Economics | Concepts, Definitions, Key Points

Economics

Concepts, Definitions, Key Points

 

1. Supply and Demand

Definition: Supply and demand are fundamental economic concepts that describe how the market determines prices based on the availability of a product (supply) and the desire for it (demand).

• Supply: The total amount of a specific good or service that is available to consumers.
• Demand: The quantity of a product that consumers are willing and able to purchase at a given price.

Key Concepts:

• Law of Demand: As prices decrease, demand tends to increase, and vice versa.
• Law of Supply: Higher prices generally lead to higher supply, while lower prices reduce it.
• Market Equilibrium: Where supply and demand meet, determining the market price.
• Shifts in Supply/Demand: Caused by factors such as consumer preferences, income levels, and production costs.

2. Elasticity

Definition: Elasticity measures how responsive the quantity demanded or supplied of a good is to changes in price, income, or other factors.

• Price Elasticity of Demand: The percentage change in quantity demanded divided by the percentage change in price.
• Price Elasticity of Supply: The percentage change in quantity supplied divided by the percentage change in price.

Key Concepts:

• Elastic Goods: Products that see significant changes in demand with price changes (e.g., luxury goods).
• Inelastic Goods: Products that see little change in demand with price changes (e.g., basic necessities).
• Income Elasticity: Measures how demand changes with consumer income.
• Cross-Price Elasticity: Measures how the price change of one good affect the demand for another (e.g., substitutes or complements).

3. Gross Domestic Product (GDP)

Definition: GDP is the total market value of all final goods and services produced within a country during a specific period.

• Nominal GDP: The raw measurement of economic output, unadjusted for inflation.
• Real GDP: GDP adjusted for inflation, providing a clearer picture of economic growth.

Key Concepts:

• GDP per Capita: GDP divided by the population, often used as a measure of living standards.
• GDP Growth Rate: Measures how quickly an economy is growing, usually compared to previous quarters or years.
• Limitations: GDP doesn’t account for income inequality, non-market transactions, or environmental degradation.

4. Monetary Policy

Definition: Monetary policy refers to the actions taken by a central bank to control the money supply and interest rates in order to influence economic activity.

• Key Tools: Open market operations, discount rates, and reserve requirements.
• Objectives: Control inflation, manage employment levels, and stabilize currency.

Key Concepts:

• Expansionary Policy: Increases the money supply to encourage economic growth (often through lower interest rates).
• Contractionary Policy: Reduces the money supply to control inflation (often through higher interest rates).
• Quantitative Easing: A type of expansionary policy where a central bank purchases securities to increase the money supply.

5. Fiscal Policy

Definition: Fiscal policy refers to government spending and taxation decisions aimed at influencing economic activity.

• Government Spending: Includes investments in infrastructure, education, and healthcare.
• Taxation: The government's method of raising revenue, which can affect consumer and business spending.

Key Concepts:

• Expansionary Fiscal Policy: Involves increasing government spending or decreasing taxes to stimulate the economy.
• Contractionary Fiscal Policy: Involves decreasing government spending or increasing taxes to cool down an overheated economy.
• Budget Deficit: When government spending exceeds revenue, leading to borrowing and increased national debt.
• Automatic Stabilizers: Programs like unemployment insurance that automatically increase or decrease with the business cycle.

6. Inflation

Definition: Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power over time.

Key Concepts:

• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services.
• Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply, causing prices to rise.
• Cost-Push Inflation: Arises when the cost of production increases, leading producers to raise prices.
• Hyperinflation: Extremely high, uncontrollable inflation, often leading to a collapse in currency value.
• Deflation: The opposite of inflation, where the general price level falls, which can lead to reduced economic activity.

7. Unemployment

Definition: Unemployment refers to the situation where individuals who are capable and willing to work cannot find a job.

Key Concepts:

• Types of Unemployment:
• Frictional Unemployment: Short-term, transitional unemployment as people move between jobs.
• Structural Unemployment: Caused by changes in the economy that make certain jobs obsolete.
• Cyclical Unemployment: Linked to the business cycle, where unemployment rises during recessions and falls during expansions.
• Seasonal Unemployment: Occurs when people are unemployed at certain times of the year, typically in industries like agriculture or tourism.
• Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work.
• Natural Rate of Unemployment: The level of unemployment that exists in an economy due to factors like frictional and structural unemployment, even when the economy is healthy.

8. International Trade

Definition: International trade involves the exchange of goods and services between countries, driven by differences in resources, costs, and advantages.

Key Concepts:

• Comparative Advantage: When a country can produce a good at a lower opportunity cost than another country.
• Absolute Advantage: When a country can produce more of a good with the same number of resources compared to others.
• Trade Barriers: Includes tariffs, quotas, and subsidies that can affect the flow of goods across borders.
• Free Trade: An economic policy that allows goods and services to be traded across borders without restrictive tariffs or other barriers.
• Trade Deficit vs. Surplus: A trade deficit occurs when a country imports more than it exports; a trade surplus is the opposite.

9. Market Structures

Definition: Market structures describe the competitive environment in which businesses operate, defined by the number of firms, the nature of the product, and the ease of entry into the market.

Key Concepts:

• Perfect Competition: Many firms sell identical products, and no single firm can influence the market price.
• Monopoly: A single firm dominates the market, with no close substitutes for its product.
• Oligopoly: A few firms control the market, often with significant barriers to entry.
• Monopolistic Competition: Many firms compete with differentiated products, where each has some control over its price.
• Barriers to Entry: Factors like high startup costs, regulatory hurdles, or technology that prevent new competitors from entering a market.

10. Public Goods and Externalities

Definition: Public goods are goods that are non-excludable and non-rivalrous, meaning they can be consumed by many people without reducing availability to others. Externalities occur when the actions of individuals or firms affect third parties, positively or negatively, without compensation.

Key Concepts:

• Non-Excludable: Once provided, no one can be excluded from using the good (e.g., public parks).
• Non-Rivalrous: One person's use of the good does not reduce its availability to others (e.g., national defense).
• Positive Externality: A beneficial effect on third parties (e.g., education or vaccinations leading to a healthier society).
• Negative Externality: A harmful effect on third parties (e.g., pollution from factories).
• Market Failure: Occurs when the market does not allocate resources efficiently, often due to the presence of public goods or externalities.