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Monday , February 20 2017

Basic Economic Concepts and Theories

Basic economic concepts and theories are too important to understand what economics is and how it works. The Council for Economic Education (CfEE) has amassed a list of the 51 key basics of economics concepts. common. And they are common into all for high school classes in economics. But it is quite hard to understand which basics of economics are the exact or which reflect true light of basics of economics. It is up to you to understand and learn

concepts of economics

According to Investopedia

“An understanding of basics of economics isn’t seen to be as vital as, say balancing a household budget or learning to drive a car. However, basics of economics have an impact on every moment of our lives.

This is because, at its heart, it is a study of choices and why and how we make them. In this article, we’ll look at some basics of economics concepts that everyone should understand.

What is Economics?

what is econimics

Economics is the study of how societies use scarce means or scarce resources to produce valuable commodities and allocate them among different people. We can also say basics of economics is belongs to the social science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.

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History of Basics of Economics

historical basics of economics

The history of basics of economics thought deals with different scholars and concepts. It is base on the subject that became political economy and economics. This is from the ancient world to the present day. It includes many different schools of economic thought. Ancient Greek writers such as the philosopher Aristotle observed ideas about the art of wealth acquisition and questioned.

In medieval times, scholastics such as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price.

In the Western world, economics was not a separate discipline. on the other hand, it was a part of philosophy until the 18th–19th century Industrial Revolution and the 19th-century Great Divergence, which accelerated economic growth.

Long before that, from the Renaissance at least, economics as an intelligent discipline or science was dominated by Western thinkers. Their educational institutions, schooling economists from outside the West, although there are isolated instances in other societies.

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Schools of Thought Belong to Basics of Economics

thinker basics of economics

In basics of economics, there are nine schools of thought. A school of thought is a group of people who share common characteristics of the opinion of a philosophy, discipline, belief, social movement, economics, cultural movement, or art movement. There are different school of thoughts such as:

Classical School of Thought

Adam Smith (The Wealth of Nations), David Ricardo & John Stuart Mill (On Liberty) are the famous economist. He is the founder of the classical school of thought. Ardo and John Stuart Mill that stressed economic growth and freedom emphasizing free markets. The mission Statement of this school is the “invisible hand” of the free markets is all we need to achieve equilibrium.

They give a general view of the economy like classical economists were the emerging capitalists from the age of feudalism.  They saw outside intervention in the markets (such as regulation and government) as a disruption to the natural order of markets. This school has evolved into the modern neoclassical schools.

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Marxism Basics of Economics

Capitalism is not just flawed, but likely to screw most of us all if left to its own devices.

Karl Marx, Karl Marx and some guy named Karl Marx are the founder of this school. A general view of the economy is a capitalist economy is not just flawed, but naturally self-destructive and therefore requires outside intervention and regulation to be consistent with prosperity.

In essence, the capitalist class will obtain exceptional power over the labor class resulting in massive inequality and general hardship. They love the labor class and they hate the capitalist class. This thought has Extremist liberals political Associations.


Keynesian basics of economics

This thought has two side’s positive and negative side on the liberal or positive side Paul Krugman, Brad Delong & Joe Stieglitz. On the conservative or negative side Greg Mankiw, David Romer & Olivier Blanchard. But the Famous Dead Economist Associated with School was JM Keynes.

When we learn basics of economics we see the New Keynesians are the adaptation of the Old Keynesians.  Who responded to the criticism of the New Classical in the 1970s and 80’s by creating an updated model of the economy to help explain some of the Keynesian failures of the 70’s.

Most of the “economics” one learns today is closely related to or directly related to New Keynesian economics.  It has become, by a wide margin, the dominant model used by policymakers.

Although economic agents are rational we believe policymakers can improve economic stability and help attain full employment through various stabilization policies designed to combat a variety of market failures. General view of the economy is the economic agents are rational, but markets are imperfect due to phenomena such as “sticky prices”.

This can result in broad market failures leading to recession. New Keynesians will generally deviate towards the use of Monetary Policy, but will at times also recommend fiscal policy to help stabilize the economy. They love the Sticky prices, rational expectations, the Zero Lower Bound, the natural rate of interest, DSGE modeling

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Austrian School of Basic Economics

Austrian basics of economics

Famous Dead Economist Associated with School are Ludwig von Mises, Friedrich Hayek, Carl Menger & Murray Rothbard.

A “heterodox” school of economics grounded primarily in the work of Mises, Hayek, Menger and Rothbard that advocates the purposeful economic decisions of the individual.

It explains the free market can solve most of our problems and the more we reduce government or eliminate government the better off we will all be. And the less the government is involved in the economy the better it will perform.

They said We can fix the economy by reducing government and central bank involvement in free market forces. Austrian Business Cycle Theory, free markets, individual freedoms and unfettered capitalism are the basics of this through.

Founder of Economics

Adam Smith, a Scot and a philosopher who lived from 1723 to 1790, is considered the founder of modern economics. He called the mechanism by which this self-regulation occurs “the invisible hand,” in his groundbreaking book, The Wealth of Nations, published in 1776.

Karl Marx, a German economist and political scientist who lived from 1818 to 1883, looked at capitalism from a more pessimistic and revolutionary viewpoint. Where Adam Smith saw harmony and growth, Marx saw instability, struggle, and decline.

Marx believes that once the capitalist (the guy with the money and the organizational skills to build a factory) has set up the means of production. In Marx’s view, presented in his 1867 tome Das Kapital (Capital), Marx couldn’t abide the notion of a profit-oriented organization.

Types of Economics

There are four primary types of economic systems in the world such as

  • Traditional
  • Command
  • Market
  • Mixed

 basics of economics Types

Economic elements

There are basically three economics elements such as

Manufacturing: Transformation of materials into intermediate and finished goods.

Regulation: The way the production system is controlled and regulated, such a taxation, incentives and standards (e.g. labor laws). Mostly the role of governments, but increasingly of international multilateral agreements.

Distribution: Activities that link the elements of the production system making goods and services available to the consumer. Includes transport and communications as well as retailing.

Branches of Economics

  • Microeconomics
  • Macroeconomics


There are Some Economic Systems Such as

basics of economics Economic Systemss

Islamic economics

The basic concept of Islamic economics is a term used to denote to Islamic commercial jurisprudence or fiqh al-mu’āmalāt and also to an ideology of economics based on the teachings of Islam that receipts a middle ground between the systems of Marxism and capitalism.

Free Market Capitalism

This concept of basic economics shows that the free market is a system. In which the prices for goods and services are determined by the open market and consumers. Under which the laws and forces of supply and demand are free from any intervention by a government. The price-setting monopoly, or other authority.

Market Socialism

Market socialism is a basic economic concept in which economic system involving the public, supportive, or social ownership of the means of production in the structure of a market economy

Central Planning

basics of economics centeral planning

According to economicshelp the basic economic concepts of central planning is known

A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government. Central planning is associated with a Communist economy; the theory is that the government will overcome market failure and achieve equality of distribution


Mercantilist theorists believed that the amount of wealth in the world was static. Thus, European nations took several strides to ensure their nations accumulated as much of this wealth as possible.

The goal was to increase a nation’s wealth by imposing government regulation that oversaw all of the nation’s commercial interests. It believes national strength could be maximized by limiting imports via tariffs and maximizing exports under Mercantilism

Economic Cycles in Economics

Economic Cycles in Economics

The economic cycle is the natural variation of the economy among periods of growth and reduction or recession. There are some factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to decide the current phase of the economic cycle.

During times of expansion, investors seek to purchase companies in technology, capital goods, and basic energy, and during times of contraction, investors look to purchase companies such as utilities, financials, and health care.

Breaking Down in Economic Cycle

An economic cycle also denoted to as the business cycle, has four stages: such as

  • Expansion
  • Peak
  • Contraction
  • Trough

During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases and inflationary pressures build.

The peak of a cycle is reached when growth reaches its maximum output. Peak growth typically creates some imbalances in the economy that need to be corrected.

This correction occurs through a period of contraction when growth slows, employment falls and prices stagnate.

The trough of the cycle is reached when the economy hits a low point in growth from which a recovery can begin.


basics of economics growth

Economic growth is a growth in the ability of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation.

Generallyaggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.

There are some growth theories

  • Neoclassical growth
  • New growth theory
  • Creative destruction
  • Human capital
  • The rule of law
  • Limits to growth


Markets in Economics

A market is one of the numerous varieties of systems such as institutions, infrastructures, social relations, and procedures. Whereby parties engage in exchange. On the other hand, parties may exchange goods and services by the barter system.

Most markets depend on vendors offering their goods or services including labor and interchange money from buyers. There are some market systems that are nursery to understand the basics of economics

The invisible hand: The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand

Marginalism: it is a theory of basics of economics that challenges to explain the difference in the value of goods and services by reference to their secondary or marginal usefulness.

Polluter pays principle: it is the usually believe under this principle that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment

Efficient market hypothesis: The efficient market hypothesis (EMH) is an investment theory. That states it is impossible to “beat the market”. This is because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Theories of Economics

Supply and Demand (Invisible Hand)

Basics of economics, the law of supply and demand is considered one of the fundamental principles governing an economy. This describes as the state whereas supply increases the price will tend to drop or vice versa, and as demand increases the price will tend to increase or vice versa

Classical Economics

This basic of economics concept are discuss in my previous lesson click here to read out.

Keynesian Economics

This basic of economics concept Keynesian Economics is already cover in my previous lesson click here to read out.

Neoclassical Synthesis

Basics of economics concept of Neoclassical synthesis is a postwar academic movement in economics that tries to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics Neo-Malthusian (Resource Scarcity)


Comprehensive notes on Marxism basics of economics is here….

Solow Model (growth comes from capital, labor, and technology) is a theory of economics shows growth, capital, labor and technology in their model

New Growth Theory (Romer & endogenous growth)

This is an economic growth theory that suggests humans desires and unlimited wants adoptive ever-increasing productivity and economic growth

Permanent Income / Life Cycle Hypothesis

In basics of economics, the life-cycle hypothesis (LCH) is a model that tries to explain the consumption patterns of individuals. The life-cycle hypothesis suggests that individuals plan their consumption and savings behavior over their life-cycle

Rational Expectations

In basics of economics, the rational expectations theory is an economic idea in which the people make choices based on their rational outlook, past experiences and available information.

The theory suggests that the current expectations in the economy are corresponding to what people think the future state of the economy will become

Rational Choice Theory

Rational choice theory is one of the basics of economics theory. Under this economic principle, shows that individuals always make practical and logical decisions. These decisions provide people with the greatest benefit or satisfaction. It is because choices are available and are also in their highest self-interest.


Adverse Selection and the Lemons Problem

The lemons problem denotes to the issues that arise due to unequal information. This is controlled by the buyer and the seller of an investment or product about its value.

Game Theory (e.g., Prisoner’s Dilemma)

Under the basics of economics, the game theory is the study of mathematical models of conflict. the game theory collaboration between intelligent rational decision-makers. The Game theory is mainly used in economics and political science and psychology as well as logic, computer science and biology.

Comparative Advantage

The theory of comparative advantage shows the basics of economics concept in which countries specialize in producing goods. Especially in which they have a lower opportunity cost and there will be an increase in economic welfare. This is different to absolute advantage which looks at the monetary cost of producing a good

New Trade Theory

New trade theory (NTT) is a group of economic models in international trade. This theory emphases on the role of increasing returns to scale and network effects. this was developed in the late 1970s and early 1980s.

The Trilemma (exchange rates, capital flows, and monetary policy)

The Impossible trinity also known as the Trilemma is a Trilemma in international economics. This Trilemma states it is impossible to have all three of the following at the same time. A fixed foreign exchange rate, Free capital movement (absence of capital controls) an independent monetary policy.

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About My Aktion

Aksa Sahi I am a web developer and SEO expert and also an Economist, I earned the degree of (Hons) in Agricultural and resource Economics from the University of Agriculture Faisalabad in 2013. Exploring the World of Technology and traveling the adventure place is my passion working as a teacher and as a freelance web developer. I love to explore the world of IT.

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