Economics is important to understand, as it affects each of us constantly. But the jargon of economics can be impenetrable, with all this talk of externalities, discounted future cash flows and the all-important yield curve, often done deliberately to thwart understanding. But most aspects of economics are actually extremely straightforward. This describes the key concepts using simple situations and basic arithmetic, such as 10 x 5 = 50.
This page presents many simple terms in economics. Then you can read the more complicated topics listed at the end.
Consider 100 people living on an island. Each person catches ten fish a day, which is what each needs to survive. This constitutes subsistence, which is the default state of living. Every other state is best understood in relation to this state.
Because of an adverse change in the ocean currents, each person on the island can catch only 7 fish a day, fewer than the 10 fish a day needed to survive. The 100 people suffer starvation.
Because of a favourable change in the ocean currents, each person on the island can catch 13 fish a day, more than the 10 fish a day needed to survive. Some catch 13 fish a day and feast, while some still catch only 10 fish a day and enjoy their leisure time. The 100 people live in relative comfort.
Each person catches on average 10 fish a day. But some days, each catches only 8 fish, because of the ocean currents, and goes hungry. On some days, each catches 12 fish, and feasts. The 100 people survive over time, but go through tough times and easy times.
How does this situation compare to Subsistence, where each person gets exactly 10 fish each day? Given the choice, most people will prefer equality, as the advantage of sometimes getting 2 extra fish is out-weighed by the disadvantage of sometimes getting 2 fewer fish.
Many simple economic situations were presented above. Using those as a basis, more complicated situations can be considered: