Economics: Definition, Branches, and Key Concepts

Definition and Branches

• Economics is the social science that studies the production, distribution, and consumption of goods and services.
• Two main branches:
  1. Microeconomics: examines the behavior and decision-making of individual economic units, such as households, firms, and markets.
  2. Macroeconomics: analyzes the economy as a whole, focusing on issues like economic growth, inflation, unemployment, and international trade.

Key Concepts

• Scarcity: the fundamental economic problem of unlimited wants and needs, but limited resources.
• Opportunity Cost: the value of the next best alternative that is given up when choosing one option over another.
• Supply and Demand: the price of a good or service is determined by the intersection of the supply curve (quantity producers are willing to sell) and demand curve (quantity consumers are willing to buy).
• Economic Systems: ways of organizing the production and distribution of goods and services, including:
  • Market Economy: private ownership, free market, and profit motive.
  • Command Economy: government control, central planning, and state ownership.
  • Mixed Economy: combination of market and command economy characteristics.

Economic Indicators

• Gross Domestic Product (GDP): total value of goods and services produced within a country's borders.
• Inflation Rate: percentage change in the general price level of goods and services over time.
• Unemployment Rate: percentage of the labor force that is currently unemployed and actively seeking employment.
• Interest Rate: rate at which borrowers pay interest on loans and savers receive interest on deposits.

International Trade

• Absolute Advantage: a country's ability to produce a good or service more efficiently than another country.
• Comparative Advantage: a country's ability to produce a good or service at a lower opportunity cost than another country.
• Free Trade: trade between countries without tariffs, quotas, or other trade barriers.
• Protectionism: trade policies that restrict imports and protect domestic industries.

Definition and Branches of Economics

• Economics studies the production, distribution, and consumption of goods and services.
• The two main branches of economics are Microeconomics and Macroeconomics.

Microeconomics

• Examines the behavior and decision-making of individual economic units, such as households, firms, and markets.

Macroeconomics

• Analyzes the economy as a whole, focusing on issues like economic growth, inflation, unemployment, and international trade.

Key Concepts

Scarcity

• The fundamental economic problem of unlimited wants and needs, but limited resources.

Opportunity Cost

• The value of the next best alternative that is given up when choosing one option over another.

Supply and Demand

• The price of a good or service is determined by the intersection of the supply curve and demand curve.

Economic Systems

• Ways of organizing the production and distribution of goods and services.

Market Economy

• Private ownership, free market, and profit motive.

Command Economy

• Government control, central planning, and state ownership.

Mixed Economy

• Combination of market and command economy characteristics.

Economic Indicators

Gross Domestic Product (GDP)

• Total value of goods and services produced within a country's borders.

Inflation Rate

• Percentage change in the general price level of goods and services over time.

Unemployment Rate

• Percentage of the labor force that is currently unemployed and actively seeking employment.

Interest Rate

• Rate at which borrowers pay interest on loans and savers receive interest on deposits.

International Trade

Absolute Advantage

• A country's ability to produce a good or service more efficiently than another country.

Comparative Advantage

• A country's ability to produce a good or service at a lower opportunity cost than another country.

Free Trade

• Trade between countries without tariffs, quotas, or other trade barriers.

Protectionism

• Trade policies that restrict imports and protect domestic industries.

Financial Statements

• Provide information about a company's financial performance and position.
• Four main types:
  • Balance Sheet: snapshot of a company's financial position at a specific point in time, including assets, liabilities, and equity.
  • Income Statement: summary of a company's revenues and expenses over a specific period of time, such as a month or year.
  • Cash Flow Statement: shows the inflows and outflows of cash and cash equivalents over a specific period of time.
  • Statement of Stockholders' Equity: reports changes in a company's equity over time.

Cost Accounting

• Identifying, classifying, and recording costs associated with a business.
• Types of costs:
  • Fixed costs: remain the same even if the level of production changes, such as rent and salaries.
  • Variable costs: change with the level of production, such as raw materials and labor costs.
  • Direct costs: directly related to the production of a specific product or service, such as labor and materials.
  • Indirect costs: not directly related to the production of a specific product or service, such as overhead costs.
• Cost accounting systems:
  • Job costing: tracks costs associated with a specific job or project.
  • Process costing: tracks costs associated with a specific process or production department.

Auditing

• Examining and evaluating an organization's financial statements and internal controls.
• Types of audits:
  • Internal audit: conducted by an organization's internal audit team to evaluate internal controls and identify areas for improvement.
  • External audit: conducted by an independent auditor to provide an objective opinion on an organization's financial statements.
• Audit procedures:
  • Risk assessment: identifying areas of high risk and focusing audit procedures on those areas.
  • Control evaluation: evaluating an organization's internal controls to identify weaknesses and opportunities for improvement.
  • Substantive procedures: testing transactions and account balances to ensure accuracy and completeness.

Taxation

• Imposing and collecting taxes on an organization's income or profits.
• Types of taxes:
  • Income tax: tax on an organization's profits or income.
  • Value-added tax (VAT): tax on the value added to a product or service at each stage of production.
  • Property tax: tax on an organization's property or assets.
• Tax accounting:
  • Tax planning: identifying opportunities to minimize tax liability and maximize tax savings.
  • Tax compliance: ensuring that an organization is in compliance with all tax laws and regulations.

Financial Analysis

• Analyzing and interpreting financial data to make informed business decisions.
• Types of financial analysis:
  • Ratio analysis: calculating and interpreting financial ratios, such as the current ratio and debt-to-equity ratio.
  • Trend analysis: analyzing financial data over time to identify trends and patterns.
  • Industry analysis: comparing an organization's financial performance to that of its industry peers.
• Financial analysis tools:
  • Financial ratios: used to evaluate an organization's financial performance and position.
  • Break-even analysis: used to determine the level of sales required to break even.
  • Sensitivity analysis: used to evaluate how changes in variables affect an organization's financial performance.