Are you ready to discover the fascinating world of economics for the first time? Maybe you just have a keen interest on how Economic science tries to explain, theorise and predict economic activity in modern life? We’ve put together some definitions of key economic concepts to get you started.
By getting to know these key concepts, phrases and economics terms, you’ll be able to:
- Create a basic foundation for further Economic studies
- Start to understand how conflicting perspectives form part of Economics
- Participate in discussions around economics
- Have a basic understanding of the various economic indicators you hear about in the news
- Start to develop your own economic views
Economics is an interesting science because nothing in our economy operates in isolation. The interest rate, consumer confidence, production and unemployment rate all influence each other as you’ll come to learn while getting to know these terms.
For that reason a lot of these concepts are used in economic debates where contradictory views exist around economic issues like monetary policy, political labour issues or decisions around policies regarding international trade. We hope that these basic descriptions of the major economic terms will make approaching economics for the first time a bit more accessible than the ordinary textbook approach.
Key Economic Terms & Concepts
Microeconomics and Macroeconomics
Although these two fields in economic study don’t operate independently, they tend to guide people into different areas of specialisation when it comes to analysing economic activity, growth and behaviour. Macroeconomics is concerned with the big picture of economic activity. In Macroeconomics we’ll measure the collective impact of things like production output, employment rates, and retail activity as measures to try model and explain the economy as a whole. These bigger focus areas include matters like the impact of a recession on our economy and how changes around our international trade policies could influence economic growth.
Microeconomics is more concerned with how individuals, households, communities and businesses make behavioural choices to drive or influence economic conditions and visa versa. In microeconomics you’ll learn how the prices of specific goods and services influence buying behaviour, how and what causes fluctuations in local business production, or you'll use complex mathematical techniques to predict producer and consumer behaviour.
Bear Market Vs Bull Market
A bull market is an optimistic market where businesses charge forward with growing business confidence and business investment, just like a bull.
This positive outlook on business and economic growth is usually reflected in a rising activity on the stock market as people tend to invest more in businesses.
A bear market on the other hand is one of hibernation, where economic confidence drops, market growth declines and consumer confidence starts to drop, resulting in less spending and a less fortunate economic outlook or shrinking economy.
Division of Labour
Adam Smith was the first one to pin this economic concept where the focus is on how you divide labour to ensure increased efficiencies in production. He stated that the production process should be chunked into smaller, more effective and specialised production units to produce greater volumes and quantities.
Inflation, Deflation, Stagflation and Hyperinflation
These economic terms all relate to the rise and fall in the cost of the general level of goods and services within a country. The interest rate is used to measure it and it’s directly related to the ‘value of money’ within that market (more about this later).
Inflation on prices will mean you can get less goods/services for the same amount of money in your pocket. Deflation, the opposite of inflation, is where the general price declines and this usually happens when there’s an overall contraction in spending.
Stagflation is a concerning economic phenomenon where growth becomes minimal, but there’s also a continuing increase of general prices.
Lastly, hyperinflation is recognized through sudden and steep general price increases. Zimbabwe experienced this when the government printed more money and this sudden money supply was not supported by the growth in GDP. It led to a massive depreciation of the local currency in Zimbabwe, increased prices of goods and unemployment skyrocketed.
International Trade and Trade Barriers
International trade is a specialisation area within the field of Economics. It deals with complexities around how we make the most out of economic resources across borders by trading with other countries.
This is where exporting or importing goods and services come into play and governments might put policies in place to protect or stimulate the production within a local market.
A tariff is a government tax that raises the cost of importing goods. Quotas limit the amount you are allowed to import and an embargo is the complete prohibition on bringing certain goods into the country.
Keynesian View or Monetarist View
The monetarist economic view came into play immediately after industrialisation. Economists like David Ricardo argued that the market behaves perfectly and its self-sustaining nature will allow it to adjust automatically to booms or contractions. Monetarists believed that government intervention will only be detrimental to the economy and that the economy's inherent stability will lead to the equilibrium between supply and demand.
John Maynard Keynes on the other hand developed the Keynesian theory just after the great depression, and believed that government intervention is key to fill gaps in spending, influence production and the circulation of money within a market.
Law of Demand and Supply
In economics we use the law of supply and the law of demand as economic model to determine the market price of economic goods.
These two laws show the relationship between the amount of a commodity that a market would like to produce against the quantity that consumers would like to buy.
In other words, if the price of a specific item increases it will influence demand negatively because people will buy less. The law of supply on the other hand says that sellers would be incentivised to produce more because of the increased potential in earnings. The market price would be where demand and supply meet each other.
Economics is built on the understanding that we operate, function and compete in an environment of limited resources.
Perfect Competition, Monopolistic Competition, Monopoly & Oligopoly
Competition forms part of all economic systems as we continue to compete for limited resources. Knowing more about the types of competition will help you understand why practices like price-collusion are seen as unethical in most markets.
Perfect competition exists when we have a spectrum of suppliers and buyers and none of the producers are big enough to influence the market.
In monopolistic competition we might still have various suppliers, but they all differentiate their products to be perceived as unique. One single producer can have a monopoly in the market which means they regulate and control the market price and conditions due to the lack of competition. Competition can thus be good to not only protect consumers and bring price equilibrium into the market, but it also stimulates growth within certain sectors around production and supply.
Oligopoly indicates that there are only a few competitors and together they control the market. Mobile networks in South Africa is an example of that where together the networks influence the ‘market price’ of mobile services.
These are only some of the terms they use when they discuss a country's economics in the news. Economic indicators are the measures and statistics we use to monitor, explain and forecast economic activity and performance in a country.
Economic Growth Rate and GDP (Gross Domestic Product)
To measure whether an economy is growing, economists determine the value that a country produces over a specific time period, and how that has changed in comparison to the previous term/period. Simply put, the GDP or per capita income is the measure we use to determine the country’s national production output.
Job creation and unemployment is a key economic indicator and on top of the list for the South African Government. We’ve seen the highest unemployment rates in recent years and with the Covid-19 pandemic these will reach new heights. The unemployment rate can guide economic efforts towards industries or sectors that needs it most and it’s a key measure when we determine a country’s economic activity.
Consumer Price Index (CPI)
Economic reports tend to mention how the consumer price index has increased or decreased. The CPI is the weighted average price of a collection of goods and services, called a basket of goods, that is purchased by households.
This is an excellent measure to see how the economic conditions impact families and individuals in the current economic climate.
The interest rate is one of the most familiar economic indicators you'll hear in the news. It is the cost of lending money, as charged by the lender over a period of time and as percentage against the money borrowed. You'll see a direct correlation between the interest charged on your house mortgage and the interest rate, which is why people jump for joy the moment the South African Reserve Bank announces a decrease in the interest rate.
The interest rate is a useful manipulation tool when the Reserve Bank wants to ease inflationary pressures. This is because increased interest rates will reduce spending, encourage saving and appreciate the Rand.
But the flipside to the story is how the same increased interest rates will cause a reduction in consumer and business confidence and slow down economic growth.
The exchange rate is the value of a currency as expressed against another currency, for example, today, it will cost you R17 to buy 1 US dollar. These prices fluctuate due to an increased demand or shortages of a specific currency within a market.
Fiscal Policy and Monetary Policy
One of the most complex issues in a mixed economy is how governments regulate and use policies, rules and measures to control the economy domestically. Various schools of thought exist around the level of involvement required from the government and how this impacts the economic well-being of citizens.
Through fiscal policy the government can attempt to balance tax rates and spending to influence the economy. This works hand-in-hand with monetary policy where the central bank governs the supply of money in the market.
Getting a Tutor
The list of terms and concepts you’ll find in the field of economics is as broad and intricate as the study of economics itself. Luckily a professional tutor in economics will be able to guide you, expand in depth on each of these terms and challenge you with exploring some theories and economic views.
It’s now easy to find an Economic tutor online with Superprof and they can customise a curriculum to supplement your current studies, learning plans or support your passion around economics. A professional economics teacher will also give you individual attention so you can zoom in on specific areas around economics that challenge you.
The real application of economics is when you can finally put all these terms to the test and actively contribute in economic debate.
You'll be able to develop an informed view on matters like our government's agenda, policy changes around its monetary policy and go on to explain to others how these affect certain sectors and the overall well-being of South Africans at large.