Whether you’re 19 or 90, you interact with the economy every day and might not be aware of it. Basic economic concepts affect your trips to the bank, to any store you visit, and your paycheck.
Learning basic economic concepts will give you an understanding of how finance is at work in your life.
Keep reading below for the top 10 tips to learn economics for beginners and start becoming an informed consumer and citizen today!
What Is Economics?
Before we break down the basic concepts of the economy, it’s important to understand what the broad term “economics” actually means. Economics is concerned with producing, distributing, and consuming goods and services.
The study of economics looks at how businesses, people, governments, and countries make decisions on distributing resources. The goal of this distribution is to satisfy wants and needs and achieve the best outcome.
There are two major areas of study within economics, called microeconomics and macroeconomics. Microeconomics focuses on how individuals and businesses produce and consume goods and services. Whereas, macroeconomics looks at larger economic progress and international trade.
It’s important to learn more about the economy to be a responsible consumer.
1. Understanding Supply and Demand
One of the broadest economic terms that is important to understand is the concept of supply and demand. When demand is high, and supply is low, prices increase. You’ve interacted with this concept whenever you’ve seen gas prices shoot up or needed to buy a popular new toy or dress.
When this happens, manufacturers will make more of the product to meet the needs of customers. So then, as supply grows, the price will decrease.
2. The Concept of Money Supply
This is another general concept that you interact with regularly. The money supply concept refers to the amount of currency that is being used by the population, including checking account deposits.
This supply of money has a large impact on the economy. It is handled mostly by the Federal Reserve, which also can print more money. It’s important to understand that money needs to be available and used within the market.
The concept of inflation comes into play when you think about the cost of cigarettes 20 years ago versus the cost of them today. Inflation refers to prices increasing for goods and services in the economy.
Many economists consider a low and stable inflation rate to be ideal. If the money supply expands too much and too fast, it can result in high inflation. This also means consumers have to pay more for goods and services. In order to handle inflation, banks will often adjust interest rates.
4. Understanding Interest Rates
You’ve certainly interacted with interest rates if you have any line of credit or an account at a bank. This concept refers to how much people pay to use someone else’s money. It also refers to how much you can earn when you use your bank account and let the bank use your money.
Interest rates are understood as an annual percentage. The percentage is referring to the total amount borrowed and will fluctuate as the money supply grows and decreases.
Keeping up with today’s interest rates will help you to know what you should invest in. For example, if mortgage interest rates are high, you may want to hold off on buying a house.
5. Cost and Benefits in Economics
Another broad term in economics is cost and benefits. This refers to the expectations and choices of consumers. Basically, in every economic situation, individuals are trying to maximize their benefits, and decrease their cost.
For example, when you’re shopping for clothes, you’re probably thinking about how much you like an item and if you can afford to buy it. You’re weighing the cost vs. the benefit of getting to wear it.
6. Opportunity Costs
Another decision-making concept is opportunity cost. When you have an opportunity, like a job offer, you consider the things you’re giving up.
For example, you might accept the job at the cost of a different job or the cost of spending time on your own business endeavors. So this concept is essentially referring to the alternative you’re giving up when you take an opportunity.
7. Understanding Incentives
Incentives are used to motivate people to take a particular action or buy a product. Economists often describe incentives as to how they’re used in the workforce. Things like bonuses are used to encourage employees to work harder or work more hours.
Incentives can also be used with consumers to encourage them to purchase things, like using a buy one, get one coupon. It’s important to be able to recognize an incentive and how it can benefit you, and the economy.
8. The Concept That Nothing Is Free
This concept relates to the idea that nothing is truly free of cost. If you receive something free in the mail, there might be some hidden costs to you or some costs that are distributed to someone else.
9. The Diamond-Water Paradox
This concept relates to the idea that water is important for survival, but when you look at the market and economy, diamonds are technically worth more.
Water is often given away for free, while diamonds are quite expensive. This could relate to the idea that there’s so much water that exists on Earth, it is less valuable.
10. Understanding the Unemployment Rate
The unemployment rate is a highly important area of the economy. This refers to the number of people in the labor force that is divided by the number of unemployed people in a population.
The U.S. defines unemployed people as those who do not have a job and are actively looking for work or are available for work. Economists use the unemployment rate to understand the health of the overall economy and will often compare it to the previous year’s rate.
Learning Economics for Beginners Starts with Understanding Basic Concepts
The ten concepts above will help you with understanding the economy. In order to be engaged in the world and understand the role you play whenever you purchase a product or put money in the bank, it’s important to learn economics for beginners.
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