UNDERSTANDING BASIC ECONOMICS

Having a general understanding of how the economy

plays a role in society can be very beneficial. It will allow
you to see the world from a different perspective, and
you will discover why people make certain decisions. A
common misconception is that economics is the study
of money, when in fact, it is the study of choices.
Economics is a social science that studies scarcity, and
how people allocate limited resources. Money is still
important in economics though!

Just a side note for those who are enrolling in Economics IB, I and many other executive members of
Finance Club have taken the course. You learn a lot about the real world, and it was one of my favourite
courses in all of high school (mainly because Mr. Fitz is awesome and makes the class fun). If you have
any questions about the class, you can message Kevin or Edwin on discord :)

Microeconomics vs Macroeconomics

To begin the lesson, you must first understand that there are two main branches of economics;
microeconomics and macroeconomics. Here is a table to compare them:

Microeconomics Macroeconomics

- Studies individual actions and decisions - Studies the economy as a whole

made by businesses - Will be on a national or
- Highly technical and precise international scale
- Mainly studies one specific factor at a - Broad and generalized
time - Studies all the forces of the economy
- Concerned with supply and demand combined together
within the firm - Typically concerned with government
- For example, a microeconomic decision decisions and how they should be
can be concerned with the best price for involved in the economy
a product to sell, which attracts the - For example, a macroeconomic decision
highest number of customers would be for the government to reduce
spending (fiscal policy)
Fundamentals of Economics

Although this lesson will primarily be focusing on macroeconomics, it is important to understand the
fundamental concepts that make up economics, and with that we first must visit microeconomics:

Supply and Demand

Supply and demand is the bread and butter of economics. It’s the concept that our world has an infinite
amount of demand for goods, but only a finite amount of resources (supply) to cover the demand. It
would be nice if everyone could have their own ferrari, mansion, and their own private jet, but there is
simply not enough resources to achieve that. This includes material supply, as well as human capital and
the labor required to create these goods. This is also the reason why currencies were created; to place a
quantitative value that determines the worth of something. The word that describes this entire concept
is scarcity.

This is a textbook supply and demand graph. As you

enter the realm of economics, you will see this graph
everywhere. It shows the relationship between supply
and demand, and how the price and quantity of goods
will shift.
Macroeconomics - Economic Cycles

It’s really important to understand that the economy moves in cycles. These cycles consist of peaks and
troughs. The peak is when there is an economic boom and financial markets are at really high prices.
Investors become greedy, and this is the tipping point before the economy falls into a recession. At the
trough, this is generally a time where the markets are at historical lows, and there is a lack of economic
activity. People are miserable and are having trouble finding employment and trying to put food on the
table. Historically, the greatest economic troughs we have witnessed are the Great Depression (1929),
and recently the 2008 financial crisis. For investors, this is the best time to invest because prices are very
low and will recover over time. Also understand that these peaks and troughs move on a trend line that
always increase. If you look at the S&P 500, a representation of the general economic health, you will
notice that it always goes up in the long term.

There is a youtube video that I recommend everyone to watch. It is a very detailed and thorough
explanation of these cycles, which allow you to see how the economy around us functions. If you are a
complete beginner, everything you need to know about the economy can be learned through this thirty
minute video: How The Economic Machine Works by Ray Dalio
The Three Basic Economic Questions

As a result of scarcity, economies are forced to answer 3 basic economic questions:

1. What should be produced?

2. How should we produce it?
3. For whom should we produce it?

Economies have many differing answers to these 3 basic questions around the world. However these
three questions can essentially be boiled down to one overarching question:

What role should the government play in the economy?

This question has become one of the most debated topics in politics ever since economics became a
topic of study. There is not an easy yes or no answer because of the sheer depth that this question
brings. Pure capitalism is having no government intervention, while communism is complete government
intervention in the economy. It is up to you to decide where you place yourself on the spectrum.
Generally, Western societies such as the USA embrace a laissez-faire economic ruling (less control). If you
compare our society to that of North Korea, which is heavily government-mandated, there are vast
differences in how the economy is run.

Many argue that capitalism embraces innovation, opportunities, and wealth at the risk of increased
income inequality, greed, and corruption. Communism allows for more security, control, and equality at
the expense of economic freedoms. It is safe to say that while these are two very opposite ideologies,
realistically, either extreme is not achievable. Most economic conditions are somewhere in the middle
instead of the radical ends. Evidently, there are anomalies that exist, but that’s just a general trend.

Also consider that the reason we pay taxes is because of our government intervening in our economy.
They need the money to build public services like healthcare, education, etc. Many people complain
about taxes without understanding that they help build the quality of life around this. Your stance on
taxation will contribute to your economic ideas about how the government should play a role.