Economics

~5 mins

Economics is the study of how societies allocate scarce resources. It examines production, distribution, and consumption of goods and services, and how these decisions affect individuals and societies.

1) Economics exists because resources are limited but human wants are not. Land, time, labour, and money all have limits, yet people always want more comfort, safety, and growth. Economics studies how societies decide who gets what. Example: Two farmers sharing one river must decide whether to split water equally or have one pay the other — that decision is economics in action.

2) Scarcity is the root problem of economics. If resources were infinite, choices wouldn't matter. Because they are scarce, we must decide between alternatives. Choosing one means giving up another, which is called opportunity cost. Opportunity cost means the value of the next best thing you gave up. Example: If you spend £10 on cinema, you can't buy lunch with the same £10 — the lunch is the opportunity cost of the film.

3) Markets exist because trade makes everyone better off than isolation. A market is simply where buyers and sellers meet to exchange goods or services. It could be a village bazaar, Wall Street, or an app like eBay. Markets let people specialise — one grows wheat, another bakes bread, a third sells it — and then swap what they need. This specialisation raises total wealth. Example: Amazon connects millions of sellers with buyers worldwide, enabling specialisation on a global scale.

4) Supply and demand explain how prices form. Supply means how much sellers are willing to produce at different prices. Demand means how much buyers want at different prices. Where the two meet is the equilibrium price — the "balance point." Example: If avocados are scarce but popular, demand is greater than supply, and price rises. If harvests are huge, supply is greater than demand, and price falls.

5) Incentives matter because people respond to rewards and punishments. Raise cigarette taxes and fewer people smoke; subsidise solar panels and more households install them. To subsidise means the government gives money or financial help to make something cheaper or easier. But incentives can backfire — paying kids to read sometimes makes them see reading as a chore rather than a joy. Economics studies not only incentives but also unintended consequences. Example: London's congestion charge reduced traffic by 30% by making city driving expensive.

6) Money exists because barter is clumsy. Without money, every trade needs a double coincidence of wants (you must want what I have, and I must want what you have). Money solves this by acting as a medium of exchange (you can swap it for anything), a store of value (you can save it and it still holds worth), and a unit of account (you can measure prices with it). Example: A £10 note can buy groceries, be saved for later, and compare costs all at once.

7) Banks matter because they turn savings into loans, fuelling growth. A bank takes deposits from people who want to save and then lends that money to others who want to borrow. Borrowers pay interest — an extra percentage — as the cost of using the money. Without banks, savings would just sit idle under mattresses; with them, they fund houses, factories, and businesses. Example: When you deposit £1000, the bank might lend £900 to someone buying a car, earning interest whilst paying you a smaller return.

8) Inflation is when average prices in an economy rise over time. If a loaf of bread costs £1 this year and £1.05 next year, inflation was 5%. A little inflation encourages spending and investing instead of hoarding cash. But too much makes money lose value (Germany 1920s, Zimbabwe 2000s). Too little, or negative inflation (deflation), makes people delay purchases, which can shrink the economy. Central banks usually aim for about 2% inflation. Example: The UK targets 2% inflation, meaning prices should double roughly every 35 years.

Related: Inflation | Deflation | Hyperinflation

9) Unemployment means people who want to work cannot find jobs. Economists divide it into types. Frictional unemployment happens when people are between jobs. Structural unemployment happens when jobs vanish because industries change — a coal miner may not easily move into tech. Cyclical unemployment rises during recessions, when businesses cut staff. The unemployment rate is simply the number of unemployed divided by the labour force. Example: During COVID-19, UK unemployment rose from 4% to 5.2% as lockdowns closed businesses.

10) Growth means the economy is producing more goods and services over time. It is usually measured by GDP (Gross Domestic Product), which is the total money value of all goods and services made in a country in a year. If GDP grows, average living standards rise. But endless growth strains the environment. Example: China's rapid GDP growth lifted millions out of poverty but created severe pollution, showing the trade-offs of economic development.

11) Trade exists because no country can produce everything efficiently. Comparative advantage explains this: even if one country is better at producing everything, it still gains by specialising in what it does relatively more efficiently. Portugal once traded wine for England's cloth because each had an advantage. Today, Saudi Arabia exports oil, China exports electronics, and the US exports aircraft and software. Example: Japan imports food but exports cars because it's relatively better at manufacturing than farming.

12) Globalisation is when economies become deeply interconnected across the world. Goods, services, money, and ideas flow across borders faster than ever. This brings cheaper products and wider choice but also displaces jobs. An iPhone is global: designed in California, built in China, using metals from Africa, and sold everywhere. Example: A t-shirt might use cotton from India, be sewn in Bangladesh, designed in Italy, and sold in London — all for £10.

13) Government steps in when markets fail. A market failure happens when free trade alone doesn't give the best outcome. For example, pollution is a market failure: a factory profits by polluting, but society pays the cost. Governments fix this by taxing, regulating, or providing public goods (things everyone uses but no one would pay for alone, like roads, police, or clean air). Example: The NHS provides healthcare free at the point of use because pure market provision would exclude the poor.

14) Taxes are money collected by governments to fund services. They also shape behaviour. A progressive tax (like income tax) takes a larger share from higher earners; a regressive tax (like sales tax) hits the poor harder. Carbon taxes reduce emissions; alcohol taxes cut drinking. But very high taxes can discourage work or drive avoidance. Tax design is always a balance between raising revenue and keeping fairness. Example: Norway's high taxes fund excellent public services, whilst low-tax countries like Singapore rely more on user fees.

15) Inequality happens when wealth and income are not distributed evenly. Some inequality motivates effort, but extreme inequality destabilises society. The French Revolution came partly because elites grew richer while peasants starved. Today, billionaires own more than billions of people combined. Economists ask: when does inequality reward talent, and when does it break social trust? Example: The richest 1% in the UK own more wealth than the bottom 50% combined, sparking debates about fairness and social mobility.

16) Recessions are times when the economy shrinks. Businesses produce less, unemployment rises, and spending slows. They are part of the business cycle — the ups and downs of growth. The Great Depression of the 1930s and the 2008 crisis both showed how deep recessions scar lives. Recovery usually comes through stimulus — government spending, lower taxes, or reduced interest rates to encourage activity. Example: During the 2008 financial crisis, UK GDP fell 6% and unemployment doubled before recovery began.

17) Behavioural economics exists because people don't always act rationally. Traditional economics assumed people make logical decisions to maximise benefit. But humans procrastinate, panic, or copy others. In 2008, panic selling made the crash worse. A nudge is a gentle push that guides behaviour without force: placing fruit at eye level increases healthy choices without banning sweets. Example: Automatic pension enrolment increased UK workplace pension participation from 61% to 88% by making saving the default choice.

18) Development economics studies how poor countries grow richer. It looks at why South Korea rose to wealth while others lagged. Strong institutions, education, and infrastructure help; corruption and weak rule of law hurt. Microfinance — very small loans to poor entrepreneurs — tried to spark growth, like funding a woman to buy a sewing machine, though results vary. Example: South Korea and Ghana had similar incomes in 1960, but South Korea became rich through education, exports, and strong institutions whilst Ghana struggled with instability.

19) Environmental economics looks at the clash between growth and sustainability. Forests cut for profit may destroy long-term resources. Economists design tools like carbon pricing, where companies pay for each tonne of carbon they emit, pushing them to pollute less. Costa Rica pays landowners to keep forests standing, recognising their value in water supply and tourism. Example: The EU's carbon trading system puts a price on pollution, making clean energy more competitive than fossil fuels.

20) Economics is practical because it touches daily life. The price of bread, the interest on loans, the value of salaries, the policies of governments — all are shaped by economic forces. Choosing between saving or spending, cooking at home or eating out, studying or working, are all economic choices. Economics is not abstract numbers but a map of how societies survive and change. Example: Understanding compound interest helps you save for retirement, whilst knowing about inflation helps you negotiate salary rises.

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