Easy Economic Terms

• Economic terms help describe the social impact of financial decisions. PM Images/Photodisc/Getty Images

  Economics studies how people, businesses and nations make decisions with their money. In addition to funding life's necessities such as food and shelter, most people spend money for things they want. Your access to money has limits, however, so economics analyzes how you balance the use of your money within those limitations. Economic terms describe patterns of behavior as people spend their money and how those choices impact the ebb and flow of cash in our society.

Supply and Demand

• According to Investopedia, one of the most basic economic concepts is "supply and demand." Demand refers to how much desire consumers have for a specific product or service. Supply refers to how much of that product or service is available for purchase by consumers within that economic system. Many factors can influence how much product a business can supply. The cost of materials may go up, reducing the supply, or new technology could allow a company to produce more of the product.

Price

• Price reflects the relationship between supply and demand. If a new competitor enters the market with a similar product, it could create an excess in supply and cause the price to go down. If the public shows a strong demand for a product, the price could go up if the demand exceeds the supply.

Opportunity Cost

• Because your income is limited, you generally need to weigh your choices before making an economic decision. Opportunity cost means you sacrifice one thing to obtain another. It's easy to see that when you purchase a computer, you give up cash, but you also relinquish the opportunity to use that cash to buy something else. For example, if you choose to re-shingle your roof instead of taking a vacation in Hawaii, your vacation signifies your opportunity cost.

Inflation

• Inflation refers to rising prices for goods and services across the board. When prices rise, your money buys less. According to "The Economist," inflation is a recent development in the American economy. People born in 1930 have seen prices increase by more than 1,000 percent since they were born. Economists have attempted to control inflationary pressures, but inflation remains unpredictable.

Recession

• A recession refers to a period of slowing economic growth. It is often accompanied by rising unemployment and a slowdown in the production of products. According to Investopedia, a recession is measured by two back-to-back quarters of negative economic growth. While recession can show up as a normal part of the business cycle, it can also be triggered by specific events.