Want to understand economics better? Here are 7 must-know economic concepts that will help you with just that.
In my previous blog post on economics, I talked about what this social science is and what the differences between microeconomics and macroeconomics are.
However, if you somehow forgot (or, tsk tsk, didn’t read it), economics is the study of the economy.
It is split into two sections –microeconomics (or the study of the economy at the individual level) and macroeconomics (or the study of the economy at the national level).
I also used Target’s expansion to Canada as an example to explain the two different facets.
As I was doing the research for that (and this) article, I realized that economics is a complex social science.
I totally forgot that. It has been a few years since I took an econ class.
There are a lot of terms and theories that can become confusing if you know nothing about it (or just forgot it).
7 Must-Know Economic Concepts
So to help you understand economics better (and to refresh my memory), here are the concepts every beginner economist needs to know:
1) Supply and Demand
This concept is the very first thing you will learn. It explains the relationship between a producer and a buyer.
It looks at how the availability and the demand for a product often affect the price.
The gist of it is, normally, if a product has low supply, but high demand, the price will be high.
But if a product has a high supply and a low demand, the price will be low.
Check out this article from Simplicable for examples of supply and demand.
2) Keynesian Economics
Keynesian Economics was developed by economist John Maynard Keynes and his followers.
This macroeconomic theory says that during times like recessions, the government should increase demand to boost growth.
To do this, the government would spend on infrastructure, unemployment benefits, and education.
By developing this theory, Keynes wanted to better understand The Great Depression and what could’ve been done to ease it.
3) Marxism
Marxism is the political, economic, and social policies developed and advocated by Karl Marx.
It, in many ways, is a socialist concept that analyses the effects (mostly negative ones) of capitalism on society.
4) Laissez-Faire Capitalism
Laissez-Faire pretty much means free market.
This concept believes that the market should remain free with little to no government involvement.
So, if a country were to practise pure Laissez-Faire Capitalism, there would be very few regulations (or restrictions) on how a corporation has to be run.
Generally, this would also mean that the private market would be the main provider of social programs, such as education and healthcare, for example.
Laissez-Faire was developed during the 18th and 19th centuries.
5) Mercantilism
Mercantilism is an economic concept that believes there is a finite amount of wealth in the world.
Therefore, to maximize profits, nations would export a bunch but import as little as possible. They would achieve this through tariffs (a tax on imports and exports).
This economic system was used sporadically throughout Europe from the 16th century to the 18th century, right before the Laissez-Faire system was implemented.
6) Trickle-Down Economics
Trickle-Down Economics is a theory that is often tied to former U.S. President Ronald Reagan.
The idea behind this concept is that if a country were to cut taxes for the wealthy, the rich would take the money they saved and put it back into productive economic activities.
They would trickle that money into activities that would boost growth, which would help out those in the lower tax brackets.
However, keep in mind that this is not an actual economic theory.
It’s a political policy that is often referred to as something from economic textbooks.
7) Behavioral Economics
Behavioral economics is the study of how psychology affects an individual’s decision to buy.
It looks at how a person’s mind is persuaded.
Additionally, it looks at how people make decisions and what influences these decisions. It’s basically the psychology of marketing.
Some theories under this umbrella are loss aversion, framing, and reciprocity.
Final Thoughts
In conclusion, I believe that by having an understanding (even a basic one) of these theories, you will be able to pick up more complex concepts easier later on.
Which concept fascinates you the most? Why?