ECONOMICS FOR EVERYONE

Economics

Economics is a social science concerned with the production,

distribution, and consumption of goods and services. It's comprised of
broader macroeconomics and consumer-centric microeconomics.
Why is economics important?

As a field of study, economics allows us to better understand economic

systems and the human decision making behind them. Due to the existence
of resource scarcity, economics is important because it deals with the study
of how societies use/distribute scarce resources and how these processes
can be accomplished more efficiently. For some economists, the ultimate
goal of economic science is to improve the quality of life for people in their
everyday lives, as better economic conditions means greater access to
necessities like food, housing, and safe drinking water.
What are macroeconomics and microeconomics?

Macroeconomics and microeconomics are the two primary branches of

economics. Macroeconomics focuses on the big picture side of economics,
specifically the decisions made by countries and governments that affect an
economy as a whole. Microeconomics, meanwhile, is the study of smaller
scale decisions made by people and businesses that affect individual
markets. Despite their differences, both branches are interdependent of
each other and share many overlapping issues.
 4 Economic Concepts Consumers Need to Know

While having a basic understanding of economic theory isn't perceived as

being as important as balancing a household budget or learning how to
drive a car, the forces that underpin the study of economics impact every
moment of our lives. At the most basic level, economics attempts to explain
how and why we make the purchasing choices we do.

Four key economic concepts—scarcity, supply and demand, costs and

benefits, and incentives—can help explain many decisions that humans
make.
1-Scarcity

Everyone has an understanding of scarcity whether they are aware of it or not

because everyone has experienced the effects of scarcity. Scarcity explains the
basic economic problem that the world has limited—or scarce—resources to
meet seemingly unlimited wants. This reality forces people to make decisions
about how to allocate resources in the most efficient way possible so that as
many of their highest priorities as possible are met.

For example, there is only so much wheat grown every year. Some people
want bread and some would prefer beer. Only so much of a given good can
be made because of the scarcity of wheat. How do we decide how much flour
should be made for bread and beer? One way to solve this problem is a market
system driven by supply and demand.
2-Supply and Demand

A market system is driven by supply and demand. Taking the example of

beer, if many people want to buy beer, the demand for beer is considered
high. As a result, you can charge more for beer and make more money on
average by using wheat to make beer than by using wheat to make flour.

Hypothetically, this could lead to a situation where more people start making
beer and, after a few production cycles, there is so much beer on the market—
the supply of beer increases—that the price of beer drops.

Although this is an extreme and overly simplified example, on a basic level, the
concept of supply and demand helps to explain why last year's popular product
is half the price the following year.
3-Costs and Benefits

The concept of costs and benefits is related to the theory of rational choice
(and rational expectations) that economics is based on. When economists say
that people behave rationally, they mean that people try to maximize the
ratio of benefits to costs in their decisions.

If demand for beer is high, breweries will hire more employees to make more
beer, but only if the price of beer and the amount of beer they are selling
justify the additional costs of their salary and the materials needed to brew
more beer. Similarly, the consumer will buy the best beer they can afford to
purchase, but not, perhaps, the best-tasting beer in the store.
The concept of costs and benefits is applicable to other decisions that are not
related to financial transactions. University students perform cost-benefit
analyses on a daily basis by choosing to focus on certain courses that they've
deemed more important for their success. Sometimes this even means cutting
the time they spend studying for courses that they see as less necessary.

Although economics assumes that people are generally rational, many of the
decisions that humans make are actually very emotional and do not maximize
our own benefit. For example, the field of advertising preys on the tendency of
humans to act non-rationally. Commercials try to activate the emotional
centers of our brain and fool us into overestimating the benefits of a given
item.
4-Everything Is in the Incentives

If you are a parent, a boss, a teacher, or anyone with the responsibility of

oversight, you've probably been in the situation of offering a reward—or
incentive—in order to increase the likelihood of a particular outcome.

Economic incentives explain how the operation of supply and demand

encourage producers to supply the goods that consumers want, and
consumers to conserve on scarce resources. When consumer demand for a
good increases, then the market price of the good rises, and producers have
an incentive to produce more of the good because they can receive a higher
price.
On the other hand, when the increasing scarcity of raw materials or
inputs for a given good drive costs up and producers to cut back on
supply, then the price they charge for the good rises, and consumers
have an incentive to conserve on their consumption of that good and
reserve it's use for their most highly valued uses.
 Economic Indicators We Need to Know
What Is an Economic Indicator?
It's a metric that's generated by the collection of information about certain
parts of an economy. Economic indicators can provide insight into overall
economic health. They help policymakers, such as government employees and
Federal Reserve board members, determine a course of action for the
economy, as well as assist investors in their investment choices.

In addition to company and industry data, the state of the overall economy
can provide insight to investors for their decision-making. For instance, when
considering whether to invest in a company that depends on consumer
spending, it's useful to know whether the economy faces a recession.
Economic indicators provide information about an economy and whether it is
expanding or contracting.
1. GDP

The gross domestic product (GDP) of an economy provides the overall value
of the goods and services that the economy produces and indicates whether
it is growing or slowing.

The Department of Commerce’s look at the quarterly change in GDP breaks

down the activity into changes in consumer spending, business investment,
and government spending, as well as the net impact of foreign trade. The
government puts out a preliminary first estimate, updates with a revised
second reading as it gets more input, and then delivers a third and final
report.
 GDP Formula

GDP = C + I + G + ( X - M )
Consumption Investment Government (Exports−Imports)
Spending

buyers sellers
2. Inflation

Inflation is the general price level rise of goods and services in an economy.
Too much inflation can mean the economy is overheating while very low
inflation can be a harbinger of economic recession.

Depending upon the selected set of goods and services used, multiple types
of inflation values are calculated and tracked as inflation indexes. The most
commonly used inflation indexes are the Consumer Price Index (CPI) and
the Wholesale Price Index (WPI). The Producer Price Index (PPI) is also used
to measure inflation as it relates to producers.
KEY TAKEAWAYS

•The Consumer Price Index measures the overall change in consumer prices
based on a representative basket of goods and services over time.

•The CPI is the most widely used measure of inflation, closely followed by
policymakers, financial markets, businesses, and consumers.

•The CPI is based on about 80,000 price quotes collected monthly from some
23,000 retail and service establishments as well as 50,000 rental housing units.
3. Employment Figures
The Department of Labor puts out a monthly release on employment that
includes the number of jobs created the previous month by the private
sector, the government, and some specific industries, as well as the national
unemployment rate. Low unemployment can point to a strong economy, but
can also predict rising inflation.

4. Industrial Production
Industrial production is a measure of the output of manufacturing-based
industries, including those producing goods for consumers and businesses.
This monthly release from the Federal Reserve also reports on capacity
utilization in the factory sector.
5. Consumer Spending
Consumer spending accounts for two-thirds of U.S. gross domestic product
and is a good gauge of consumer health. The Department of
Commerce’s monthly release on personal income and outlays provides
data on consumer spending. It also provides information on inflation
through a price index that reflects changes in how much consumers have
to spend to buy certain items.