Basic Economic Principles & It’s Effect on Personal Financial Choices

Households

Consumers play a vital role in the economy by purchasing goods and services, driving demand.

Businesses

Producers create goods and services to meet consumer demand, employ workers, invest in technology, and innovate.

Government

Regulates economic activities, provides essential services, and manages fiscal policies such as taxation and spending.

Gross Domestic Product (GDP)

Measures the total value of all goods and services produced within a country's borders in a specific time period.

Importance of GDP

Reflects the overall economic health of a nation and helps policymakers assess the effectiveness of economic policies.

Inflation

Refers to the general increase in the prices of goods and services over time, leading to a decrease in purchasing power.

Impact of Inflation

Affects consumers' purchasing power, makes goods and services more expensive, and influences interest rates.

Expansion

Characterized by rising GDP, increasing employment opportunities, and overall economic growth.

Recession

A period of economic decline marked by reduced GDP, rising unemployment, and lower consumer spending.

Depression

A severe and prolonged recession with significant decline in economic activity and widespread hardship.

Fiscal Policy

Government decisions on taxation and spending to influence the economy.

Monetary Policy

Managed by the Federal Reserve, it involves controlling the money supply and interest rates to achieve economic goals.

Law of Supply

As the price of a good or service rises, suppliers are willing to produce more of it.

Law of Demand

As the price of a good or service increases, the quantity demanded by consumers decreases.

Equilibrium

Occurs when supply and demand are balanced, determining the market price and quantity of goods exchanged.

Economic Development

Sustained improvement in living standards, technological advancements, and overall economic well-being of a society.

Scarcity

Limited availability of resources relative to unlimited wants and needs, forcing choices about resource allocation.

Factors of Production

Includes land, labor, capital, and entrepreneurship used in the production of goods and services.

Opportunity Cost

The value of the next best alternative forgone when making a decision.

Trade-offs

Involves sacrificing one option to gain another, helping prioritize spending and resource allocation.

Macroeconomics

Study of the economy as a whole, focusing on factors like GDP, inflation, and unemployment.

Microeconomics

Study of individual economic units such as households and businesses, analyzing their behavior.

Decision-making

Economic reasoning involves evaluating costs and benefits, predicting consequences, and making informed choices.