A Beginner's Guide to Economics

By: Isla Hildebrand

The term "economics" can be best defined as the study of how individuals produce, consume, and transport goods or services. It involves analyzing people's behaviors and traits, taking note of how money is spent, and studying how resources are distributed within a society.

Economics isn't really all that money-based; however, it's more of a social science. It combines the psychological side of decision-making with the analytical side of finances in a real-world setting. At its foundation, economics is really simply a study of human behavior and how the decisions we make shape us.

You don't need to be a mathematician or crazy Wall Street banker to understand how money works. This article is a guide to the unfolding realm of economics by breaking down the basics. We explain the simple terms you should know, demonstrate economics in everyday life, and clarify why it's so important to understand the world of commerce.

Economics is everywhere, so let's dive right in.

Terminology for Amateurs

While there are a plethora of expressions used in the study of economics, knowing the basic vocabulary is essential to understanding the subject itself. Here are 10 basic terms that are most commonly used when it comes to the main picture.

1. Budget

   A budget is the blueprint for how you choose to spend, save, and invest your money. It can be broken down into weekly, monthly, or annual sections, depending on how long your plan is. You can break down a section into topics (rent, car, groceries, etc.) and set aside a given amount of money for each area. Budgets can be used for everyday activities or to run the national bank.

2. Gross Domestic Product (GDP)

   Gross Domestic Product, more commonly referred to as GDP, measures the economic size of a country. Through a proper analysis of the goods and services produced by a country, governments can determine the projected financial prosperity of an area or region. Interpreting GDP is essential to understand if a country needs to improve an industry, or if it's flourishing as a whole.

3. Supply & Demand

   The term Supply & Demand is one of the most used phrases within economics because of how it shapes a market. The actual expression itself is a law derived from the 1770s, and it was used to theorize the relationship between a consumer and producer. As prices rise, it means demand is higher, and when they fall, it means the opposite. Supply & Demand is an essential part of economics because it reflects predictions within future rates of finance.

4. Inflation

   Whenever the price of gas, homes, or coffee goes up, it's due to inflation. Inflation is the practice of increasing the average price of a product with respect to purchasing power. Too much inflation can cause the economy to overflow, and too little inflation leads to recession. Inflation can help increase production at times and lower national debt, which allows for this practice to remain essential.

5. Scarcity

   Scarcity relates to the psychological side of economics, as it can be defined as the restricted number of resources available for human consumption. This practice then allows individuals to pick alternatives if an original product is no longer in stock, too expensive, or less preferred. Scarcity teaches people to make quick decisions and think through a choice by weighing the pros and cons before following through with a purchase.

6. Interest Rates

   Whenever a person, company, or even country chooses to borrow from a lender, they are expected to pay back to baseline price, with an added percentage for the outstanding loan. So if you buy a TV for $1,000 and pay a simple interest rate of 6% annually, you would be paying a total of $1,032 with an interest expense of $86. The lower the rate, the more obtainable it is to the average person.

7. Fiscal Policy

   Whenever the government uses taxation policies or decides to spend money as a collective, they are using fiscal policy to set an economy up for long-term development. In case of inflation, a government may use this policy to shrink the economy, called "Contractionary fiscal policy," where taxes increase and spending declines. On the other hand, they could use "Expansionary fiscal policy" to boost an economy out of recession through lowered taxes and employment stimulation.

8. Incentives

   Incentives are used by governments and companies alike to either positively or negatively impact a market. When offering more employment positions, this is a positive incentive as it's a stimulus for people to make money. An increase in taxation is a negative incentive because it forces people to spend less. Incentives allow for a behavioral examination of how we as people function when a reward or consequence is involved.

9. The Business Cycle

   The business cycle is a pattern of economic growth or recession demonstrated by the GDP of a business or industry, usually with one following after the other. By properly tracking this cycle, economists can make accurate predictions for a country's economic well-being, success, and prosperity. Each country has its cycle, and it varies depending on season, industries, and production rates.

10. Equity

    Last, but certainly not least, is the term Equity. Equity can best be defined as the portion of an asset that a shareholder has control over. So if the asset was, say, a company, and the company was sold, the shareholders would receive their equity (amount of money) back in return. To build long-term foundational stability and understand the value of a business, knowledge and understanding of equity is essential.

While there could be an entire dictionary of terms used in economics, just knowing these 10 phrases already sets you up for a better overall understanding of the topic. To understand these terms is to understand the core of economics, which then allows you to look for economics in your day-to-day life, only this time with a better conception.

Economics around Earth

Every time you debate purchasing a product your head, you're asking economic-based questions. It's all around you in your everyday life, even if you don't notice it.

Let's go through 3 examples of economics in everyday life!

1. Concert tickets

   Whenever you're looking at potential seat options for your favorite artists, you're using scarcity and Supply & Demand. As much as you might want those front row tickets, they're heavily requested by others, meaning they aren't cheap. Since you don't want to spend $300 on one ticket, you use scarcity to search for an alternative and find seats that might be further back, but a lot cheaper. At least you can still use the big screen.

   
   

2. Gas prices for a car

   Over the past few years, we've all seen the rise and fall of gas prices in real time. Whenever you're deciding to spend money on gas, though, you're taking into note inflation rates and budgeting. You have to consider the price per gallon, and if it's higher than usual, boom, inflation. If you don't want to spend $4 per gallon of gas, you then choose to budget and search to find a cheaper alternative if possible.

   
   

3. Student loans & debt

   Whenever someone starts college, there's a chance they may have to take out loans and incur debt in the future, as the price of college isn't cheap. This involves considering interest rates, as in the future, if you let the loans sit there, the debt then piles up, and the rate you're paying back becomes a lot more. Because of this, lots of budgeting then comes into play to plan out how you might want to pay back the loans over time.

   
   

Once you start to notice the little economic things in your everyday life, like coffee prices, rent, or a college trade-off, you'll then begin to notice how your behaviors shape these decisions. By becoming conscious in the decision-making aspect of finance, you're able to make smarter long-term choices and shape your future through the commerce system.

To put it in simple terms: By understanding economics, you understand the power you have over yourself as an individual.

So, Why Is It Important?

It probably feels like we've already explained why economics is important, right? I mean, it teaches us to consciously make decisions, how we have the power to choose, and how it's all around us. But that's only surface-level in terms of the foundation.

Let's wrap up by talking about some ways economics is important for the long-term, but in ways you might not have already thought of.

You begin to recognize the global impact, not just as an individual. A basic understanding of economics allows us to understand more about how global trade works, how public relations are formed, and how migration is an outcome of this practice. A recognition of how economics works around the world allows us to then connect it to local aspects of our lives, as explained in the previous section.

Sometimes learning how economics works from the ground floor allows us to interpret future trends that could result from current patterns. These predictions could range from notations about market shrinkage/growth, to an increase in interest rates, or even to a future job market emergence. Let's say you're slowly starting to notice an increase in pricing for a specific drink; you might be able to take note of this before it becomes mainstream and figure out a way to avoid paying inflated prices long-term.

The last way that economics can be applied to a long-term situation is by how it can allow you to digest news reports more easily. Sometimes when we hear about inflated prices or an economic recession, we can be quick to panic, and it can get overwhelming. But with a proper foundation in economics, you can think on a more rational level and, instead of responding with panic, you can break down a situation into logical terms and think about a more realistic outcome.

Why Economic Knowledge Gives You an Edge

The study of economics is so much more than government finances, confusing graphs, and statistical mathematical data. It's the fundamental explanation for why we make certain decisions and how the world functions in the way that it does. Knowledge within the world of economics builds a sense of power, independence, and wisdom.

Learning how to manage money & finances, make rational choices, and understand the world around you allows for a deeper sense of rationality when faced with a problem. To learn economics is one thing, but to understand it is a much deeper level.

It doesn't take a degree to feel like an economist, by simply taking note of the world around you, asking necessary questions, and striving the uncover answers, you're already halfway there.