As with any subject you study at school or university, there are always going to be certain key terms or phrases specific to that subject. Just as students of languages have to get to grips with conjugation, the past participle, and various cases and tenses, so too do economics students have their own terminology to navigate.
Economics Definition
Economics is a social science that studies how individuals, governments, firms, and nations make choices on allocating limited resources to satisfy their unlimited wants. It involves the production, consumption, and transfer of wealth.
There are some obvious economic terms and topics that students will likely already be familiar with, such as:
- Financial markets;
- Saving compared to investing; or
- Unemployment figures and trends.
However, other terms are core to economics, which may not immediately spring to mind, whether that's GDP growth or hyperinflation.
Below is an overview of key economic concepts, including fundamental concepts that may not be particularly obvious to students.
Economic Concepts Consumers Need To Know
If you’re looking to get ahead in your economics studies, then it pays to be ahead of the curve when it comes to key concepts that might be discussed during lessons, or that are mentioned in your course textbooks.
Below is just a selection of the terms that you should be familiar with in order to get the most out of your studies. Of course, some of the terms may not appear immediately relevant to economics classes, such as the concept of incentives, but as you’ll see, there’s a crucial reason why these ideas are so important to the field.
Scarcity
This concept explains that resources are limited while human wants are unlimited, leading to trade-offs and the need to make choices.
Scarcity is a fundamental concept in economics, signifying that the demand for a product or service exceeds its availability. This limitation can restrict the options for consumers, who are the driving force of the economy. Understanding scarcity is crucial for determining the value of goods and services. Items that are scarce, such as gold, diamonds, or specialized knowledge, hold higher value due to their limited availability. Sellers of these items can command higher prices because they are aware that the demand surpasses the supply, allowing them to find buyers willing to pay more.
Supply and Demand
This fundamental economic concept highlights the relationship between the quantity of a product producers are willing to supply, and the quantity consumers are willing to buy at a given price.
The connection between the amount of a product or service provided by producers and the amount desired by consumers is known as supply and demand. This balance, also known as market equilibrium, is what determines the prices of goods according to classical economists.
When the demand for a product increases but its supply remains the same, the price tends to go up. Understanding the dynamics of supply and demand helps business owners predict market trends, adjust pricing strategies, and recognize growth opportunities.
In general, it is difficult to disrupt established markets that are in a stable equilibrium. Most opportunities for new businesses arise in dynamic new markets where there is unmet demand.
Economies of scale are achieved when the average cost per unit decreases with an increase in production levels. Larger-scale production enables businesses to distribute fixed costs over a larger number of units, leading to cost reductions. Entrepreneurs can utilize economies of scale to enhance efficiency, lower per-unit costs, and enhance their competitiveness in the market.
Furthermore, economies of scale serve as a significant obstacle for new entrants. It is challenging for small startups to enter markets where large corporations have established substantial economies of scale, making it difficult to compete on pricing.
Incentives
Incentives matter in economics as well as in economic policy. This is because incentives often influence the demand for a good or service, as the higher the incentive, the greater the projected demand for that product.
For example, if you reduce the price of a chocolate bar, then consumers are incentivised to buy more of it, and as a result demand for that product will be higher, as will its sales.
Opportunity cost is the value of the alternative that is given up when a decision is made. For example, when an entrepreneur decides to allocate resources to a particular project, the opportunity cost is the potential benefit that could have been gained by allocating those resources to a different project. Understanding opportunity costs enables entrepreneurs to assess trade-offs, prioritize investments, and allocate resources effectively.
Money
Money is a core aspect of economics, but it often doesn’t get thought about too often as a concept or economic theory.
Money is important, well, because it’s everywhere. At its most basic, money is a means through which one person agrees to exchange goods or services with another. However, its application in economics is much broader. From stock markets to monetary policy, to inflation, money is at the core of many economic concepts and theories.
What’s more, the popularisation of new currencies, such as Bitcoin, continues to challenge economists in terms of what money means, and how its value impacts economic policies and decisions around the world.
Productivity
Productivity can be used to gauge how well or poorly an economy is performing, as usually, higher levels of productivity indicate a growing economy.
By definition, productivity is measured by how much is outputted for each unit of input. Economists commonly consider labour as an input metric, although there are other inputs, such as capital, that can be considered. Outputs can be measured by items such as gross domestic product.
However, you can measure the productivity of almost anything, making it an indispensable analytical tool and prospect for economists the world over.
The concept of marginal utility refers to the extra satisfaction obtained from consuming an additional unit of a product or service. As individuals consume more of a particular item, the marginal utility typically decreases. For instance, while a single glass of water may be highly valuable when you are thirsty, an extra glass is unlikely to provide much value as your thirst has already been quenched.
Marginal Costs
Marginal costs reflect the extra expenses associated with producing an additional unit of a product or service. For instance, when a company chooses to boost its output, it faces added costs like labor, materials, and overhead expenses.
The ability to have low marginal costs is what makes certain things highly scalable, unlike others. Information, thanks to advancements in technology, can be scaled almost infinitely, while physical products are typically more challenging to mass-produce. This is why the majority of startup ventures focus on software products.
Search for good economics tuition online on Superprof, and learn about the fundamentals of Economics with the help of an Economics teacher in your area!
Other Core Branches of Economics You Should Know
Aside from a handful of economic terms that you should be aware of, economics is also divided into different areas of study. Knowing key concepts within these core areas will make it easier for you to understand what exactly these areas of economics seek to examine.
Macroeconomics
Macroeconomics is the study of the economy as a whole and seeks to look at the “big picture” of how global financial markets and local economies operate. Some of the key macroeconomics terms you may come across during your studies include:
- The business cycle;
- Gross domestic product (GDP);
- Inflation and deflation; and
- Monetary or fiscal policy
There are other key economic terms within this field, such as aggregate demand and supply, so the above list is not exhaustive.
Gross Domestic Product (GDP) is the total monetary value of all finished goods and services produced within a country's borders in a specific time period. It provides an overall measure of a country's economic performance
Inflation
Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. This results in a decrease in the real value of money over time.
When inflation occurs, each unit of currency buys fewer goods and services than it did before, leading to consumers being able to purchase less with the same amount of money.
Microeconomics
Microeconomics is the yin to the yang that is macroeconomics. In simple terms, it is the opposite of macroeconomics, as microeconomics seeks to understand how individuals and individual companies can influence the economy, and what drives those economic actors to take the decisions that they do.
Key microeconomics terms that you may encounter include:
- The price elasticity of demand;
- Asymmetric information; and
- Income distribution.
The concept of demand elasticity describes how the demand for a product or service changes in response to a change in one of the factors that influence buyers' purchasing decisions. It reflects the relationship between demand and various factors, including price, availability of substitutes, advertising influence, and consumer income.
Essentially, this blend of psychology and economics shows how far-reaching the study of economics can be. If you’re interested in finding out more about this area, then you may wish to read “Thinking, Fast and Slow” by Kahneman.
Technology Has a Crucial Role in Economics
Another core concept that has heavily influenced the area of economics is technology. Although technology is a hugely broad concept, the impact of technology on economics is undeniable.
Take, for example, the industrial revolution, which began in Britain during the 18th century, had a huge effect on almost every aspect of life, from:
- How and where people lived;
- Increases in wealth – whether to business or, arguably, to the working classes; and
- Changes to working conditions.
Since that watershed event, the foundations of many modern and developing economies were established, although living and working conditions have naturally changed over the past few hundred years.
You can also see the impact that technological advances have had on economics, economic growth, and economic activity within the past few decades. The way in which business is conducted has fundamentally shifted within the last 50 years, with a move towards the digital economy and the age of the internet.
Indeed, some now argue that, due to the wide availability of information online, that any perceived information asymmetry in the economy has actually reduced.
This is because purchasers now have more access to empirical data than ever before about a product, thereby reducing any information mismatches or uncertainty that may have previously been in place between buyers and sellers.
Consolidate Your Knowledge of Economic Concepts
There’s no getting away from it – there can be a lot of new terminologies to learn when you first start studying economics. Even if you’ve been studying economics for a few years, or are studying it at university, you’ll find that there are always new terms or concepts to get a handle on.
Thankfully, there’s help at hand. If you can, try to understand what area of economics the term applies to. For example, does a term such as price elasticity of demand or a concept such as interest rates belong within the remit of:
- Macroeconomics;
- Microeconomics;
- Global economics and international trade; or
- A mixture of different fields
By identifying which branch of economic study a term falls under, you may be able to associate a new concept with the one you’re already familiar with, thereby consolidating your learning and helping the new term to stick in your mind.
If you do find yourself struggling, then you can always reach out for extra support. Economics tutors are experienced with a range of economic terms and concepts and can give you practical exercises and real-world examples to help develop your knowledge in particular areas.
On Superprof, you enter your postcode and the subject you’d like to study, and then you’re matched with a tutor in your area. With the options of having one on one or group tuition, there’s plenty of flexibility so that you can get the extra study time you need, without spending a fortune to do so.
Knowing core concepts can be a real asset when it comes to coursework or exams, so don’t delay getting on top of the key economic terms, especially ones that feature heavily in your curriculum.
Whether you need to learn more about the 2008 global financial crisis, current world economic issues, or the state of the Eurozone, remember that many an economist before you also had to start out learning about such issues and their implications from an economics perspective. As such, it's always a good idea to be proactive, and reach out for that extra support if you need it.
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