Basic Economic Concepts
#1 – Scarcity
Scarcity is one of the key economic concepts.
In economics, it refers to the limited availability of resources for human
consumption. The world population needs are unlimited, whereas the resources to
meet the needs are limited. The limited feature of resources makes it more
valuable and expensive. Effective resource allocation techniques and
integration of alternatives confront the scarcity issues. Examples of scarce
resources are oil and gold. Its scarcity will limit the human want for it.
#2 – Supply and Demand
Another important economic concept is
supply-demand. Supply refers to the number of goods and services available for
consumers. The law of supply states that as price increases, also supply
increases and vice versa. Hence the supply curve is upward sloping.
Demand indicates the number of goods and
services consumers are willing and able to purchase. According to the law of
demand, as price increases, demand decreases and vice versa. Therefore it
points to a downward sloping demand curve. If demand is greater than supply,
the price of goods and services tends to increase in a market, but the price
decreases if supply is greater than demand. The equilibrium price happens when
the supply meets with demand.
If the price of a chocolate brand increases,
its demand decreases and vice versa. When the price of cocoa rises in the
global market, chocolate price increases, and producers increase the supply to
obtain the advantage.
#3 – Incentives
Incentive refers to the factor that
influences the consumer in the decision-making process. Two types of incentives
are intrinsic and extrinsic incentives. Intrinsic incentives originated in the
consumer without any outside pressure, whereas extrinsic incentives developed
due to external rewards. For example, the decrease in the price of a
discretionary item is an incentive to purchase that item.
#4 – Trade-off and Opportunity Cost
A trade-off occurs when a decision leads to
choosing one thing over another. The loss incurred by not selecting the other
option is called opportunity cost when one option is selected. For example, a
trade-off occurs when Mr. A takes a day off at university to go to a cinema.
The opportunity cost is what Mr. A loses by not attending university for a day
like participation point.
#5 – Economic Systems
An economic system comprises various entities
forming a social structure that enables a production system, allocation of
resources, and exchange of products and services within a community.
Capitalism, communism, socialism, and market economy are types of economic
systems.
#6 – Factors of production
Another important economic concept is factors
of production. It refers to inputs applied to the production process to create
output: the goods and services produced in an economy. The essential factors of
production forming the building blocks of an economy include land, labor,
capital, and entrepreneurship. For example, consider a manufacturing entity,
where factors of products are land representing the natural resources used,
labor represents the work done by workers, capital represents the building,
machinery, equipment, and tools involved in the production, and finally, the
entrepreneur aligns other factors of production to create the output.
#7 – Production Possibilities
In economics, production possibility frontier
is a curve in which each point represents the combination of two goods that can
be produced using the given finite resources. For example, a farmer can produce
20,000 apples and 30,000 apricots in his fixed land so that the trees are
placed to have adequate space to develop a healthy root system and receive
enough sunlight. However, if he intends to produce 50,000 apricots, he will
make only 10,000 apples on his farm.
#8 – Marginal Analysis
The marginal analysis compares the additional
cost incurred and the corresponding additional benefit obtained from an
activity. Usually, companies planning to expand their business by adding
another production line or increasing volumes perform this analysis. For
example, if a company has enough capacity to increase production but improves
the warehouse facility, a marginal analysis indicates that expanding the
warehouse capacity will not affect the marginal benefit. In other words, the
ability to produce more products outweighs the increase in cost.
#9 – Circular Flow
The circular flow model in economics
primarily portrays how money flows through different units in an economy. It
connects the sources and sinks of factors of production, consumer &
producer expenditures, and goods & services. For example, resources move
from household to firm, and goods and services flow from firms to households.
#10 – International Trade
International trade occurs when a trade
happens between countries. Goods and services are traded across countries
contributing significantly to GDP. The two main types of international trade
are import and export. Import is the purchase of goods or services from another
country. In this form, payment has to be made to the
other country. Thus, it involves the outflow of money. The sale of goods and
services to another country is called exports. In this form, payment is
received from another country. Thus, it involves an inflow of money. Examples
of international trade include trade between companies in China and USA, and
goods exported from China to the USA include electrical and electronic
equipment.