in here we share with you 10 things in economics that everyone must know
Economics is a critical part of our life. Almost everything we do is in one way or the other connected to it. Whether we go to work in the morning, buy something to eat for lunch, or simply sit at home and watch TV in the evening, there is always a multitude of economic principles at play.
Thus, being familiar with the most fundamental of those principles can be extremely helpful. Not only will it help you to understand what is going on in the world around but it will also enable you to take well-informed and better decisions which is vitally important in all parts of life.
With this in mind we have created an infographic that illustrates and explains the 10 things in economics that everyone must know.
Table of Contents
- Microeconomics VS Macroeconomics
- Law of Supply & Demand
- Marginal Utility
- Gross Domestic Product (GDP)
- Growth Rate
- Interest Rates
- Interest Rates vs. Inflation vs. Growth
- Fiscal Policy
- Comparative Advantage
Microeconomics VS Macroeconomics
Microeconomics is the branch of economics that deals with how individuals, including people and companies, respond to economic conditions. For example, the question of what price points will cause people to switch from buying beef to chicken falls under microeconomics, as do questions of whether certain interest rates will cause individual firms will ramp up hiring.
Some microeconomics focuses on production, meaning the transition of resources of one form to another as in a factory or office. Labor economics also generally falls under microeconomics, understanding what motivates workers and their employers and causes hiring, layoffs and changes in wages.
Because microeconomics is focused on topics near and dear to many business owners’ hearts, it’s often considered more immediately useful and less abstract than macroeconomics, which looks at the economy at large.
Macroeconomics, on the other hand, looks at the economy as a whole. That includes trying to understand what drives the business cycle from boom to bust, or from growth to recession, and what controls overarching economic indicators such as gross domestic product, unemployment and inflation.
For those reasons, macroeconomics lends itself less to experimentation than microeconomics, and the science has, in some ways, been slower to develop.
Macroeconomics can therefore be of use to students of history, trying to understand why certain countries prospered at different times, and to politicians and central bankers at places such as the Federal Reserve that are looking to steer the economy into the future.
Law of Supply & Demand
The law of supply and demand reflects the relationship between demand and supply in that a change in one causes a change in the other. According to the law of supply and demand, when there is higher demand for a commodity, there is a rise in the supply of such commodity and vice versa.
The law of supply and demand explains the interaction between the desire for a product and the supply of that product.
For instance, if the supply of a product is how and the demand is high, it means such product is scarce and insufficient for the number of people that wants it, hence, it will lead to an increase in the price of the product.
marginal utility, in economics, the additional satisfaction or benefit (utility) that a consumer derives from buying an additional unit of a commodity or service. The concept implies that the utility or benefit to a consumer of an additional unit of a product is inversely related to the number of units of that product he already owns.
Marginal utility can be illustrated by the following example. The marginal utility of one slice of bread offered to a family that has only seven slices will be great, since the family will be that much less hungry and the difference between seven and eight is proportionally significant.
An extra slice of bread offered to a family that has 30 slices, however, will have less marginal utility, since the difference between 30 and 31 is proportionally smaller and the family’s hunger has been allayed by what it had already.
Thus, the marginal utility to a buyer of a product decreases as he purchases more and more of that product, until the point is reached at which he has no need at all of additional units. The marginal utility is then zero.
Gross Domestic Product (GDP)
Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports).
While GDP is the single most important indicator to capture economic activity, it falls short of providing a suitable measure of people’s material well-being for which alternative indicators may be more appropriate.
This indicator is based on nominal GDP (also called GDP at current prices or GDP in value) and is available in different measures: US dollars and US dollars per capita (current PPPs). All OECD countries compile their data according to the 2008 System of National Accounts (SNA).
This indicator is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.
The economic growth rate is used to measure the growth of an economy, usually in terms of its output or gross domestic product (GDP). GDP measures the value of all goods and services produced by an economy over a certain period of time.
Nowadays, market-based economies revolve around continuous growth. An economy is defined as a set of inter-related activities for production and consumption that determines how limited resources are allocated. Market-based economies distribute these scarce resources with a market system, wherein the economic forces of supply and demand determine the allocation of resources.
A market-based economy prospers by being able to produce more goods and services over time, which in turn leads to more tangible wealth in the form of money, and in theory, every participant in the market economy is better off.
It may be one of the most familiar words in economics. Inflation has plunged countries into long periods of instability. Central bankers often aspire to be known as “inflation hawks.” Politicians have won elections with promises to combat inflation, only to lose power after failing to do so.
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.
The interest rate is the amount a lender charges a borrower and is a percentage of the principal the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).
An interest rate can also apply to the amount earned at a bank or credit union from a savings account or certificate of deposit (CD). Annual percentage yield (APY) refers to the interest earned on these deposit accounts.
Interest Rates vs. Inflation vs. Growth
There’s almost an inverse relationship between interest rates & growth, and interest rates also can affect inflation directly. Thus, when you increase interest rates inflation tends to come down, along with growth.
One is good and other is bad. Thus, the constant tension on setting the interest rates. In the U.S., Federal Reserve sets the short term rates and it’s one of the most watched economic news.
Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.
The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.
In the communiqué following their London summit in April 2009, leaders of the Group of 20 industrial and emerging market countries stated that they were undertaking “unprecedented and concerted fiscal expansion.” What did they mean by fiscal expansion? And, more generally, how can fiscal tools provide a boost to the world economy?
A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.
Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?
Let’s see someone who is the best at doing something is said to have an absolute advantage. Michael Jordan has an absolute advantage at basketball. For all I know, Michael Jordan may also be the fastest typist in the world, giving him an absolute advantage at typing, too. Since he’s better at typing than you, can’t he type more cheaply than you? That is, if someone has an absolute advantage in something, doesn’t he automatically have a comparative advantage in it?
The answer is no! If Jordan takes time out from shooting hoops to do all his own typing, he sacrifices the large income he earns from entertaining fans of basketball. If, instead, his secretary does the typing, the secretary gives up an alternative secretarial job or perhaps a much lower salary playing basketball. That is, the secretary is the lower-cost typist.
The study of economics helps people understand the world around them. It enables people to understand people, businesses, markets and governments, and therefore better respond to the threats and opportunities that emerge when things change.
Economics majors are well-positioned in an ever-changing world because they have problem solving and analytical skills that allow them to succeed in variety of career paths—law, risk management, actuary, finance, foreign affairs, public administration, politics, policy analysis, health administration, entrepreneurship, market analysis, journalism, and unknown careers of the future.