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Macroeconomics and Personal Finance Balancing Needs and Demands Your Decision Matters Most

Updated on April 9, 2015

Economics is the study of the various rules of cause and effect for how supply and demand cause prices to increase and decrease. While a small portion is social - the perception, the essence of economics is quantitative and most closely akin to mathematics with precise movements along a chart that can be clearly quantified.

Etymology of the Word Economics

The word "economics" is derived the Greek word oikonomis, which means "one who manages a household." The household is the very first starting point in every economy. In the days before industry, the agrarian society was farm based and traded based upon food and clothing (an agrarian society is one that is based on agriculture as its prime means for support and sustenance) - goods and services produced from the farm that was managed by the family.


“What difference does it make to the dead, the orphans, and the homeless, whether the mad destruction is wrought under the name of totalitarianism or the holy name of liberty or democracy?”

Mohandas Gandhi quotes

Economics and Personal Finance

Understanding economic decisions in business is a necessity. Understanding economics in your own personal decision making is equally important. The economic decisions you make will impact you and your family for many years to come. Understanding economics can help you in this decision making process. In this article we will cover the basics that are need for your own personal finance:

  • Supply and Demand
  • Macro and Micro Economics
  • Price Elasticity
  • Consumer Price Index
  • Economies of Scale
  • Market Structure

Economics Matters Because It Can Either Generate or Prevent Homelessness

Gandhi was a wise man except in the world of finance and economics. It does matter what happens because we as a consumer, a citizen of the world can affect the economics and can prevent homelessness.

Fun Economics Rap Video - Must See!

Economics Rap Song

The video to the right is a must watch video for anyone studying economics. It gives a fun look at the economic breakdown and many components that contributed to it. Turn on the video and listen and just keep reading.

Supply and Demand

Supply is the quantity of the good or service.

Demand is the need or want that is created for the good or service.

Supply Shocks are unexpected events that cause supply to ebb and flow. When supply is increased typically the price is reduced as the demand is decreased. When supply is decreased, often the price rises.


Fortune of Your Finances

Fortune Cookie with Money - Money Decisions Your Control - Not Your Fortune - You Create the Fortune of Your Finances
Fortune Cookie with Money - Money Decisions Your Control - Not Your Fortune - You Create the Fortune of Your Finances | Source

Economic Decisions

Whether you choose to purchase something or not, is an economic decision that has impact upon the macroeconomics of the country that you live in and the community that you reside and spend your money in.

Understanding economics allows you to make smart decisions that guide your own future - radically different from the theory of the fortune cookie of taking what life hands you.

Create a positive outlook, create your own destiny and a bright future is yours.

Calculate Your Finances

Photo of a Calculator for Your Personal Finances
Photo of a Calculator for Your Personal Finances | Source

Macro Economics and Micro Economics

Macro Economics and Micro Economics - what is the difference?

Basic economic decision we all face everyday - from a simply Starbucks to an expensive holiday dinner to great gifts - all decisions have consequences and benefits.

Microeconomics is the study of individual behavior and macroeconomics is the global or bird's eye perspective.

The simple way to distinguish the two is macro is a term for large and micro for small.  Let's examine how these two sciences are similar yet very different.


Macroeconomics Diagram

Macroeconomics Diagram
Macroeconomics Diagram | Source

Macroeconomics

Macroeconomics is the global viewpoint of the entire economy.  It could be the national economy or the global economy.  As the global economics are changing very quickly, we are seeing a direct impact upon the American economy from other other countries.  Cheap goods from China has served to first elevate our standard of living and now the movement of that manufacturing overseas has had a direct upon our employment rate here in the United States.

Macroeconomics studies trends and indicators such as the Gross Domestic Product, unemployment rates.  Inflation, consumption, supply and demand play critical roles in the price elasticity and the effect upon the economy on a large scale.

Supply and Demand Chart

Source

Microeconomics

Microeconomics is the field of science that concentrates upon supply and demand for goods and services. Economics use chart that showcase the price movements as the supply changes.

For instance, in the chart to the right we see the equilibrium where price and quantity intersect and yet this chart clearly marks the area of surplus and shortage given the price of an item.


Elastic and Inelastic Prices

Price elasticity is the amount of give and take or room for movement for prices. Some goods are greatly affected by price. Some goods such as necessities have less of an effect upon demand and are said to have price inelasticity - in other words, supply shortage have the potential for little effect upon their demand. The key is simple:

Consumer Behavior Drives Price Elasticity

Economists closely study the effects of supply and consumer behaviors. The price elasticity of a good or service may change over time. Short term and long term changes may be remarkably different. Examples of goods which are often inelastic: medicine, gasoline, good, etc... Consumers need drives the demand not the price of the item.

Smart Shoppers Understand Price Elasticity

As a savvy shopper, you know the price elasticity of the goods that you purchase. If the product that you want has an elastic price, and you don't need the item which is typically the case of products that have price elasticity, you could forgo your purchase and shop around for the best possible price.

Other items, such as food you may need to purchase immediately or purchase a substitute. Fruits out of season are now readily available but the quantity and quality are often limited and the price is usually higher. Frozen fruits or substituting fruits in season are viable alternatives for both your and your family.

Consumer Price Index

Consumer Price Index or CPI also sometimes referred to as the retail price index is a standardized method to average the price of goods. It is a statistical measure of a weighted average price of a specific set of goods and services used to track changes over time. The CPI provides an important indicator of inflation.  In essence, the CPI provides a benchmark of the direction of shifts in supply and demand of the most commonly consumed goods and services.

10 Principles of Economics Translated - Why?!

Economies of Scale

When businesses can buy raw materials in large quantities, or what is commonly known as "bulk", economies of scale occurs where each unit purchased is priced lower than the average cost.

Barriers to Entry in the Marketplace

Many industries have high barriers to entry such as capital needed for infrastructure for manufacturing or merchandising of the goods and/or services.

In the case of an industry with high entry barriers, the companies in that market could artificially set the prices for the goods. In the case of a monopoly, that particular company may have complete control.

Market Structure

Market structure can range from perfect competition where there are many different sellers in the marketplace with identical products to a monopoly where there is one single producer of the product to everything in between. An oliogopoly is a market structure closest to the monopoly where only a few suppliers exists and prices could be readily set or controlled.

View of the Horizon Over the Ocean

View of the ocean and the sun shining through the clouds - View of the Horizon
View of the ocean and the sun shining through the clouds - View of the Horizon | Source

When we can identify a problem and face the problem with confidence and enthusiasm, the solution is on the way. -- Zig Zigler

Personal Finance and Economics

American Choices writes about the global economy because the global economy will affect both you and I at some point in our lives. We have seen what seems to have an inhaustive supply of goods from China to a point where services are now being delivered from another fellow BRIC country - India.

These global affects do have a direct impact upon our personal finance. We have seen this most recently in the "jobless recovery" and the lack of jobs here in America.

Sailing a ship needs a map and a compass, understanding where North is located in order to navigate and trim our sails. We have no control over the winds but like sailing, we can trim our sails to navigate to our best point of reference. Learning the economic indicators and understanding how these indicators can impact us personally is an important part of effectively managing our personal finances through both storms and clear skies.

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