Personal finance: Basic economic terms and notions
Anyone who wishes to save and invest money has to have a strong understanding of finance. People can learn how to handle their finances in a way that will enable them to accumulate wealth over time with the correct information and instruction.
Learning to save money is the first step towards becoming financially literate. This entails being aware of your sources of money, creating a budget for your expenses, and designating a portion of your income for saves. After you have built a solid foundation of savings, you can start learning how to invest your money to get the best returns. At first, investing may seem scary, but with the correct advice and resources, anyone can become a knowledgeable investor who understands how to manage their money.
To start you off in your journey to become independent let's start by going over some basics, shall we?
- The foundation of economics is an understanding of supply and demand. It is the fundamental idea that underpins how market prices are established. The quantity of a good or service that producers are willing and able to sell at various prices is referred to as supply, whereas the amount that customers are willing and able to purchase at various prices is known as demand.
- A market equilibrium point, when the price is stable and there is neither an excess supply of demand, is produced by the interaction between supply and demand. The equilibrium point is affected when one of these variables changes, such as a rise in demand, which can lead to either higher pricing or increased output. Understanding supply and demand enables both consumers and businesses to decide on pricing strategies that will provide the highest profits.
- An important economic statistic used to assess the state of a nation's economy is its gross domestic product (GDP). It is the total cost of all commodities and services produced inside the borders of a nation over a given time frame, typically one year. The total value of all finished goods and services sold to individuals, companies, and governments is included in GDP. The significance of GDP is found in its capacity to present a comprehensive picture of a nation's economic performance.
It helps in the identification of patterns in growth, inflation, and unemployment rates by policymakers. It can also be used to assess how well various nations' economies are doing relative to one another.
- The total rise in the cost of goods and services over time is referred to as inflation. It is a crucial economic idea that has an impact on people, companies, and governments. A rise in the demand for products, a reduction in the supply of goods owing to natural disasters, political unrest, or an excessive expansion of the money supply are just a few of the causes of inflation. The economy can be impacted by inflation in both positive and bad ways.
Inflation that isn't too high might promote investment, expenditure, and economic expansion. However, high inflation rates might result in decreased investment levels, a loss in economic activity, and a reduction in purchasing power. To control inflation and maintain price stability within their economies, governments adopt a variety of strategies, including monetary policy.
- The gains that are given up when a decision is made are referred to as opportunity cost, which is a key notion in economics. The value of the next best option must be sacrificed in order to pursue a certain course of action. The opportunity cost, for instance, would be the interest that someone could have made if they had saved their savings instead of using them to buy a house.
Opportunity cost can also be used to decisions involving time and resources in addition to financial ones. As a result, it is crucial for both individuals and companies to base their decisions on what they stand to gain compared to what they could lose as an opportunity cost.
Ps: this is from my upcoming book: Financial Freedom for Everyone