ECONOMICS 101
An understanding of basic economics is essential to your financial literacy and will help enable you to effectively manage your near-term finances and long-term investments effectively. A strong understanding of this module will also help you make informed financial decisions and understand what is going on in the financial world around you.
WHAT IS INFLATION?
Inflation is a familiar term that has become particularly relevant due to the economic constraints caused by the COVID-19 pandemic. It refers to the general increase in prices over time and has a wide-ranging impact on your everyday life. Awareness of inflation rates is essential for understanding purchasing power, cash flow management, and decision-making related to purchasing, budgeting, saving, and investing.
Lawmakers typically increase DOD wages annually to counteract inflation. However, it is crucial to note that while the Department of Defense (DOD) raised wages by 4.3% in 2022 (which is higher than most civilian companies), inflation rose by 6.5%, resulting in a 2.2% reduction in purchasing power. It is imperative to exercise responsibility and understand the purpose of pay increases each year.
WHY DO SUPPLY AND DEMAND MATTER?
Supply and demand are fundamental economic concepts that play a crucial role in determining prices and market equilibrium. Supply refers to the quantity of a product or service that producers are willing to offer at a given price. At the same time, demand represents the quantity of that product or service that consumers are willing to purchase at a given price.
This fundamental concept affects you, the consumer, with every purchase you make. When there is no market equilibrium, prices are either heavily discounted or the prices rise until equilibrium is met. A quick example of this is the 2022-2023 egg shortage. The Avian flu (also known as bird flu)caused an extreme chicken shortage. The chicken shortage led to an egg shortage. Consumer demand did not reduce because of the egg shortage, introducing a lack of market equilibrium. Since there was more demand for eggs than the supply of eggs, sellers were forced to raise prices of eggs until market equilibrium was met. At its height, the consumer price index (CPI) reported that egg prices jumped 49%, affecting you and every other person who likes eggs with their breakfast!
The concept of supply and demand is relevant to you with every purchase you make but is especially important on big purchases such as purchasing a vehicle or a home.
GROSS DOMESTIC PRODUCT (GDP)
GDP measures the total value of goods and services produced within a country over a specific period. GDP growth rates indicate the pace of economic expansion or contraction. Understanding GDP growth can help individuals assess the overall economic environment and make decisions related to investments.
INTEREST RATES
Banks set interest rates and influence the cost of borrowing and the returns earned on savings accounts and other investments. Changes in interest rates affect mortgage rates, credit card interest, loan rates, and investment returns.
WHAT DOES OPPORTUNITY COST?
In simple terms, opportunity cost means giving up something you could have gained or experienced to choose something else. When it comes to finances, it's about understanding that every financial decision you make has trade-offs, and by choosing one option, you might miss out on the benefits of another option.
For example, if you decide to trade in your well-running, paid-off vehicle for a new F-150 that costs you $675/month, the opportunity cost for that decision is $675/month plus whatever interest you could have made investing that same $675/month. Over a six-year period, a typical auto-loan term, if you invested $675/month into a fund with an 8% return, that fund would be worth $62,640.66. Furthermore, that truck will significantly decrease in value over time. Remember truth number three, "Financial habits shape long-term outcomes."