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The Basics of Economics

Economics is a broad field that involves the analysis of production and consumption of goods and services in a specific region. Economics can be divided into two major categories, namely, macroeconomics and microeconomics. Needless to say, economics is a deep ocean whose depths cannot be reached in a single post such as this; the objective is to skim the surface and stir interest that would lead a few readers to delve further into relevant topics.

Microeconomics

Microeconomics (bottom up) refers to the study of the impact of decisions made at an individual, family, group or community level (micro = small/low level) on the country.

Microeconomic analysis involves investigating the savings rate of a consumer, debt load, family decisions based on perceived benefits (such as accepting a higher paying job but commuting two hours per day to get to it versus living within a 10 minute walk and a lower paycheck), frequency and outlay of lottery ticket purchases, etc. Most, if not all, microeconomic decisions are based on perceived value or, in formal parlance, benefit-cost ratio.

Macroeconomics

Macroeconomics (top down) deals with the study of the influence of aggregate (micro) units on the country’s economy as a whole (macro = big picture).

Macro topics include inflation, interest rate changes, labor pool/growth, unemployment rate, import and export, national income, etc. This category also dissects the performance of a nation’s fiscal and monetary policies and their suitability for improving the country’s well-being.

Key Terms

Business cycle

A business cycle refers to the unsystematic but periodic fluctuations seen in economic activities lasting several months or years. Typically, a business cycle cannot be predicted and its occurrence is a random event but there are defining phases such as contraction, trough, expansion, and peak that can be identified as shown in the “Deviations from the long-term growth trend US 1954–2005” graph below:

Businesscycle_figure3

Image courtesy: Wikipedia

Recession

Recession refers to a drop in economic activities, also termed as a business cycle contraction. Various factors such as GDP, price inflation, unemployment rate, income, spending, etc. are used to determine if the economy is in a recession.

Economic Efficiency

Economic efficiency refers to the production of an item (output of the process) at the lowest possible cost without comprising the safety of the workplace and abiding by local (applicable) regulations. Economic efficiency is governed by prices of raw materials needed for production.

Technological Efficiency

If the output from a process can be increased without a corresponding increase in input, while retaining the quality of the output (item), then the process is said to have been made technologically efficient. As would be evident, technological efficiency is dictated by scientific factors (research).

Opportunity Cost

The opportunity cost of any action or activity is the next best alternative to that action or activity. In other words, what action was not performed to accommodate the originally implemented one. Simple real world examples include choosing to sleep than working out, deciding to become part of the labor force after high school on a full-time basis than going to university, etc.

Do you like reading about economic indicators? Are there other key terms that an interested reader should be aware of? Any good books (related to economics) that you would recommend?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.

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About the author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.

{ 4 comments… add one }
  • Steve June 7, 2012, 10:10 am

    Keep it up Clark, always well written articles.

  • Liquid June 7, 2012, 3:29 pm

    I think econ is really interesting. Wish I’d’ve paid more attention to it in high school.

  • Clark June 7, 2012, 4:00 pm

    Steve: Thank you!

  • Drew June 10, 2012, 6:58 pm

    Nice summary. For books I would have to say “Economics In One Lesson” by H. Hazlitt. It’s worth it for his ‘broken window’ fallacy alone, as everything else in economics stems from that one lesson. Brilliant.

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