Introduction to Economics

10 min readNov 2, 2022

This article will teach you the fundamental economic principles and terminologies. After completing it, you will be able to grasp business channels, have your own opinion about your favorite currency, and can add the “banking domain” skill to your LinkedIn profile (possibly?) :). This article will be divided into three parts and will contain the notes I take while watching the Economics playlist on the CrashCourse YouTube channel. When you feel you need additional information, simply navigate to that topic’s reference number and watch the video.

What is Economics?

It is the study of scarcity and resource utilization, the production of products and services, the rise of production and wealth over time, and their impact on a wide range of complex societal concerns. [1]

What is scarcity?

The interaction between infinite desires and finite resources. [2]

Why economists do not come to an agreement about a subject?

Economics is a social science that studies societies and the connections between individuals within such societies. Because it is a discipline based on human behavior and includes various criteria, different economists arrive at different conclusions.

What is an incentive?

A set of extrinsic motivators that explain people’s decisions. [2]

For instance, private universities make money by enrolling students. As a result, these private institutions are expected to enroll as many students as possible. When student capacity is reached, the quality of education may suffer, leading to an increase in the number of dropouts. As a result, students who intend to enroll may decide not to join due to low quality, allowing things to balance out. If students continue to enroll and the university wishes to reduce the number of dropouts. They can increase the incentive money for newcomers, allowing fewer new students to enroll. [2]

What is macroeconomics?

The study of production, employment, prices, and policy on a big scale national scale. [2]

Example:

Will a slowdown in European economies force American economies to slow?

What is microeconomics?

The study of how customers, workers, and corporations interact in specific markets to produce outcomes. [2]

Example:

How many employees should we hire in order to optimize our company’s profit?

What is a market?

Market is the medium where buyers and sellers agreed to buy and sell with their own consent. [2]

What is a monopoly?

A monopoly occurs when there is a single seller in the market. The monopoly case is considered the polar opposite of perfect competition in conventional economic theory. Companies would want to be a monopoly to eliminate competition and maximize profit but this is not good for customers.[3]

How did economics start?

When the industrial revolution began, products began to be manufactured quickly in factories with brands, creating more supply, while population expansion accelerated, creating more demand. [4]

What are supply and demand?

The supply and demand model explains how prices change as a result of a trade-off between product availability and demand. Because of supply and demand and the Production Possibility Frontier theories, governments or businesses opt to focus on producing what they are excellent at and trading other items that they need but are not so good at creating. So trading benefits both countries and businesses. [4] [5]

The Production Possibility Frontier(PPF) [7]

Should we get generalized or specialized in our profession?

We are becoming more specialized in modern society, which gives us the possibility to be very good at one thing. [5]

What are the 3 fundamentals of an economic system?

What will be produced?
How it will be produced?
Who will consume the produced?

What are the 2 fundamental economic systems?

Planned economies

In planned economies the government controls the factories of production; some may argue that this is communism or socialism, but this is incorrect. “Communism’s theory can be summed up in a single sentence: the abolition of private property.” -Karl Marx. Everyone owns everything that is produced in communism, so the product is dispersed equally. In practice, no country has ever been fully communist; many are socialists such as China, North Korea, or the former Soviet Union. [8]

Socialism frequently includes both private property and some public ownership and management of the business. The purpose is to achieve certain common objectives, such as providing free and simple access to education and healthcare. In both socialism and communism, the government plays a role in determining the three fundamentals of an economic system. The command economy is one in which the government completely controls the economy and decides directly on the three fundamentals of an economic system. [8]

Market economies

Individuals own the factories of production in market economies, and governments do not interfere with the three essentials of an economic system. Businesses manufacture to make a profit. The unanticipated social advantages that result from individual activities are referred to as the invisible hand. Companies or products that consumers dislike will disappear in open marketplaces. Countries today have a spectrum of planned and market economies. And these are not constant but dynamic; for example, Canada added free self-care to its economy, while China added a free market to its economy. [8]

Do we need governments?

Although a free market appears to be ideal, governments are also required. These include upholding the rule of law and providing basic goods and services such as roads, bridges, education, and defense. Because free markets cannot function when bridges are collapsing, people are uneducated, and bombs are dropping from the sky onto your roof. Governments also control ethical issues such as car emissions and safety regulations. [8]

How do governments get the money to provide goods and services?

Governments obtain funds by taxing individuals and corporations as well as borrowing. [8]

What are price signals?

The information generated by markets directs the distribution of resources. Businesses cannot take advantage of consumers as easily if markets are transparent and purchasers have the freedom to select. [9]

What is the equilibrium price?

The price at which a product’s quantity is offered is equal to the quantity of the product in demand. [9]

What is equilibrium quantity?

At the equilibrium price, the quantity demanded or provided. [9]

What is GDP?

GDP (Gross Domestic Product) is the total worth of all final goods and services produced inside a country’s borders over a given time period, often a year. GPD does not account for all monetary transactions in the economy. For example, unlawful activities, firms purchasing another firm; individuals purchasing assets, or domestic automobiles. So, while it is not a perfect instrument for assessing a country’s economic health, it is the best we have. GDP and unemployment rate are inversely connected; when one rises, the other falls. [10]

What is Nominal GDP?

The GDP that has not been adjusted for inflation is known as nominal GDP. [10]

What is Real GDP?

Real GDP is GDP that has been corrected for inflation. [10]

What is inflation?

It is the widespread rise in prices and decline in the purchasing power of money. [10]

What is deflation?

It is a broad decline in prices and a decrease in the purchasing power of money. Inflation and deflation are both harmful. Deflation is negative because it prevents individuals from spending, which leads to inflation later on. In economics, stability is desired because money is used to represent assets. [10]

What is a recession?

When real GDP falls in two consecutive quarters or six months. [10]

What is economic depression?

A severe recession. [10]

What are discouraged workers?

Unemployed persons who have given up looking for a job. [10]
Unemployment is strongly associated with suicide rates, spousal violence, and societal upheaval. [14]

What is under-employment?

It describes a condition in which people are obliged to labor in low-wage or low-skilled employment. [10]

What is frictional unemployment?

The time between occupations when a worker is looking for a new job or transferring from one job to another. [10]

What is structural unemployment?

Structural unemployment is when unemployment results from a lack of demand for the worker’s particular sort of labor. A 0% jobless rate is difficult to achieve since there will always be frictional unemployed people. As a result, the goal is to avoid cyclical unemployment. [10]

What is cyclical unemployment?

It is recession-related unemployment.[10]

What is the natural rate of unemployment?

It is the lowest level of unemployment that an economy may endure over time. [10]

Why do some countries have high GDP and some countries have low GPD?

The short answer is productivity. GDP is directly proportional to the number of inhabitants in a country. So we can look at GDP per capita to determine true wealth. [11]

What is GDP per capita?

The country’s GDP is divided by its population. Countries with higher GDP per capita have fewer infant deaths, a higher quality of life, a higher level of education, and so on. In the United States, GDP per capita has been gradually expanding for decades, yet median family income has remained constant. This is due to income disparities. [11]

What is technology in economics?

The whole of society’s knowledge and information on the use of resources to produce goods and services. [11]
Technology goods and services have lower manufacturing costs and are created faster, resulting in substantially higher productivity. [11]

What is purchasing power?

The number of tangible items or services that can be purchased with a given sum of money. [12]

What are economic bubbles?

It is the market phenomenon defined by asset price increases that are much higher than the asset’s underlying value. When people see increasing prices, they want to buy in order to profit (but that is a hot-hand fallacy) by selling it later, producing greater demand and escalating prices. Even more than its core value, it will eventually come to a stop and decrease, much like a balloon popping.

What is the hot hand fallacy?

The hot hand fallacy is a psychological situation in which individuals feel someone is “hot” or “cold” based on past performance when that performance has no influence on future results. For example, rolling a dice is independent of how you rolled it previously. [13]

What is CPI (Consumer Price Index)?

It is a measure of the average price changes for a certain set of products and services purchased by a typical consumer. Used to calculate the annual inflation rate. [12]

What is economic speculation?

Trading a high-risk financial product with the hope of making a large profit. [12]

What is the recessionary gap?

A condition in which real GDP is less than potential GDP at full employment. [14]

What is the inflationary gap?

The amount by which actual GDP exceeds potential GDP for full employment. [14]

What is fiscal policy?

The process by which a government adjusts its spending levels and tax rates in order to monitor and impact a country’s economy. Increasing government expenditure and lowering taxes both create jobs and raise wages in some cases. As a result, these workers spend their money, which helps the economy. Tax cuts also encourage consumer spending, which boosts the economy. [14]

What is deficit spending?

It happens when governments spend more than they get by taxes. [14]

What does “crowding out” mean in the economy?

It happens when government spending replaces or reduces private sector spending. [14]

What is austerity?

Raising taxes and reducing government spending to reduce government debt. [14]

What is debt?

It is the budget deficit accumulation. [14]

What is a budget deficit?

The amount by which a government’s spending exceeds its income over a specific time period. [14]

Debt is measured in relation to GDP. A worker has more debt than her child, but because the worker earns more, it is less of a concern for her. [14]
Lenders are individuals that prefer to save money in order to invest and profit. Consumers (for example, auto loans), corporations (for example, factories), and governments. If governments borrow more and because loans are limited, firms and consumers would borrow less, harming the economy in the long run. [14]

For example, Greece’s debt climbed so dramatically that lenders decided not to give money or land in exchange for higher interest rates. The highest interest rate loans are the more difficult to repay, resulting in greater debt and the government declares that it cannot pay its debt. This is known as “default,” and it is awful for everyone since it causes a severe recession. [14]