12 basic concepts to learn to understand economics

1. economics has two main areas - microeconomics and macroeconomics

Microeconomics deals with customers, income, prices, profitability, etc. Macroeconomics deals with the economy as a whole, interest ratesThe macroeconomy is useful for managers, while the macroeconomy is mostly followed by investors. Microeconomics is more useful for managers, while macroeconomics is mostly followed by investors.

2. The law of supply and demand is the foundation of the economy

 

Whenever there is an increase in the supply of a commodity, its price goes down, and whenever the demand for a commodity goes up, the price goes up. Thus, when you have excess production of wheat, food prices should go down, and vice versa. For example, in Russia, during the buckwheat crop failure, the price of this product rose by 400- 500% until the market was saturated with a new crop.

3. Utility Limit

Whenever you increase the amount of something, the possibilities of using it decrease. For example, an increase of 10,000 rubles to your monthly salary of 30,000 rubles will make you more happy than when you earn 1 million a month. This is widely used in the pricing of goods.

4. Gross Domestic Product (GDP)

GDP is a basic measure of the size of an economy. It is equal to the sum of all people's incomes or the sum of the market value of all goods and services produced in that country. For example, the largest economy in the world, the United States, has a GDP of about $14 trillion. This means that each year the U.S. produces $14 trillion worth of goods and services.

5. The growth rate of the economy

Economic growth is usually measured in the growth rate of GDP volume, the growth rate per capita, the growth rate of production of major sectors of the economy. The growth rate of the economy are calculated on the basis of data for the previous and subsequent year, as a percentage.

6. Inflation

You've probably noticed that the prices of most foods are higher now than in years past. Inflation (measured as a percentage) - is an "economic scale" showing how much goods and services in aggregate have risen in price compared to the previous year. In advanced economies, annual inflation is about 2%, which means that on average the price of goods and services rises by 2% each year. In Russia, according to official data, inflation this year was 6%. The fundamental role of Central Banks is to adjust inflation and keep it low (but not negative).

7. Interest rates

When you lend money to someone, you have a right to expect repayment and additional income. This income is called interest. The interest rate is the measure that will determine how much income you get. The short-term interest rate is usually set by the Central Bank. In the U.S., it is currently close to zero; in Russia, it is 8.25%. The long-term interest rate is set by the market and depends on the rate of inflation and the long-term prospects of the economy. The mechanisms used by central banks to manage short-term interest rates are called monetary policy. High interest rates are good for investors, and low interest rates are good for the end consumer. So for example a mortgage loan in developed EU countries will cost you no more than 3% per annum, as the average interest rate in the developed European countries is no more than 2%.

8. How are interest rates, inflation, and economic growth related?

There is an inverse relationship between interest rates and economic growth, and a direct relationship between interest rates and inflation. So when you increase interest rates, inflation tends to go up. One is good news and the other is bad news. So there is a certain tension in society at the time interest rates are announced. In the U.S., short-term interest rates are set by Federal Reserve System (Fed)and this is the main economic news in the country.

9. Fiscal policy

The government can influence the economy to a greater or lesser extent by regulating the country's budget expenditures. One form of regulating budget spending is tax policy. If the government spends more, it can lead to higher demand and thus higher prices. Higher prices cause inflation to accelerate. Inflation, in turn, forces the government to increase spending. Thus, governments try to spend more during periods of low growth and low inflation and cut spending during periods of high growth and high inflation.

10. Cyclicality of the economy

Market economies tend to rise and fall at intervals of about 7 years. At the beginning of the cycle there is rapid growth, then a hit to the top, followed by a contraction, leading to recession (a period of negative growth and/or rising unemployment) and, finally, a rise again.

11. alternative cost

When you do an activity, you tend to compare it with the best alternatives. For example, when you're agonizing over a project on a Friday night, you probably think more than once, "Isn't it time for me to do something else?" The alternative option (in this case, partying with friends) carries more weight, and thus this option is much more appealing than your project. Switching to an alternative activity expresses itself in "opportunity cost" - the value of what you sacrificed.

For example, going to a nightclub has an opportunity cost equal to the amount of money spent on this event and the amount of money a person could get if he went to work instead of going to the club. If the cost of admission to the club is 500 rubles, food in the club (dinner) costs 1500 rubles, drinks cost 1000 rubles, then going to the club will cost 3000 rubles. If you don't go to the club, you save 3000 rubles. But you have to eat anyway, so the funds are spent on dinner at home (let it be 500 rubles). Total saving is 2500 rubles. If a person spent 5 hours in the club, and his hour costs 250 rubles, the potential additional earnings are 1250 rubles. The total opportunity cost is 3750 rubles.

12. Comparison of benefits

Let's say you work in Internet technology and one day a client asks if you can do a website for them. Should you do the Web site, or would it be more profitable to outsource the work to a friend? What would be your decision? A reasonable person should calculate how much time it will take to create a website and determine if they can make more money in that time period to start a more profitable project. Then, after calculating the pros and cons, he can keep the order or pass it on to a friend who might make the site more efficiently.

If your friend has agreed to do the site more efficiently, you, in this case, missed the opportunity due to various circumstances. This is called the theory of advantage comparison. Your friend has the upper hand here, and it makes no sense for you to be in this business. Nations, businesses, and people should do only the things they are best at and give the rest to others.