Regardless of what you're studying, everyone should have a basic understanding of economics because it's vital to how we function within society. Whether you realize it or not, you use economic concepts on a daily basis to make decisions — and no, these decisions do not always include money. Let's take a deeper look at this topic.
Simply put, economics is the study of how society allocates its scarce resources. Since humans have virtually unlimited wants and needs, we must determine how to satisfy our needs with limited resources. Money comes to mind when most people discuss economics because they associate economics with purchasing goods, the exchange rate and oil prices — the list could go on. What most people don't know is that economics also deals with decision making, how firms work within industries and how the marketplace functions, among other things. Fresh U proudly presents you with five basic economics concepts that every college student should know.
As mentioned before, our wants and needs are virtually unlimited, but our resources to satisfy those desires are limited. Thus, we must choose which desires to satisfy. To use resources sustainably, our goal is to use them effectively and efficiently. This means that we want to achieve our goal while minimizing the amount of resources needed to achieve our goal. For example, if you want to bake a cake, your ingredients will have been used effectively if you finish with a cake and not a disastrous mess in the oven. If you bake the cake correctly on your first try, then you'll have used your ingredients efficiently since nothing was wasted.
2. Opportunity Cost
This concept goes hand in hand with scarcity. Commonly known as the basic relationship between scarcity and choice, opportunity cost is a benefit someone gives up in order to gain something else. For example, if you have $10 to spend but you must choose between spending it on food and spending it on a book, you must give up one to attain the other. The opportunity cost of buying food is the book, since you no longer reap the benefits of owning the book. On the contrary, the opportunity cost of purchasing the book would be your inability to satisfy your hunger.
3. Supply and Demand
Maybe you've heard of this before, but never truly understood what it meant. Markets are driven by supply and demand; it's what causes fluctuations in prices and the exchange rate. Let's take a look at demand first.
Demand is defined as how much of a good or service is desired by consumers. For example, if the price of apples is low, many people will purchase them, or demand them, because they're very affordable. Contrarily, if the price of apples is high, only a few people will purchase them because they're expensive.
Now let's look at supply, which is how much the market offers. At a lower price, suppliers will produce less because of low revenue potential. At a higher price, suppliers will produce more because they can increase profits significantly by selling high priced goods at higher quantities.
People respond to incentives. Governments offer them because they can motivate individuals to act a certain way, which can be a good thing. For example, if a government offers subsidies to firms who reduce their pollution to a specified amount, firms will want to minimize their pollution so they can take advantage of the subsidy. Here's another example: if your boss offers you recognition for a project you worked hard on, you'll be motivated to work just as hard next time — if not, even harder — so you can receive the same recognition again.
5. Purchasing Power
If you have a dollar one year, it's still worth the same as a dollar in the future, isn't it? Wrong. While it may still be defined as a single dollar, inflation has caused it to be worth less than it was before. Let me explain: say that your dollar can buy you a candy bar. One year later, you go back to the convenience store to purchase that same candy bar, but you notice the price has now risen to $1.10. Inflation pushed the price up, indicating that you need more than a dollar to purchase the same candy bar. Thus, your purchasing power has declined.
There's much more depth to economics than what I've discussed here — this article barely scratches the surface — but it's a start. If you ever find yourself wanting to learn more, Investopedia is a great resource. You could also talk to your parents; they probably know more than you're aware of. Another great resource is the news — they're always discussing exchange rates and the business world.
I've taken two economics courses in university so far, and I've been surprised at how applicable they are. If you're OK with taking a social science course that involves some math, I'd highly recommend it. As a young adult, it's important to know how our world works. With money being tossed left, right and center, we have every right to know and understand how it's being used and why.
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