Basic Concepts in Economics

Economics is the study of the transfer of goods or products and services. The study of economics deals with the values assigned to these goods or services and how different factors effect the flow, or trade, of any given product. It is important to understand the basic concepts of economics in order to grasp how the economy and society function.
  1. Supply and Demand

    • One of the most basic economy concepts is that of supply and demand. The concept of supply and demand is at the very backbone of most economic issues and fundamentally deals with the issue of scarcity in the marketplace. If demand increases and supply remains the same then prices will increase, while a decrease in demand with the same supply will cause a price decrease. At the crux of the concept is idea of the zero-sum. Supply and demand are directly related, and a rise in one will come at the cost of the other.

    Opportunity Cost

    • A fundamental concept in economics is that of opportunity cost. This concept deals with scarcity of a commodity and teaches that for every purchase or investment there is an opportunity cost. This theory is at the heart of many economic considerations and is used in a wide array of situations. A common example used to teach this concept deals with purchasing an item versus investing the money. When you purchase a consumer good, you gain the good at the opportunity cost of the interest or capital gain that would have been earned from investing the same given amount of money.

    Guns Versus Butter

    • The "guns versus butter" theory is a basic economic concept used to teach the fundamental ideals of the production possibility frontier. This model uses wartime production decisions as its basis and gives the economic choice of producing butter for domestic consumption or guns for wartime efforts. The choice between the two is a zero-sum decision and illustrates modern day government spending as a part of gross domestic product.

    Tragedy of the Commons

    • The "tragedy of the commons" is a basic economic concept that illustrates common property resources. Under the model, a common good such as air is discussed and explained to be free for all, as it is common property. As rational actors, people then use as much of the resource as they can, which causes the depletion of the resource and illustrates the classic "freeloader problem" in economics.

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