What Are the Five Concepts Important to the Understanding of Economics?

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Economics is the study of the production, distribution, and consumption of goods and services. The two main areas of economics are microeconomics and macroeconomics. Microeconomics focuses on the basics of an economy, such as the needs of the consumers, and the buyers and sellers of property and commodities. Macroeconomics looks at the economy as a whole, including factors such as inflation, unemployment, and governmental monetary and trade policy. To understand economics in a general sense, certain basic concepts will help you be able to discuss an economy, the people working within it, and the larger forces at work within it and outside of it.


In economics, “production” covers several areas. Production is considered to flow and it is measured by output over time. Products vary, including items for consumption, such as food or haircuts; necessary investment items, such as buildings and machines; items for the public, such as medicine and the armed forces; and private goods, such as such as computers or candy — things people regularly use that are not necessary to live. A fundamental economic question is “What to produce?” This question should be answered by defining the resources available and the needs of the public working within the economy.

Supply and Demand

Supply and demand determines price fluctuations, depending on how much consumers purchase and how much is available to be bought. There are four basic laws of supply and demand. If demand increases and supply remains the same, there is a higher rate of equilibrium between price and quantity. If demand decreases and supply remains the same, there is a lower equilibrium between price and quantity. If supply increases and demand remains the same, there is a lower equilibrium price and higher available quantity. If supply decreases and demand remains the same, there is a higher price and higher available quantity.

Economic Systems

An economy is based on the system adopted by the nation. Traditional economies refer to pre-20th century economics, such as the agrarian economies, where decisions were made by a small group of leaders. Command economies are defined by having highly centralized forms of government that make the decisions about the goals of the economy. Market economies are driven by the consumers themselves, and the suppliers respond to consumers. Mixed economies are those that combine a mixture of the three other types. With a few exceptions, most nations in the 21st century have some form of mixed economy.

The Role of the Govenrment

To understand an economy you must also understand the role of the government in the managing of the economy. There are governments that completely control their economy and do no business with other nations. There are governments that control monetary policy and tax business, but otherwise they do not get involved in the markets. Like mixed economies, the role of a government in the formation of an economy is important to understand in order to interpret the economics of the nation.

Business Cycles

Business or economic cycles target the fluctuations, both anticipated and unforeseen, within an economy. Fluctuations in business cycles can be seen as short-term and long-term growth trends and they can shift. Some terms used to describe business cycles include expansions, booms, busts, recessions, or stagnation. Cycles are measured using the real gross domestic product of a nation. Unlike the more structured aspects of economics, business cycles do not follow a predictable or mechanical pattern. Nonetheless, they must be factored into understanding an economy.