Economics is the study of how populations, businesses and individuals use money and other resources to produce wealth. Understanding basic concepts of economics is important to local, state and federal governments, as well as organizations affected by them. Professionals in economics and business also need to know how economics works to advise clients, companies and students in academic settings.
A major component of economics is the way in which a community or business uses available resources. Financial budgets, for instance, involves prioritization decisions on where to invest limited monetary resources. Manufacturing companies must figure out how to best use equipment, labor and materials to develop goods in the most efficient way. Decisions on how to preserve natural resources in the environment in production processes is another resource-utilization concern.
Scarcity and Choice
Scarcity and choice are closely related economics concepts. Scarcity refers to a condition in which consumers have limited access to goods and services they desire. This may result when a country has low supplies of a natural resource. The U.S. is notoriously dependent on foreign oil production. When supplies are scarce, gasoline prices rise. Choice is essentially a contrasting scenario in which consumers have access to a number of close alternatives to meet a need. This may result when companies produce competing options to meet a given need.
Supply and Demand
A major theme in economics is the law of supply and demand. This is the recognition that an increase in price typically leads to lower customer demand when all other factors remain steady. Similarly, increased demand relative to supply normally drives prices higher. Companies try to find equilibrium price points when marketing products. This is the point at which supply and demand are equal, which creates the optimal price for revenue and profit maximization.
Economies of Scale
Economies of scale refers to the ability of economic systems to minimize the costs of production or resale by optimizing production or operational efficiency. In manufacturing, for instance, a business is normally more efficient when it has one order to make 500 widgets from the same piece of equipment than when it has five separate orders of 100 widgets over time. Similarly, a reseller usually gets a better unit price when it orders large quantities of goods from suppliers at a given time.
Allocation and Distribution
Allocation refers to the amount of given resources used in certain areas of production. Again, companies allocate certain financial resources to functional business activities based on the expected value to the company and its customers. Distribution is the use of transportation and logistics to move goods from producer to end customer. In a free trade system, companies collaborate with distribution partners in this process. A manufacturer normally produces and then sells goods to a wholesaler that in turn sells to a retailer. The retailer then holds goods and markets them to consumers.
Comparative advantage is a long-held economic principle that historically relates to importing and exporting between countries and governments. In essence, countries or companies may choose to produce just the goods they can make efficiently and import or purchase supplies or goods from other sources when they don't have efficiency advantages. This principle relates to the scarcity and economic value of time and the desire of governments and businesses to optimize efficiency, resources and profit potential.
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- American Economic Association: What Is Economics?
- Northeast Missouri State University: Basic Economics Concepts
- University of South Carolina: Economics: Basic Concepts
- The Economist: Economies of Scale and Scope
- Massachusetts Institute of Technology: Economists Find Evidence for Famous Hypothesis of 'Comparative Advantage'
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