Basic economic terms

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Economics is the study of how goods and services are produced, distributed and used in a society. Important key terms in economics help create a basic understanding of economic principles and theory.

In economic terms, if someone is both able and willing to offer a product or service, a supply exists. If someone else is willing to purchase that product, he creates demand for it. Supply and demand help drive the economy by benefiting all parties involved, providing money to the seller and a product or service to the buyer. The "law of supply" states that the amount of a product supplied directly affects the price; rarer items cost more. Similarly, the "law of demand" states that the less money a product costs a consumer, the more in demand it will be, illustrating the importance of value for money.

When something is in high demand but low supply, scarcity comes into play. Scarcity is when people would like more supply than is available - when demand exceeds supply. This concept helps drive economies, with people prioritizing what resources are most important and worthy of their money.

Profit is largely what motivates sellers, companies and manufacturers to create supply. Profit is the money earned on something after the cost of manufacturing it and selling it are deducted, as well as deducting enough to ensure continued production.

A budget is a planned and often written statement that states the expenses of a person, business or government and how it intends to meet them. It often defines what an entity will spend versus what it expects to make in a given time, usually a year. Budgets help people understand where they stand financially. They're also an important planning tool, helping you evaluate how best to spend or save your money. A budget can also be a set-in-stone comparison of what was made versus what was spent, as it's often used in government to determine surplus and deficit.

Understanding inflation is important because doing so can help you understand your purchasing power at the store or other places where you spend your money. Inflation refers to the rise in prices that occurs over the course of time compared with the money supply. Inflation is generally measured as an index number expressed in a percentage.

In the simplest terms, interest rates typically refer to the amount of money that is paid annually on money that has been borrowed. Economists often use interest rates as a gauge for whether the economy is expanding or contracting. Higher interest rates indicate strong economic growth.