It can be a bit intimidating for someone who doesn’t have a finance or business background to learn the jargon of economics. It can be challenging, but it’s certainly not impossible!
For most people, the economy involves budgeting and managing their household finances. While this may be true and consist of the basic comprehension of what economy is, economics as a subject is more comprehensive. Author Samuel Enajite Enajero in his book Collective Institutions in Industrialized Nations talks about some essential economic lessons for the African region. Enajero shares that societies without dynamic collective institutions rely on fundamental institutions at the zero-order – zero order institutions and poverty – resulting in retrogressive or stagnant societies.
For a beginner starting on the road of financial management, what are some common concepts they need to know?
Basic Economic Concepts
Economic or financial management starts from a simple buying or selling experience. When we ask questions such as how much does this item cost, do we have enough money to buy it, or where shall we be getting funds to purchase this item indicates that we are traversing through the basic foundation of financial management or planning.
But when we enter a bank and encounter terms such as deposit, interest rate, insurance, etc., we start to get intimidated and would probably step out in retreat. No worries there, you are not alone! The economy is not limited to the walls of a financial institution such as a bank. We also encounter economy when we hear news about how the government handles taxes or people’s money.
When a government purchases buildings, facilities, transportation, etc., the government is dealing with economics. When the government is dealing with problems about an increase in price in commodities, gas, fuel, etc., the government is handling issues concerning economics.
To help you out in understanding economics, here are some of the basic terms you will probably encounter at some point either in the news or in conversations or, yes, in any financial institutions:
An asset is something that has value to an individual or a business. It can earn and accumulate value and be used to meet or fulfill debts, contracts, or commitments.
Typical assets you would know are houses and lots, land or properties, infrastructure and facilities, vehicles, jewelry, money in any monetary form, etc. Note that an asset is something, tangible or intangible, that provides potential benefit for an individual, a business, or any other entity.
A liability is an obligation that must be fulfilled between parties. In other words, it’s a responsibility that needs to be carried out and would provide benefit at a later date. Perhaps the best example of a liability that anyone can relate to is a house mortgage.
When a person purchases a house on loan, once his loan is approved, he first “receives” the house, then comes the settlement of the loan through what is known as the “mortgage.” Other examples of liabilities are taxes to be paid, salary owed to employees, money owed to financial lending institutions, and so on.
Supply and Demand
Supply and demand create the foundation of economics and are ever-present in every aspect of our lives. From the ingredients we buy in groceries, from when we go shopping to filling up our cars with gas, supply and demand is the pivoting point of the economy.
In the simplest term, supply refers to the number of goods or services made available to the consumers. Demand refers to the number of consumers available who are looking and willing to purchase the goods or services. For an economy to thrive, there should be an adequate supply and demand; meaning there should be a balance between the two.
Scarcity happens when there is more demand than the available supply. Scarcity is when a limited or inadequate amount of resources, or supply, cannot meet the number of consumers’ needs.
A typical example is the scarcity or unavailability of medicine or medical supplies in some poor and third world countries, where the patient population is high, but medicines or supplies are low.
You might, at some point, receive a call from a broker or an insurance agent to “invest” your money in some stocks or an insurance company. Investment refers to putting money into financial plans or institutions, shares, or property to generate a profit, gain income, or appreciation the value of money invested, usually in a specified period.
Capital refers to that sum of money you put in to start a business or an investment. Capital is used for initial business operation, miscellaneous expenses, or any spending needed to manage or run a business or an investment.
These are just some basic economic concepts and some of the most commonly used terms. As you go deep into finance and economics, you’ll encounter a dictionary of financial and economic terms. It’s normal to be a bit intimidated when facing unfamiliar terms. The tip here is first to identify what aspect of finance you want to learn about and start from there. Search and filter out banking terms if you want to know more about banking. If it’s insurance you want to understand more, limit your search to insurance concepts.
This is suggested for those who don’t have any finance or business background. It can help avoid confusion from thousands and thousands of financial and economic concepts. As long as you’re determined, you can eventually get the hang of the economics jargon.