Basic Economic Principles

Basic Economic Principles:

Economics is very important, and visible through your daily life even if you may not know it. In a way, it is the underlying study of how we, as humans, make our choices when buying things.

The four basic principles of economics include costs and benefits, incentives, scarcity, and supply and demand. Also, you will see how a country’s economic performance can be measured.

Costs and Benefits:

Economists believe that people will always choose the most benefits over the least costs. For example, if you own a business, you won’t buy new products for your inventory until you know that there are customers who will want to buy those items and give you a profit.

This doesn’t just happen in business. Another example is you studying for school. You may spend more time on subjects that you like or you believe are important, such as math. But you may not spend as much time on subjects you are already familiar with or deem less important, like English.


Have you done something because you know you would get rewarded? The reward is an incentive. Incentives can help tip the balance in the favor of a specific outcome. This happens in economics as well. For example, if more people want to buy a certain product, the producer or manufacturer will be more incentivized to produce more of that product for a bigger profit.


In school, you’ve probably learned about Darwinism, or the principle of “survival of the fittest.” Also, you may know that species can compete for resources if there is a lack of it. This principle is also present in economics.

Economically, our resources aren’t endless. That means we need to figure out how to allocate our resources in the most efficient way, usually meaning not everyone gets what they want. For example, flour is used to make a lot of delicious foods. Due to its scarcity, only a certain amount of noodles and bread can be made. How much of each food to be made is determined by supply and demand.

Supply and Demand:

This is likely the most common economic principle you may have heard. High demand occurs when many people want the same thing, while the supply for a different product may be low because it isn’t in demand.

When there is demand increases but the supply doesn’t change, the sought-after product or service could be more highly priced since more people covet it creating a shortage. This can also happen if demand doesn’t change but the supply decreases. Conversely, a specific product may have a lower price if a surplus occurs, either because demand is decreasing while the supply doesn’t change or because the supply is increasing while demand remains unchanged.

What is Gross Domestic Product (GDP):

The gross domestic product is a measurement of a country’s economy. This is usually calculated annually, but can also be published quarterly.

The GDP measures an economy’s health and standing by combining investments, government outlays, public and private consumption, and the foreign trade balance (exports having a positive value while imports being negative).

There are also two ways to calculate GDP, nominally or on a real basis. A real GDP is often a more accurate indication of long-term economic performance because it accounts for inflation. Nominal GDP is calculated by using current prices, not factoring in inflation for the period of time it is being calculated.

Written by Allie Chang

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