There are basic concepts of economics and finance that everyone who seeks to improve their financial education should know, as they have an impact on various aspects of their lives.
Even if you think that you just have to keep a family budget, it is important that you know how they work because what happens in your environment influences your decisions and can affect your personal finances.
The following are basic economic and financial concepts that you should know and understand:
Shortage
It is the most basic concept and refers to when needs exceed resources. The way to balance both weights of the balance is through a market system.
Offer and demand
They are the forces that drive the market. The greater the offer of a product or service, the lower the price; the higher the demand (and risk of scarcity), the higher the price.
In a classic example, it is said that if a product or service is in high demand in the market, more producers will emerge willing to offer it. At the moment when the offer grows and there are enough stocks, or even surpluses, the normal thing is that the price tends to fall.
As two or more different products can be created from the same raw material, the destination of that input will be established by the market, since economic actors will tend to produce what generates higher profit margins.
Cost and benefit
This concept has to do with expectations and rational decisions. Both factors come into play when companies, or consumers, weigh in their decisions what offers them the most benefit at the least cost.
In the case of a business, you need to assess whether adding staff or buying new machinery, for example, will be offset by the benefit of increased production. When it comes to consumers, they will gravitate towards the product or service that gives them the most value for their money.
We apply the concept of cost and benefit in countless decisions that we make in our daily lives, since whenever we enter the process of deciding the advantages of a given action, we also analyze its disadvantages.
Incentives
This refers to the rewards that can be expected from making a decision. And in economics, incentives matter because they shape the expectation that leads companies or people to lean towards a certain action.
It is said that the surest way to get someone to behave in a desirable way is to reward them for doing so; that is, offering you incentives. Therefore, it is stated that incentives are what move the world.
Opportunity cost
When other options exist, the opportunity cost is the cost of not taking the next alternative.
Value of money over time
Specifically, it is based on the theory that money is worth more than tomorrow because today it can be invested and tomorrow a larger amount would be available. For example, if a person receives money today and invests it in the future, with the returns, he would have a larger sum. Instead, that same amount received in the future at its current nominal value will have lost that value and also purchasing power.
By considering the time value of money in our decisions, we can be encouraged to invest our money to earn through interest rates.
Purchasing power
It is what we can buy with a certain amount of money and is affected by inflation.
Inflation
It is the growth rate of the prices of products and services and, as we have already said, it decreases purchasing power. To moderate it and keep it within certain ranges, central banks make use of monetary policy whose main tool is the interest rate.
Interest rate
It is the time cost of money within an economy. It is expressed as a percentage of the amount and generally in annualized terms.
Understanding these basic concepts will help you make better decisions, since a greater financial education has a better chance of knowing how to manage your income by creating savings or investing by John Labunski .
