Understanding the basics of economics helps in understanding the economic decisions taken. The concept of economics forms the basis of what economics is about. It explains and studies how and why individuals and companies allocate their resources to satisfy their unlimited wants and needs.

What are economic concepts?

Economics concepts provide the basis on which the behaviours, like choices and actions, of economic agents like individuals, companies, and governments in the economy can be explained. Several key concepts help us explain economic agents which are scarcity, incentives, demand and supply, trade-offs and opportunity costs, the scale of preference, and wants.

Economics concepts in decision making.

Understanding the concepts of economics helps individuals, governments, and companies make better decisions. The economic concepts all contribute to and have their impact on the economy and consumers; scarcity, incentives, trade-offs, opportunity costs, and demand and supply can help explain appropriate decisions companies, individuals, and even the government can make.

Several key economic concepts provide the basis for understanding how businesses, individuals, and the government make their decisions about resource allocations.

Scarcity

This is one of the key economic concepts. Scarcity happens when the supply of resources is limited and unable to satisfy the unlimited wants. The scarce nature of resources increases their value and costs. When supply cannot meet demand, it causes scarcity, and the only way to address and fight scarcity is to make sure resources are effectively distributed.

Example of scarcity

An example of a scarce resource is a Birkin bag; the amount supplied does not meet the demand. People sometimes have to wait months in an online queue to get their hands on one.

The impact of scarcity is a rise in price for the product or service that is currently scarce.

Scarcity, despite its name, does not always mean a shortage of resources in economics. A product can be said to be scarce even if it’s available, as long as individuals can’t afford to purchase it.

Incentives

This is a strategy that influences consumers’ decision-making processes. There are two types of incentives which are intrinsic and extrinsic. Extrinsic incentives are related to external rewards, whereas intrinsic incentives are related to individuals and consumers without any external pressure.

Simply explaining this, incentives are like rewards from the government or a business. 

Examples of incentives

A teacher attaching a reward to get the whole class’s participation is an incentive.

Another example of an incentive is a big mall running a 20% discount. Consumers are more likely to purchase items they would not have purchased on a normal day because the discount, which serves as the business’s incentive, has made them cheaper for their customers. Other examples of incentives from the government are subsidies and tax credits, among others.

Demand and supply

This is an important concept in economics. We experience supply and demand all the time in our daily lives. For instance, if a particular pair of sneakers are popular in the market and the demand for them is high, the producers of those sneakers will likely make more of them and increase the price.

Hypothetically, this high demand may lead to dupes of the sneakers flooding the market now that the supply of the sneakers has surpassed the demand, which will lead to a fall in price.

Trade-off and opportunity cost.

Like the name implies, “trade-off” involves making a decision to choose something over another. When you make a trade-off you know and understand you will lose something, be it goods, services, or money. The thing you lose in regard to the trade-off is called opportunity cost.

Trade-off and opportunity cost are sometimes used interchangeably in the concepts of economics, but they do have a difference and serve different purposes. A trade-off happens when an individual is left to make a decision about picking one of two valuables while opportunity cost is the other valuable not picked in the trade-off.

Examples of trade-offs and opportunity costs

A fashion design graduate wants to buy a sewing machine, so she goes to the shop and sees two brands with different prices. Brand A goes for 80. She has a budget of 40 sewing machine.

Her decision to pick the 80 sewing machine by Brand B being left behind is the opportunity cost.

Scale of preference

The scale of preference is a rundown of the wants of consumers, arranged according to their significance. It has to do with the positioning of an individual’s wants, arranged according to their importance. This list is created to weigh the options available and satisfy the most important wants; the most desired want is usually at the top of the list.

The scale of preference helps individuals and businesses in their choice-making and also helps them utilize their resources appropriately.

Examples of scales of preference

As a student, you want sneakers, a bag, a laptop for all your projects, a football club jersey, and a blanket. You have money to purchase two of these five items, so you create a list of all four, putting the most important item at the top and the least important at the bottom. That list is a scale of preferences. Your scale of preference might look like below.

1. Laptop (the most important item for school on the list)
2. Sneakers (comfortable shoes for school)
3. Bag (to carry things for school and other outings)
4. Blanket (to help sleep at home)
5. Football Club Jersey (As a student, you’ll probably understand that school and comfort are more important than the jersey for now, so it’s placed last pending when the budget for these purchases increases.) 

From this list, you can see the item’s rank according to its importance.

Wants 

Wants are goods and services that are desired by consumers for consumption. In economics, wants are seen as what we are keen on having despite having limited resources. Wants are endless and can be tangible or intangible. They could be in the form of tangible goods or services, like houses, and televisions, or intangible goods such as patents and copyright, among others. They could also be services, like a driver or baker, among others.

Human wants are insatiable and cannot be fully satisfied.

These concepts all play a role in explaining the behaviours of economic agents.

Key Takeaway

• Economic concepts explain the behaviours of economic agents like individuals, businesses, and the government.
• Scarcity in economics is when supply is limited and does not necessarily mean the product or service is unavailable.
• A tradeoff is chosen as an alternative over another, and the opportunity cost is the alternative that was not chosen in the tradeoff.
• The scale of preference is creating a list of wants according to their importance.
• Understanding the basic economic concepts can help economic agents in their decision-making.

FAQ 

Q. What are the three basic economic concepts?

Ans: The three basic concepts are supply and demand, scarcity, and opportunity cost.

Q. What is the economic development concept?

Ans: Three main economic development concepts that explain how humans make decisions are scarcity, supply and demand, and incentives.

Q. What is the economic growth concept?

Ans: The economic growth concept is increasing the number of goods and services available in an economy over a specific period.

Q. What are the three major theories in economics?

Ans: Economics has several theories of economics; the three major theories of economics are Neoclassical, Keynesian, and Marxian.

Take a quick quiz.

Let’s test your knowledge with a little quiz.

1 . Which of these is not an economic concept?

1. Scarcity
2. Opportunity cost
3. Excesity 

2  . The forgone product after a choice is made can be referred to as __________

1. Tradeoff
2. Opportunity cost
3. Scale of preference