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Economics and YOU

economics pillar 5 Aug 25, 2020

Economics is a big topic that can seem overwhelming (and boring). But when you relate it back to yourself, it can seem a little less intimidating. Because lets face it, most of us are pretty self-centered.

Opportunity Cost

This is one of my favorite economic concepts. It's all about making decisions. You choose to do one thing and without realizing it, you've given up the opportunity to do a multitude of other things you COULD be doing.

Let's say that two of my favorite things are going to the theater and going out for dinner with friends. If I'm invited to a play that I've been anticipating coming to town and that same night a group of friends are getting together to go to a restaurant I've been dying to get into, what happens?

I have to make a decision to do one or the other. Unless of course I can figure out a way to do both. But if they are happening at the same time, I have to choose. And without realizing it, I have experienced opportunity cost.

I have either missed out on the play that received amazing reviews or I have missed out on time with friends and an incredible dinner.

Here is the Investopedia definition of Opportunity Cost: 

"Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. The idea of opportunity costs is a major concept in economics.

 

Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making."

Gross Domestic Product (GDP)

Okay, try this one - GDP. Did you know that you, the consumer, account for approximately two-thirds of the spending that makes up the GDP in the United States? I find that number amazing! You, me and all our friends spend more than corporations and the Government.

During the Pandemic, have you been spending less than you normally do? You're not going out as much, not travelling, not going to events. Most people are saving more now than they have previously.

So what happens to the economy when people buy less? It contracts rather than expands. Lack of growth over a period of time can lead to a recession.

Investopedia's definition: 

"Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health."

Scarcity and Supply & Demand

What's your favorite thing to buy? I asked that of a fitness trainer recently and she immediately responded "leggings". If she's currently paying $100 for her favorite brand from Company XYZ, what happens if one of the primary materials needed to make the leggings becomes difficult to get.

During the last few months, we've seen companies get shut down due to COVID outbreaks or not enough orders. Or there could be a supply chain issue that causes a significant slowdown in getting the necessary ingredient. Now, instead of producing 500 pairs of leggings a day, Company XYZ is only able to make 200. There is now a scarcity of the desired leggings. With so many of us working out at home and dressing more comfortably for work, we are buying more leggings than ever before. Demand now exceeds the supply, and the likely result will be the price going up. 

Investopedia definitions for Scarcity and Supply & Demand

"Scarcity refers to the basic economic problem, the gap between limited – that is, scarce – resources and theoretically limitless wants." 

"The law of supply and demand is an economic theory that explains how supply and demand are related to each other and how that relationship affects the price of goods and services. It's a fundamental economic principle that when supply exceeds demand for a good or service, prices fall. When demand exceeds supply, prices tend to rise."

Conclusion

Hopefully that sheds some light on a few economic concepts and helps you see that there is a direct connection between economics and you. We are all impacted by what happens in the economy, so having a stronger grasp of what these things mean can be really helpful. 

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