When you find yourself in a scrum with a thousand other consumers trying to get the newest smartphone or holiday toy, you are a living example of the economic principle of supply and demand. Basic economic principles can influence everything from lines at the store to the likelihood of getting a raise at your job. Understanding the principles of economics can help you to better understand the world and make informed decisions.
When buy something at the store that costs $100, you might end up paying $105 or more when you actually check out. Governments collect money from citizens by imposing fees or taxes on a variety of activities like buying goods, earning income and owning property. Taxes are the reason you take less home in your paycheck than your actual pay rate dictates: employers are required to send some of your pay to the government to pay for income taxes. The government uses tax money to pay for public goods like roads, sewer systems, public schools and national defense.
If you went to the movies or purchased a gallon of milk 10 years ago, you’d probably paid less than you'd pay today. Inflation is a basic economic concept that describes the rate at which prices in the economy increase over time. When the prices of entertainment, food, travel and other living essentials goes up, the economy is experiencing inflation. While inflation is often viewed as a bad thing, it can have positive consequences like getting raises at work and bigger tax deductions. Inflation is far more common than deflation -- a fall in prices -- which usually occurs only in recessions and depressions, when the supply of goods and services outstrips demand.
Supply and Demand
In economics, supply is the amount of stuff producers in the economy make available for sale and demand is the extent to which consumers want to buy those goods. Supply and demand influence all the prices in the economy: abundant resources and products tend to be cheaper, while scarce resources and products are more expensive. Similarly, items that many people want to buy tend to be more expensive than products nobody wants. That's the reason water is cheaper than gasoline: despite the fact that we need water to live, water is so abundant that it remains relatively inexpensive. A change in demand can change the price -- if no one wants wide ties anymore, producers will have to cut prices to get rid of their inventory. A change in the supply situation can also make prices move -- that's why you'd pay dearly for a glass of water in the middle of the Sahara, where the supply of water is nil.
Trade between nations is an economic principle that has ever-increasing relevance to daily life as digital technology continues to connect people across the globe. International trade allows nations to focus on what they do best and then trade for the things that can't produce efficiently. For example, the U.S. imports many simple goods from countries like China and India that have cheap labor, while it exports things like aircraft and cars. Countries that export a lot more to the U.S. than they import from the U.S. often wind up owning of lot of U.S. government debt; they have to do something with all the dollars they earn and so buy U.S. Treasury bonds.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.