Use of Terminology: Correct Application of Economic Terms
Micro vs. Macro: Two Sides of the Economy
Economics is divided into two main branches. Microeconomics looks at individual decisions—like a family buying groceries or a company setting the price for a lemonade stand. Macroeconomics, on the other hand, zooms out to look at the entire economy—like the total employment in a country or the inflation rate. Using these terms correctly shows you know whether you are talking about a single tree or the whole forest.
The Engine of the Market: Supply & Demand
These two terms are the most famous in economics. Supply is how much of a good or service is available. Demand is how much people want it. The interaction between them sets the market price. If a new video game is released and only 10 copies exist (low supply) but 100 people want it (high demand), the price will be high. If a bakery bakes 200 loaves of bread (high supply) but only 50 people want bread that day (low demand), the price will drop to avoid waste.
| Scenario | Supply | Demand | Resulting Price |
|---|---|---|---|
| New Tech Gadget Release | Low | High | ⬆️ Increases |
| Seasonal Fruit (Summer) | High | High | ↔️ Stable |
| Out-of-Fashion Clothing | High | Low | ⬇️ Decreases |
Every Choice Has a Cost: Opportunity Cost
When you choose one thing, you give up something else. That "something else" is your opportunity cost. It's not just money; it can be time or enjoyment. For example, if you have $10 and you choose to buy a movie ticket, your opportunity cost is the pizza you could have bought instead. If you spend an hour playing video games, the opportunity cost is the hour of studying you missed. Economists use this term to remind us that resources (like time and money) are always limited.
Real-World Application: Your First Job
Imagine you are offered a summer job for $15 per hour. This is your wage (the price of your labor). You decide to work 20 hours a week. Your total income is $300 per week. With that income, you are a consumer in the goods market. If you spend $200 on a new phone, that is consumption. The $100 left is your savings. If you put it in a bank, you are supplying capital which the bank can lend to others. Understanding these terms helps you see your role in the circular flow of the economy.
Important Questions
In economics, a need is something essential for survival, like food, water, and shelter. A want is something you desire but is not necessary for survival, like a specific brand of sneakers or a video game. Marketers often try to turn wants into perceived needs.
Scarcity is the fundamental problem in economics. It means that society has unlimited wants but limited resources (like oil, wood, or labor). Because of scarcity, we must make choices, and every choice has an opportunity cost. If there were no scarcity, there would be no need for economics.
The main actors are households (people like you and your family), firms (businesses that produce goods and services), and the government. Households supply labor and consume goods. Firms hire labor and produce goods. The government sets rules, provides services (like schools and roads), and collects taxes.
Footnote
- [1] Microeconomics: From Greek "mikros" meaning small. The study of individual economic units like households and firms.
- [2] Macroeconomics: From Greek "makros" meaning large. The study of the economy as a whole, including inflation, unemployment, and economic growth.
- [3] CPI (Consumer Price Index): A measure that examines the average change in prices paid by consumers for a basket of goods and services over time. It is a key way to measure inflation.
- [4] Capital: Human-made goods used to produce other goods or services. Examples include machinery, tools, and factories.