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.