Understanding economics is very important. It affects our lives because it is a study of choices and why and how we make them. In this article, we’ll look at some basic economic concepts that everyone should understand.
You indirectly understand scarcity as it’s the most basic concept in economics. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only specific quantity of wheat grown every year. Some people want bread; some people want cereal; and so on. Only controlled quantity of any one product can be made because of the scarcity of wheat. How do we decide how much flour should be made for bread? One answer is a market system.
Supply and Demand
The market system is driven by supply and demand. Take wheat again. Let’s say people want more wheat, so the demand for wheat is high. This means you can charge more for wheat and can make more money on average by changing rice into wheat. More people start producing wheat and, after a few production cycles, there is an unnecessary wheat in the market that prices drop. In the meantime, rice prices have been increasing as the supply contracts, so more rice is bought. The market is generally highly responsive in real life, and true supply shocks are rare, at least ones caused by the market are rare.
Costs and Benefit
This concept debates about rational expectations and choices. In any situation, people would make most beneficial choice against least cost. For example take any juice or soft drink, the manufacturer will hire more employees to make more drink, only if the price of drink and the sales volume justifies the additional costs to the payroll and the materials needed to make more. Similarly, the consumer will buy the best drink he or she can afford, not, perhaps, the best tasting drink in the store.
Everything Is in the Incentives
Incentives are part of costs and benefits and rational expectations. We’ll take an example of a drink. This particular drink has two sizes of bottle: one 500ml bottle and a 1L bottle for couples. The owner wants to increase production, so he offers a bonus to the shift that produces the most bottles of drink in a day. Within a couple days, he sees production numbers shoot up from 10,000 bottles a day to 15,000. However, he is soon blasted with suppliers ‘calls asking when the shipments of the 1L bottles are going to come. The problem, of course, is that his incentive was wrongly based. It should have been volume of drink rather number of bottles.
Putting It All Together
Scarcity is core of all economics. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefit and so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices.
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