In this post, we’ll unpack all you need to know about economics, defining exactly what it is, unpacking the key concepts that are important to understand and more.
What Is Economics?
Economics is the study of how individuals, businesses, and governments make choices on allocating resources to satisfy their wants and needs.
Economics examines how these groups interact within markets to determine the production, distribution and consumption of goods and services.
Understanding economics is not about predicting markets; it’s about understanding incentives, trade-offs and second-order effects.
Microeconomics Versus Macroeconomics
Microeconomics focuses on the behaviour of individuals, households and businesses within specific markets.
Macroeconomics focuses on economy-wide outcomes such as growth, inflation, employment and business cycles.
Scarcity
Scarcity is the foundation of economics. Time, capital, labour and natural resources are all limited.
Since you cannot have everything, every choice comes at the cost of something else. This concept — opportunity cost — applies universally, from personal spending decisions to national policy.
Supply & Demand
Both supply and demand are the fundamental forces that determine prices in a market.
Supply reflects how much producers are willing to sell at different prices. Demand reflects how much buyers are willing to purchase.
When demand exceeds supply, prices rise. When supply exceeds demand, prices fall.
Incentives
Incentives are factors that motivate and influence the behaviour of individuals and organisations.
The 3 main types of incentives are economic, social and moral.
Incentives can either be financial, such as rewards and penalties, or non-financial, such as social recognition and intrinsic satisfaction.
Incentives drive outcomes.
Money
Money is a tool for storing value, measuring prices and facilitating exchange.
The quality of money matters. When money is stable, it encourages saving, long-term planning and productive investment. When it is unstable, it distorts behaviour, rewards speculation and erodes purchasing power.
Growth
Economic growth comes from productivity — doing more with the same inputs. This is driven by technology, capital formation, education and efficient institutions. Growth is not guaranteed; it must be earned through investment, innovation and sound incentives.
Government
Governments shape the economic environment through taxes, spending, regulation and monetary policy. At their best, they provide stability, rule of law and public goods. At their worst, they distort markets, misallocate capital and create long-term fragility.
Cycles
Economies move in cycles. Periods of expansion are followed by contraction. Booms sow the seeds of busts. Understanding cycles helps explain why volatility is not a flaw of the system, but a feature of it.
Trade
Trade allows specialisation. By focusing on what they do best, individuals and nations increase total output and efficiency. Voluntary exchange is positive-sum.
Conclusion (TL;DR)
Economics is the study of how individuals, businesses, and governments allocate resources to satisfy their wants and needs.
