Intro to Economics: The Basics You Need to Know

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What is Economics? 

When you hear the word "Economics", what do you think of?

If it's money, finance, wealth, stocks, or just getting rich, you're not alone in this common misconception. In fact, many people initially view economics through this narrow lens and overlook its broader scope and significance in shaping the world around us and the decisions we make.

Economics is the study of how people make choices with scarce resources and unlimited wants. It has everything to do with the allocation of limited resources on the planet, encompassing much more than just money or stock trading.

"Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life." — Tyler Cowen, American economist and columnist

The two most important assumptions in economics is the idea of scarcity, described as the tension between infinite wants and finite resources, and the idea that everything has a cost. If you've ever heard the quote "There ain't no such thing as a free lunch", you've already been exposed to one of the most important ideas in economics.

Economic Concepts

In order to understand economics, you must first learn about the main concepts that lay the foundation for the subject:

Choice

Economics involves explaining why humans make choices and what leads them to make certain choices over others. Individuals, businesses, and countries can't have everything so they are forced to weigh the benefits and costs of their decisions and make choices.

In a world with competing wants and needs of society yet a limited amount of resources, choices must be made about how to allocate resources efficiently.

Scarcity

Refers to the basic economic problem of having limited resources to meet unlimited wants and needs. It is central to economics because it forces individuals and societies to make choices about how to allocate their resources most effectively. Understanding scarcity helps explain why trade-offs are necessary and how decisions impact overall resource use.

Opportunity Cost

Imagine you have $20 and choose to spend it on a movie ticket instead of buying a new book you've been wanting. In making that choice, you're giving up the chance to enjoy the book in favor of watching the movie.

Fittingly, opportunity cost refers to the value of the next best alternative that must be given up or sacrificed in order to obtain something else. It highlights the concept of trade-offs in economics, and helps with making informed choices. Furthermore, opportunity cost range from everyday choices such as the example above to more significant decisions, such as choosing between job offers or investing in different financial assets.

It's important to remember that opportunity cost doesn't only involve monetary loss, since it can also involve non-monetary factors such as time and experience.

Efficiency

Involves making the best possible use of scarce resources to avoid waste. It can also be defined as using the fewest resources to produce the greatest number of goods or services.

The two types of efficiency are:

• Productive Efficiency - Producing at the lowest possible cost

  
  

• Allocative Efficiency - Producing what consumers mostly want

Efficiency is generally used as a metric to choose which option is most appropriate for a given situation. In other words, it's one of the most important factors in economics that is used to drives choices and decision-making.

Equity

By definition, equity is the condition of being fair or just. In addition to efficiency, it is another factor used to make choices and to determine if the most efficient option is the best choice. This is because the most efficient production methods may be unfair and not benefit society as a whole, meaning equity has to be involved in decision-making.

Supply and Demand

Describes the relationship between the availability of goods (supply) and the desire for them (demand).

The interaction of supply and demand determines the price and quantity of goods in a market, with prices rising when demand exceeds supply and falling when supply exceeds demand. Understanding this relationship is crucial because it explains how markets function and how prices are set.

Invisible Hand

A concept introduced by economist Adam Smith in The Wealth of Nations to describe how individuals' pursuit of self-interest unintentionally benefits society as a whole.

It emphasizes that when people act in their own best interest, market forces of supply and demand guide resources to their most efficient uses. This idea is important because it underpins the argument for free markets, suggesting that minimal government intervention can lead to economic prosperity.

Macro vs. Microeconomics

Economics can be divided into two main branches ranging from the very small to the very large. The study of individual decisions is called microeconomics while the study of the economy as a whole is called macroeconomics.

While microeconomics might involve analyzing a company's pricing strategy or the supply and demand for a specific product, macroeconomics looks at country's GDP, inflation, and unemployment.

Economic Systems

There are many economic systems worldwide and throughout history that shape the way resources are allocated and decisions are made. The main four types of economic systems include:

Traditional

Decisions are based on customs and traditions passed down through generations. Particularly common in rural or agricultural communities with little technological advancement.

Command

Relies on central planning by the government to allocate resources and make decisions about production and distribution. Examples include North Korea and, historically, the Soviet Union.

Market

Decisions about production and consumption are guided by market signals such as prices and consumer preferences, with minimal government intervention.

Mixed economies

Incorporates both market-driven decisions and government regulation. Examples include Sweden, which combines strong social welfare programs with a capitalist market, and Canada, which blends private enterprise with significant government oversight. Most countries today are considered mixed economies, as they combine elements of both market and command systems.

The Bottom Line: Why should I care about economics?

Now that you've had a brief overview of economics, learning about the main concepts, types, and systems, you might be asking yourself why it's important for you to learn or care about the subject.

Well, understanding economics helps you make smart choices with your money, understand how things like prices and jobs work, and see how big economic trends affect your life. It's not just about numbers; it’s about making sense of the world around you.

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