THE FIVE IMPORTANT ECONOMIC CONCEPTS EVERYONE MUST KNOW
If you believe economics has little to do with you, think again. Learning the fundamentals of economics may not be that important to you, but it can affect our lives in one way or another because economics is about what we choose and how we make them.
The Council for Economic Education has listed 51 key economic concepts for high school classes in the United States. But this article will outline only the five common concepts.
Scarcity. This is the most basic economic concept pertaining to limitations. In other words, the world has limited means to achieve the unlimited desires. Maximizing scarce resources or finding other options is essential to economics. For instance, markets have limited supply of certain fruits and vegetables since they grow only at a specific time of the year. And because of inadequacy of fruits and vegetables, only so much of any one product can be created. How to decide how much, say flour, should be made for bread? Market system.
Supply and Demand. What drives the market system? Supply and demand. Let us take bread as an example. If people want more bread, the demand for this product increases. When demand escalates, producers can charge more for bread. More manufacturers will begin creating bread. And after a few production cycles, the supply for bread climbs, but the prices decline. On the other hand, the price of flour has been rising as the supply drops. Hence, more producers purchase wheat to create flour.
Incentives. The idea of demand curve is the most classic example in economics. When a particular product becomes more expensive, people purchase less of it. Conversely, when it becomes more costly, they will buy more of it. Incentives make the world go round or wrong. For example, the company owner seeks to increase the production of chocolates. Therefore, he offers a bonus to a group that can come up with the most number of chocolates in a day. If used correctly, incentives can cultivate growth in businesses. Otherwise, it can topple the entire production, which can be detrimental in the long run.
Cost and Benefit. This concept encompasses a huge area of economics dealing with rational expectations and rational choices. Individuals, in most situations, are likely to choose what they think is the best for them, with the least cost, or the choice that give more in benefits than it costs. Yes, people are rational in general, but several factors can affect their inner accountant and logic such as advertising. Cost and benefit may not dominate your mind all the time, but believe it or not, they control you more than you think.
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