How Economies Work – A Simple Guide

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Individuals have to make choices between because of scarcity; the fact that they don’t have enough resources to satisfy all their wants.  

In order to understand how economies work, it’s important to have an understanding of economics, which is the study of how people allocate resources. 

There are two distinct areas of study within economics, namely: microeconomics and macroeconomics.  

Microeconomics studies the behaviour of individuals in a market and how they make their purchasing decisions based on the amount of resources they have. 

Macroeconomics, on the other hand studies national and international economies. Gross Domestic Product (GDP) is used to keep track of how an economy is doing. It measures the value of all final goods and services produced in an economy in a given period of time. It is an important unit used in macroeconomics. 

Buyers and sellers interact in markets. There is generally someone looking to sell a good or service and someone on the other end, who is willing to buy this good or service. This essentially that one of the main forces driving these transactions is that of demand and supply; which is one of the basic principles of how economies work. Supply is the quantity of something available for sale. Demand is the willingness to purchase it.  

There are various tools that can be used to understand how economies work. The use of graphs is a popular way to gain insight into economic decision-making. For instance, if the demand curve is above the supply curve, this indicates that people are willing to pay more to buy those units than they cost to produce. 

There are three main principles that govern how economies work: 

  • A country’s standard of living depends on its ability to produce goods and services. 
  • Prices rise when the government prints too much money.  
  • Society faces a short-run trade-off between inflation and unemployment.

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