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Friday, December 3, 2010

Economics 101

eco·nom·ics noun pl
\ˌe-kə-ˈnä-miks, ˌē-kə-\

a : a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services.

A General Overview

Economics is the social science that analyzes the production,
distribution, and consumption of goods and services.

Economics aims to explain how economies work and how economic
agents interact.

Economic analysis is applied throughout society, in business, finance and government, but also in crime,[3] education,[4] the family, health, law, politics, religion,[5] social institutions, war,[6] and science.[7] The expanding domain of economics in the social sciences has been described as economic imperialism.[8]

Common distinctions are drawn between various dimensions of economics.

The primary textbook distinction is between microeconomics, which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Other distinctions include: between positive economics
(describing "what is") and normative economics (advocating "what
ought to be"); between economic theory and applied economics;
between mainstream economics (more "orthodox" dealing with
the "rationality-individualism-equilibrium nexus") and heterodox
economics (more "radical" dealing with the "institutions-history
-social structure nexus");[9] and between rational and behavioral

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it.
And if it stops moving, subsidise it.”
~ Ronald Reagan 40th U.S. President

mac·ro·eco·nom·ics noun pl
\ˈma-krō-ˌe-kə-ˈnä-miks, -ˌē-kə-\

: a study of economics in terms of whole systems especially
with reference to general levels of output and income and to
the interrelations among sectors of the economy.

A General Overview

Finance is based on economics. Therefore, to properly understand
financial markets and their behavior one must first understand

Economics at its core is concerned with the production, distribution,
trade and consumption of goods and services.

To put this in human terms we can say that economics is the science
that arises out of the interplay between limited resources and
unlimited human wants and needs.

There are two basic ways to view economics. There is the broad
and distant view, which attempts to view things in aggregate for
a society at large. We call this view “Macroeconomics”.

Macroeconomics is concerned with the status of the economy as
a whole.

Thus, it looks at overall employment of a general population or
overall income of a nation as opposed to a more focused view
of a population segment or specific industry.

This view is helpful because it is only by this kind of analysis that
we can see the general trends which a society or nation is following.

Macroeconomic theory and analysis is employed most often by
Governments and institutions, which have a responsibility to
make policies and decisions which affect the economy as a whole.

Some terms you may have heard of which concern themselves with
the macroeconomic view of the economy are Gross National Product,
Inflation, Consumer Price Index and Fiscal Policy. The meaning of
each of these is listed below.

Gross National Product – This is the most common measure of
economic productivity for an aggregate population. GNP is
defined as the total value of all goods and services produced
in final form during a specific period of time (usually 1 year).

Inflation – Inflation is defined as a condition of generally increasing
prices. The term used for measuring these prices can vary according
to the desires of the individual, government or institution doing the

Consumer Price Index – The CPI is a measure of how much prices
have increased or decreased as compared to a baseline years prices.
The prices used in arriving at this figure are standard goods and
services determined by the evaluator. Thus, the CPI for the United
States might vary greatly as compared the CPI for a country from
the Middle East.

Fiscal Policy – Fiscal Policy is essentially the manner in which a government achieves economic objectives through government spending and taxation. Fiscal policy is the alternative to Monetary Policy.

Monetary Policy – Monetary Policy is essentially the practice of a
government managing the supply of money to achieve economic
objectives. The United States uses the Federal Reserve System
to either increase or decrease the supply of money, which in turn
effects the overall economic environment as a whole.

“The first lesson of economics is scarcity: There is never enough of
anything to satisfy all those who want it. The first lesson of politics
is to disregard the first lesson of economics."
~ Thomas Sowell American Writer & Economist

mi·cro·eco·nom·ics noun pl
\ˈmī-(ˌ)krō-ˌe-kə-ˈnä-miks, -ˌē-kə-\

: a study of economics in terms of individual areas of activity
as a firm.

A General Overview

Besides Macroeconomics, the other basic way to view economics is
the “Microeconomic” view.

This view concerns itself with the particulars of a specific segment
of the population or a specific industry within the larger population
of good and service providers.

More importantly, from a financial standpoint microeconomics
concerns itself with the distribution of products, income, goods
and services.

Of course it is this distribution, which directly affects
financial markets and the overall value of any particular
resource at a specific point in time.

If there is one concept integral to an understanding of
microeconomics it is the law of supply and demand.

A more detailed look at supply and demand as well as how they
affect price will be helpful in understanding microeconomics.
Before discussing supply and demand it is helpful to understand
what price is as a concept and how it relates to supply and demand.

Price is essentially the feedback both the buyer and seller receive
about the relative demand of a product, good or service. When
the price is high then demand will be low and when the price is
low demand will be high.

There are two laws intrinsically related to microeconomics. These
two laws are the Law of Supply and the Law of Demand. A closer look
at each will illustrate how they relate to pricing and the distribution
of goods and services.

According to the LAW OF DEMAND, as price goes up; the quantity
demanded by consumers goes down. As the price falls, the quantity
demanded by consumers goes up.

This law concerns itself with the consumer side of microeconomics.
It tells us the quantity desired of a given product or service at a
given price.

The LAW OF SUPPLY concerns itself with the entrepreneur or
business, which supplies the products and services.

This law tells us the amount of a product or service businesses
will provide at a given price.

Essentially, if everything else remains the same, businesses will
supply more of a product or service at a higher price than they
will at a lower price.

This is because the higher price will attract more providers who
seek to make a profit on the good or service.

By the same token a low price will not attract additional suppliers
and as a result the overall supply will remain low.

“True individual freedom cannot exist without economic security
and independence. People who are hungry and out of a job are
the stuff of which dictatorships are made.”
~ Franklin Roosevelt 32nd U.S. President

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