, bluefin tuna is a popular fish that has significantly increased in demand due to an increase in demand for sushi. The rise in demand has lead to overfishing, and now bluefin tuna prices are skyrocketing, one bluefin tuna has sold for $1.75 million. 

Financial stability is a difficult task but not an impossible one. It can be achieved through various methods, including international regulatory coherence, learn more here.

Trade-Offs

With scarcity playing a factor in determining value and price, this leads to consumers having to make trade-offs or choose alternatives. A trade-off is something you select over another option given a set of circumstances.

For example, you would like to live on the beach. There is a limited number of properties that are located on the beach, and many other people would also like to live by the beach, giving you an option to either:

  1. Pay more 
  2. Or live somewhere else

The trade-off of living on the beach would be the cost associated with the land. It is going to be more expensive than living elsewhere. This could mean you will have to work more hours or cut back on other costs.

Opportunity Cost

After deciding what option you choose in a trade-off, the opportunity cost is the loss that comes with choosing that option over the alternatives.

In the beach example, suppose you chose to live elsewhere, the opportunity cost would be not living on the beach. That is the “cost” of the option you chose.

Incentives

Governments and businesses can help sway the decision of consumers by using incentives or bonuses for choosing a particular option. 

Referring back to the beach example, let’s say the property was known for flooding, and the cost of flood insurance was too high for your liking. What if the government-subsidized, or paid a part of the cost of the flood insurance, would you reconsider?

Looking to Expand Your Knowledge on the Basic Concepts of Economics?

Learning basic economic terms can help give you a better understanding of how the transfer of money works. It is something you deal with in everyday life and can be applied to many different aspects of finance.

For more information on the basic concepts of economics, check out the rest of our website!

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