Economics is the social science of analyzing the choices people make based on the resources at their disposal. Specifically, economics seeks to understand and explain the needs and wants of people and how to maximize resource allocation according to those needs and wants.
Some foundations in economics include supply and demand, needs and wants, micro and macro economics, gross domestic product (GDP), and opportunity cost. Understanding these terms will provide you with a basic working knowledge of how people and countries as a whole allocate, or use, their resources to suit their needs on a regular basis.
Supply and Demand
The principles of supply and demand drive economics. Supply refers to the amount of a particular good or service a producer has available. Demand refers to the level of want for a particular good or service by the general public. For example, if many people want a TV but there are not many left in the store, then the price will be pretty high because there is a greater demand than supply. On the other hand, if not many people want a TV and there are many TVs in the store, then the price will be lower because there is a greater supply than demand.
Needs and Wants
Most basically, people have unlimited wants in a world of limited resources. People and countries need to make the best use of their limited resources (money) in order to first fulfill their needs and then as many of their wants as possible. Needs are things like housing, food, and clothing while wants would be entertainment, eating out at fancy restaurants, and name-brand clothing.
This is the study of economics on a large scale. Macroeconomics studies the decisions very large companies and countries make and how these decisions impact the world.
This is the study of economics on a small, or individual, scale. Microeconomics usually studies how one person or a family makes the best use of their resources to meet their needs and satisfy their wants.
GDP stands for gross domestic product, which refers to all the money made in a country in a given year. GDP is the most common measure of the health and development of a society’s economic performance. Well-developed countries like the United States have a higher GDP than developing countries like Kenya.
Opportunity cost refers to the loss of a potential gain when an alternate decision is made. In other words, this is something you missed out on because you decided to do something else. For example, you might choose to go to the beach instead of working and getting paid for a week. In deciding to go to the beach, you had fun but it came at the cost of not getting paid for the week. The opportunity cost of going to the beach was your salary for a week.
The government does several things that impact the economy. It is important for the government to regulate, or control, certain aspects of the economy. Also, the government must work with other countries to promote and regulate economic growth.
There are four main types of economic systems in which governments attempt to control or promote economic growth:
Traditional—Traditional economies are influenced by culture and are the most basic economic system. They are often found in rural, less developed regions of the world.
Command—Command economies are controlled by the government. The government sets prices of materials, the cost of production, and income levels.
Market—Market economies have the least government involvement. Market economies are driven by interactions between businesses and individuals as well as the basic principles of supply and demand.
Mixed—Mixed economies combine private business and government business. These are basically a mix between market and command economies.
Globalization is process of making something worldwide in scope. Today, the world is very globalized, especially in terms of economics. People and businesses buy, sell, and trade things across the entire world. Many countries today depend on each other for the buying and selling of goods and services. This is called economic interdependence.
The U.S. government allows competition to drive the economy. However, the government also keeps a close eye on the economy in an effort to step in and set regulations to prevent recessions and depressions. One way they do this is through regulating interest rates on borrowed money. Rates tend to be higher when the economy is strong and lower when the economy is weak to allow people to pay less in interest and spend more in other places.
The government places regulations on businesses for various purposes. Most often, regulations are put in place to preserve or protect something. Sometimes regulations are put in place to protect the consumer, businesses, or the environment.
Most simply, consumer economics refers to microeconomics. It is the study of the economic behaviors of individuals and small groups of people rather than large businesses or governments.
Needs and Wants
As mentioned earlier, people have unlimited wants in a world of limited resources. People and countries should make the best use of their limited resources (money) to fulfill their needs and then their wants. Needs are things like housing, food, and clothing while wants would be entertainment, eating out at fancy restaurants, and name-brand clothing.
In economics, the producer refers to the person or business that is offering a good or a service. Any company that sells something is a producer. Producers have limited resources so they try to keep production costs low in order to stay profitable.
On the other hand, the consumer refers to the person that buys a good or service from the producer. Consumers also have limited resources so they try to find the best price for the things they need in order to make the best use of their resources.