12 Basic Concepts You Should Know About Economics

The economy affects every aspect of our daily lives. From the toothbrushes we buy to the stocks we invest. That is why, in order to become a conscious citizen, you need to know at least basic economic concepts. Knowing them gives you an idea of how things are going around the world and allows you to make healthy decisions.

We know that many people have neither the desire nor the opportunity to study formal economics, so we have put together the 12 most basic concepts of economics for you. You can also see this article as a summary of the introduction to economics.

1.Microeconomics and Macroeconomics

Macroeconomics deals with the economy as a whole. Total figures in macroeconomics and data from all over the country are the focus. Macroeconomics therefore offers a broad perspective. Microeconomics investigates small economic units. Examines individuals and closely looks at their decision-making processes. Although these two disciplines focus on very different fields, they are intertwined with each other.

2.Opportunity cost

People are constantly in exchange. Due to the limited resources available, they need to make some choices. So they can’t get everything they want; they have to choose some things over others. The opportunity cost briefly characterizes the value of the other best alternatives abandoned in this process.

3.Supply and demand

The price of a good or service is determined by its supply-demand balance. In many cases, the increase in demand leads to an increase in price, provided that everything else remains the same. Likewise, an increase in supply leads to a fall in prices. In the long term, the market is expected to achieve a balance in which supply and demand are equalized.

4.Comparative Advantage

If an actor in the market can provide a good or service with less opportunity costs than its competitors, then this actor has a comparative advantage. In the case of comparative advantage, all market actors that produce one good or service more effectively than others can benefit from this advantage through partnership and trade with each other.

5.Decreasing Marginal Benefit

In many cases, people’s happiness in receiving a particular product or service decreases as the supply of that product increases. At some point, the marginal utility of a product can be reduced even to negative values, for example it can be completely negative. Marginal benefit is a concept that companies often use to set prices for their products.

6.Economic Growth and GDP

Economic growth is necessary to satisfy people’s desire to continually raise living standards, to redistribute income and to discover new technologies. Economic growth is determined by the gross domestic product (GDP in short), which is the sum of all products and services produced in an economy over a period of time.

7.Externalities

Externalities are the positive or negative consequences of the economic activities of an unrelated third party. They can increase or decrease at both ends as production or expenditure. In most cases, externalities corroborate market collapses that can only be solved by internalizing externalities through strict regulations.

8.Interest rates

When a bank gives a loan to someone, it expects a payment with interest. Thus, it aims to compensate for the risk of non-repayment of money and opportunity costs. Interest rates are the value that specifies how much interest a person or an organization must pay to get a loan. Therefore, interest rates play an important role in money trade.

9.Fiscal Policies

One way for a government to influence and control the economy of the country is to regulate expenditures and tax rates. In a concept called fiscal policies, a government can either stimulate the economy by increasing spending and reducing taxes, or slowing down the economy by reducing spending and increasing taxes. Fiscal policies can be used to correct economic fluctuations (bursts and extinctions).

10.Inflation and Deflation

Many economies experience moderate inflation at all times. In short, inflation means; People’s purchasing power decreases as prices rise. Deflation, on the other hand, is less common and is expressed as an increase in purchasing power while prices are cheaper.

11.Monetary Policies

Central banks or money boards can influence the economy by regulating the supply of money. They do this by trading government bonds or by adjusting interest rates. An expansionary monetary policy provides economic activity and growth, while a contractionary monetary policy does the opposite.

12.Cyclical Fluctuations

Economies regularly experience periods in which economic activity increases and decreases. The cyclical waves begin with the economic boom and continue with the decline. After the bottom point of the recession is seen, the economy starts to expand again towards the peak and thus a new wave of conjuncture begins.