Anyone who would like to develop their knowledge of economics, either for the purposes of improving their studies or out of general interest, should be very familiar with some of the most common economic concepts and terms.
This is because:
- Knowing key economic terms, from supply and demand to econometrics and monetary policy, will help you understand more about the field;
- You will give yourself more credibility when speaking about economic matters; and
- Learning key terms can be a great way to study economics more broadly, and it can also help develop your skills in economic analysis.
Economics Definition
Economics is a field of study that examines how individuals, businesses, governments, and nations make decisions to utilize scarce resources in the production, distribution, and consumption of goods and services. This discipline has implications for various other areas, such as politics, psychology, business, and law.
Microeconomics
Microeconomics is a branch of economics that analyzes the market behavior of individuals and businesses to understand their decision-making processes
Macroeconomics
Macroeconomics is a branch of economics that studies the behavior of an overall economy, encompassing markets, businesses, consumers, and governments.
List of Important Economic Terms And Definitions
Supply
The amount of a good or service that producers are willing and able to offer for sale at a given price.
Demand
The quantity of a good or service that consumers are willing and able to buy at a given price.
Price
The amount of money that must be paid to purchase a good or service.
Market
A place or mechanism that brings buyers and sellers together to exchange goods or services.
Gross National Product (GNP)
Gross National Product (GNP) is a measure used to assess the economic performance of a country. It represents the total value of all finished goods and services produced by a country's residents, both domestically and abroad, within a specific time frame, typically a year.
Monetary policy
The use of a central bank's control over the money supply and interest rates to influence the economy.
Subsidy
A payment or other incentive given by the government to support a particular industry or activity.
Purchasing Power Parity
Purchasing Power Parity (PPP) is an economic theory that suggests exchange rates between two countries' currencies should adjust to equalize the price of a basket of goods and services in both countries. In simpler terms, it implies that identical goods in different countries should have the same price when expressed in a common currency.
Basic Terms Of Economics
Below are 25 introductory terms that are commonly used in the field of economics, and which may well be used during your studies in economics. Even if the below terms are not taught as an aspect of your curriculum, often these terms will be referenced in your wider economics reading. For example, these terms are often mentioned in blog posts, economics news articles, or even during economics podcasts.
- Bear market
The principle of a bear market is simple enough. Essentially, it represents a pessimistic outlook on a stock market’s performance, often with such markets falling into a downfall spiral, where prices continue to drop.
As a result of a bear market, selling of stocks tends to increase. Additionally, investors expect, and may well receive, increased losses from their investments.
- Bull market
A bull market represents a much more positive outlook on a stock market’s performance compared to a bear market. In a bull market, stock prices either have or are expected to increase.
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- Business cycle
The business cycle refers to the overall expansion and subsequent contraction of an economy over some time.
As a result, the business cycle is part of the wider field of macroeconomic theory. You can find a definition of macroeconomics below.
- Comparative Advantage
A term attributed to economist David Ricardo. Comparative advantage is a theoretical concept that describes the ability of one party to produce goods and/or services with a lower opportunity cost compared to another party or parties. See below for a definition of opportunity cost.
- Deflation
Deflation is the opposite of inflation. It occurs when demand reduces, and this, in turn, produces results such as reduced prices.
- Division of Labour
The division of labor describes the process of breaking down tasks so that separate groups or individuals can carry out each task. It is often associated with the production process and overall productivity.
- Elasticity of demand
The elasticity of demand describes how demand for goods or services increases or decreases when the price of that good or service changes. Goods that generally are susceptible to the elasticity of demand should exhibit the following patterns:
- An increase in the cost of the good will lead to a decrease in demand; whereas
- A decrease in the cost of the good will lead to an increase in demand.
- Financial markets
Refers to a market or marketplace where financial assets are bought and sold. A common example of a financial market is a stock exchange.
- Fiscal Policy
In simple terms, fiscal policy refers to a government’s spending and how it affects the economy, particularly if spending levels change.
Fiscal policy refers to government actions related to its spending and taxation policies to influence the economy. It's a tool used to manage the economy by adjusting government spending levels and tax rates to either stimulate or restrain economic growth.
Expansionary fiscal policies involve increasing government spending or reducing taxes to boost aggregate demand, aiming to stimulate economic growth, increase employment, and control inflation. On the other hand, contractionary fiscal policies involve decreasing government spending or raising taxes to reduce inflation, control economic growth, or prevent an overheating economy.
Fiscal policies are implemented through the government's budgetary decisions, and they play a significant role alongside monetary policy in shaping the overall economic landscape of a country.
- Gross domestic product (GDP)
GDP is often used as a measure of a nation’s economic performance and activity. It is usually calculated on a quarterly or annual basis.
GDP is often used to assess the overall health and growth of an economy. It encompasses consumption, investment, government spending, and net exports (exports minus imports). Policymakers, economists, and analysts closely monitor GDP to understand economic trends, make projections, and formulate policies.
- Growth rate
The growth rate is a measure of growth and how it increases over some time. It can be used to describe economic growth, gross domestic product, or items such as annualised growth rates for a company.
- Interest rates
An interest rate is calculated by applying a percentage to the amount of the principal being borrowed.
Interest rates refer to the cost of borrowing money or the return on investment for lending money, typically expressed as a percentage. They are set by central banks or financial institutions and can impact various aspects of the economy, including savings, investments, loans, and inflation.
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- Inflation
inflation refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money. It's usually measured as a percentage increase in the Consumer Price Index (CPI) or the Producer Price Index (PPI).
Inflation can occur due to various factors such as increased demand, supply chain disruptions, rising production costs, or government policies like excessive money printing. Moderate inflation is considered normal for a healthy economy as it encourages spending and investment, but high or hyperinflation can erode savings and destabilize economies. Central banks often aim to manage inflation rates through monetary policies like adjusting interest rates or money supply.
In its simplest terms, when there is inflation there is a rise in the prices charged for goods and services. Where an economy has inflation, the cost of living tends to rise.
- Keynesian economics
Developed by the economist John Maynard Keynes, Keynesian economics describes Keynes' economic theories and beliefs, which contained the conviction that government involvement in the economy through spending and taxes could help increase demand and move an economy out of a depression.
- Law of demand
The law of demand examines how customers’ buying habits change when prices increase. Specifically, the theory posits that all other things being equal, when prices of a good increase, the demand for that good falls.
- Law of Supply
The law of supply states that all other things being equal, an increase in price levels results in an increase in the quantity of those goods that are supplied.
- Macroeconomics
Macroeconomics studies how the economy behaves in the aggregate, i.e. as a whole. Concepts examined in macroeconomics include:
- Inflation;
- The level of prices in the economy;
- Growth rate.
- Marginal utility
Marginal utility refers to the amount of satisfaction a consumer has by consuming a good or service. The marginal utility can be used by economists to gauge how much of a good or service a consumer should buy.
It's a fundamental concept in economics, particularly in understanding consumer behavior and demand. As a person consumes more of a product or service, the additional satisfaction gained from each extra unit typically decreases. This principle is known as the law of diminishing marginal utility.
For example, imagine having one slice of pizza when you're hungry; the satisfaction you get from the first slice is high. However, as you consume more slices, the additional satisfaction from each subsequent slice decreases since you start feeling full.
Understanding marginal utility helps in various economic analyses, such as determining consumer choices, pricing strategies, and resource allocation.
- Microeconomics
The opposite of macroeconomics is microeconomics. Microeconomics focuses on how individuals and companies act within an economy, and how their behaviour also influences an economy.
- Monetarism
Monetarism is a school of thought that centers on the idea that the volume of money in an economy is a key factor in the amount of economic activity and growth. It is a theory that sits in contrast to Keynesian economics.
- Oligopoly
A term used within the area of market share. In a monopoly, there is only one supplier in the market, and in a duopoly, there are only two. In an oligopoly, there are more than two suppliers in the market, and the actions of one supplier can influence the actions of the others.
- Opportunity cost
Opportunity cost refers to the potential value that is lost when choosing one option over another. It's the fundamental concept in economics and decision-making. When you make a decision, the cost of that decision isn't just what you pay for the chosen option, but also the value of the next best alternative that you forgo.
For instance, if you decide to invest your money in stocks, the opportunity cost is not just the money spent on stocks but also the potential earnings from other investment options like bonds or real estate. Similarly, if you choose to spend time studying for one subject, the opportunity cost is the potential benefit you could have gained from studying another subject or engaging in a different activity.
- Stagflation
Stagflation describes an economy that is experiencing slow economic growth, whilst also experiencing inflation and high levels of unemployment. Stagflation is far less common than inflation or deflation.
- The Invisible Hand
An idea introduced by the philosopher Adam Smith, the invisible hand describes the benefits that society at large can enjoy as a result of the actions of self-interested individuals. The invisible hand was an argument used to advocate the benefits of a free market.
- Trade barriers
Trade barriers relate to a government policy or regulation that limits or controls international trade. Examples include:
- Tariffs;
- Trade quotas; and
- Embargos
Create Your Economics Terms Glossary
The difficulty in understanding economics is that there is so much terminology within the field. However, if you take some time to learn core economic concepts, such as those outlined above, then you’ll be able to:
- Speak with more confidence when discussing economic matters;
- Understand more about which theories and concepts belong to which area of economics, for example, macroeconomics or microeconomics; and
- Use these terms during your exams or in essays, which will show your teacher or lecturer that you’re comfortable using and highlighting such terminology.
Although it can take some time to get to grips with economics concepts, the best tactic to improve your understanding of such key terms is to try and learn new terminology at a slow, but regular, pace.
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For example, you could aim to learn between one and three new terms every week. This would mean that, well before you get to the end of the academic year, you’ll be very comfortable with terms such as those above and what they mean, and you'll have taken the time to commit such terms to memory so that you can remember them for years to come.
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Of course, if you need or would like to learn such terminology quicker and more intensively, then you can always hire an economics tutor to help you revise core economic terms and concepts. Aside from helping you learn such terms, an economics teacher or tutor can:
- Give you exercises that consolidate your knowledge of economic terms;
- Provide you with learning techniques to help you during your revision;
- Identify areas or key terms that you're struggling with, whether that's concepts that fall within behavioural economics or terms such as stagflation; and
- Complement your school’s curriculum by working with you on the areas you’re having the most difficulty with.
Superprof, for example, has a wide range of economics tutors that you can choose from. Simply enter your postcode and Superprof will match you with online and local tutors in your area that would be happy to help you succeed in your studies.
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You have lucidly explained some basic concepts that are fundamental ideas in learning & understanding economics . As well as grasping journalist common jargon in discussing economic development & climate in a Nation or internationally . Thank you Krishna Sir , for your urge to guide even student learners !
I am senior citizen with Masters in Commerce from Reputed Univesity Studied Managerial Economics & Management, Specializing in Banking &Costing about 45 years ago &Retd
Banker . Just I wanted to brush up my basic ideas in economics . Your short write up
definitely help me Sir.
You can sign up as a teacher on Superprof.co.in
Email us at namaste@superprof.com our team will assist you with the process!
Thanks for helping the young generation to develop their knowledge of economics. You’ve well described the GNP
Thank you for your kind words. :)