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Introduction to Economics: Basic Concepts and Principles

What is Economics?

❶Nominal just means inflation has not been taken into account and real means it has.

Economics Basics – Demand & Supply

Supply and Demand
10 Economic Concepts Everyone Needs To Understand
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If an entity is really efficient in producing a commodity output to input ratio is high , it has an advantage over another entity which is not that efficient in producing the commodity under consideration.

If I am good at making shoes and you are good at making jam, it makes sense to do what we are good at and trade afterwards. Moreover, the economies of scale prove to be an icing on the cake — the production cost per unit decreases as we produce more and more of the same units the initial one-time setup cost can be a major part of the total expense.

And the best part is that both parties are better off after doing the transaction and so is Mother Earth, for less wastage. Just to appreciate the grandeur of this simple idea, just imagine your standard of living in a world where you have to produce everything for yourself. You would likely revert to a medieval lifestyle, growing your own food and defending our own property. Say goodbye to the iPhones, cushy jobs, roads even the shitty ones , branded clothes and the air-conditioned comforts.

Studying economics can be both rewarding and intimidating at first, but knowledge of basic economics is essential not only for the B-School junta but for anyone who interacts with markets.

In an era where having money is one of the prime determinants of the ability to make more of it, you better watch out and get your basics right. Can you please suggest me a way to crack the interview. An increase in college tuition 5.

Faster, more powerful electronic chips. Your email address will not be published. Economics Basics — The free market hypothesis In a perfect free market, for any good or service— the total quantity supplied by the sellers and the total quantity demanded by the buyers will reach a state of economic equilibrium over time. Economics Basics — Cost, efficiency and scarcity Going by the geeky definition, opportunity cost is the value of the next-highest-valued substitute use of that resource.

For instance you may forego going to the physics class for a session of LAN gaming, but the risk of not understanding subsequent lectures and flunking the semester is the opportunity cost you should be aware of. Every entity has a different point-of-view regarding this opportunity cost as the needs and resources of entities keep shifting with time. Economic efficiency is the measure of output obtained with a given set of inputs, i.

Technological ability usually decides the upper limit for the maximum efficiency which can be achieved. The basic definition of scarcity is slightly philosophical— humans have unlimited desires but the means of production being finite and limited labor, land and capital , various trade-offs are to be made to allocate the resources in the most efficient way possible.

The production-possibility frontier PPF is a bridge which ties the three concepts. If we assume that the economy produces just a couple of goods guns and butter are the default choices for economists, scary lot!

Each point on the PPF curve shows the maximum possible output of an economy i. Elasticity is defined as the change in quantity of the goods associated with a change in the prices. If quantity of the good does not change much with a change in its prices, it is said to be inelastic onions need to be purchased even after the prices double as it is a basic necessity and there are no actual substitutes. Marginal utility is the extra satisfaction one gets from each additional unit of consumption.

April 15, at May 29, at October 13, at 5: January 9, at 9: One answer is a market system. The market system is driven by supply and demand. Let's say people want more beer, meaning the demand for beer is high. This demand means you can charge more for beer, so you can make more money on average by changing wheat into beer than grinding that same wheat into flour.

More people start making beer and, after a few production cycles, there is so much beer on the market that prices plummet. This extreme and simplified example does encapsulate the wonderful balancing act that is supply and demand.

The market is generally much more responsive in real life, and true supply shocks are rare — at least ones caused by the market are rare. On a basic level, supply and demand helps explain why last year's hit product is half the price the following year.

The concept of costs and benefits encompasses a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost — or, to put it another way, the choice that provides more in benefits than in costs.

Going back to beer: If demand is high, the breweries of the world will hire more employees to make more beer, but only if the price of beer and the sales volume justify the additional costs to the payroll and the materials needed to brew more. This extends far beyond financial transactions. University students perform cost-benefit analysis on a daily basis, by focusing on certain courses that they believe will be more important for them, while cutting the time spent studying or even attending courses that they see as less necessary.

Although people are generally rational, there are many, many factors that can throw our internal accountant out the window. Advertising is one that everyone is familiar with. Commercials tweak emotional centers of our brain and do other clever tricks to fool us into overestimating the benefits of a given item. Some of these same techniques are used quite adeptly by the lottery , showing a couple sailing a yacht and enjoying a carefree life. This image and its emotional message "this could be you" overwhelm the rational part of your brain that can run the very, very long odds of actually winning.

So, cost and benefits may not rule your mind all the time. Incentives are part of costs and benefits and rational expectations, but they are so important that they are worth further examination. Incentives make the world go round, and sometimes go wrong. If you are a parent, a boss, a teacher or anyone with the responsibility of oversight, and things are going horribly awry, the chances are very good that your incentives are out of alignment with what you want to achieve.

We'll take a safe example, however, of — you guessed it — a brewery. This particular brewery has two sizes of bottles: The owner wants to increase production, so he offers a bonus to the shift that produces the most bottles of beer in a day. Within a couple of days, he sees production numbers shoot up from 10, bottles a day to 15, However, he is soon deluged with calls from suppliers wondering when orders of the 1L bottles are going to come.

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Italicized terms within the definitions are themselves defined elsewhere in the glossary, for cross-reference. Absolute Poverty: Poverty defined with respect to an absolute material standard of living. A solid understanding of economics helps build a strong foundation in almost every area of life. Here are 5 economic concepts consumers need to know.

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