5 Most Important Concepts of Economics

Scarcity

Scarcity is something that everyone understands, whether they realize it or not because everyone has experienced its impact. The core economic dilemma of scarcity is that the world has finite – or scarce – resources to fulfill unlimited wants. People must constantly decide how to deploy their resources effectively to meet their objectives.

For example, only a fixed amount of wheat is cultivated each year. Some favor bread, while others prefer beer, but manufacturers can only produce a certain amount because of the limited wheat supply. How do we calculate the amount of flour for bread and beer? One solution to this challenge is a market system based on supply and demand.

Supply and Demand

Supply and demand are the driving forces in a market system. For example, if many individuals desire to buy beer, the demand for beer is said to be high. As a result, you can charge a higher price for beer and generate more money on average when you use wheat to manufacture beer rather than flour.

Product prices may lead to a situation in which more people start brewing and, after a few production cycles, there is so much beer on the market – beer supply expands – that beer prices plummet.

While this is an oversimplified and extreme example, the supply and demand idea helps to explain why last year’s popular product cost half as much as this year’s.

Costs and Benefits

Cost and benefit concepts are tied to the economy’s rational choice (and reasonable expectations) theory. When economists argue that people act rationally, they suggest making decisions with the best benefit-to-cost ratio in mind.

Breweries will recruit more personnel to brew more beer if there is a tremendous demand for beer, but only if the price of beer and the volume of beer they sell justify the higher expenses of their salaries and the resources needed to produce more beer. Similarly, the consumer will purchase the most excellent beer available, but not always the best-tasting beer in the shop.

The notion of costs and benefits may also apply to various decisions that aren’t monetary. Daily, college students undertake cost-benefit analyses, focusing on the classes they believe are most crucial to their success. Decisions made through this cost-benefit analysis may also include lowering the amount of time they spend studying subjects they think aren’t as important.

Everything is in the Incentives

If you’re a parent, manager, teacher, or someone in a supervisory role, you’ve undoubtedly previously had the opportunity to provide a reward—or encouragement—to raise the chance of a specific outcome.

Economic incentives explain how supply and demand encourage businesses to give customers what they want while simultaneously urging consumers to save their limited resources. When client demand for a product rises, so does the market price, incentivizing manufacturers to produce more to command a higher price.





When the cost of raw materials or inputs for a product rises, and manufacturers restrict supply, the price they charge for the product increases, and buyers are incentivized to conserve their consumption, which is superb and reserved.

Stock and Flow

Stock and flow are two types of variables that differ primarily in their relationship to time.

The stock is a precise amount at a single point in time, which may have accumulated through time. The flux is a monetary sum expressed over some time, usually in the form of a charge.

You can describe the principles of inventory and flow using the following example: suppose you have a monthly rent payment of $20. This rent would be the cash flow, denominated in dollars ($20), over some time (1 month), which we may describe as $20/month. However, you were in debt the previous month and discovered that you only had $16 to pay your rent.