Top Economic Concepts and Principles to Apply in Your Life

When the topic of economics is brought up, most people probably have flashbacks of a high school teacher trying to teach you theoretical models and concepts of how the economy works, but I have a feeling most were asking why this stuff matters? and how does it apply to my life? Before you write off the whole subject, review these economic concepts to turn theoretical economic ideas into applied economics that can help build financial security in your own life.

All these economic principles are very useful when applied toward making decisions such as investments, running a business, or purchasing products.

Opportunity Cost

An opportunity cost is not obtaining a potential benefit from an alternative to a decision or choice. Opportunity costs are not accounting figures but can play an important role in determining the potential costs and benefits to a decision. Considering any opportunity costs when making a decision can lead to better outcomes for consumers when purchasing products, for investors when weighing risk/reward outcomes, and for business's when making strategic decisions.

Scarcity & Resource Allocation

Both of these economic concepts are bound to each other and are important to understand to improve your own economic circumstances.

Scarcity is a characteristic that resources have that limits supply leading to a higher relative economic value. resources that are limited such as time, money, and natural resources have varying degrees of scarcity due to their supply which drives the importance of Resource allocation.

Allocating resources efficiently can extract the most benefits from them. This also reduces costs and limits any potential wastes.

Law of Diminishing marginal utility

This economic concept illustrates the relationship between consumption and the utility derived from an economic choice. Utility is a term used for satisfaction or benefits obtained in economics. The law states that for each additional unit consumed after the first, your marginal utility or benefit decreases. The marginal utility can also become negative which means there's no additive benefit to consuming an additional unit and can increase the costs or negative consequences of overconsumption.

Risk, Reward, and Uncertainty

Risk is the potential for loss, generally thought as a probability of an event. In other words, risk is a known and specific event or factor that has a statistical probability that can be understood and accounted for when making decisions, such as when choosing investments, insurance, or business strategies.

Rewards are the benefit obtained for making a decision after considering potential risks and uncertainties.

Uncertainty is the varying degrees of unpredictability for potential outcomes due to unknown variables and events leading to lack of knowledge of potential risks. These unknown risks therefore have unknown probabilities of occurring which can add to the uncertainty of outcomes.

Taking these economic concepts into consideration can lead to more informed and comprehensive decision making. When adding up all of the decisions we have to make as consumers, investors, and in business, the benefits of more informed decisions can strengthen your financial and economic circumstances.

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