While we might not all be cut out for the trading floor of the New York Stock Exchange, the basic principles of economics are within anyone’s grasp! They’re also a great first step to understanding the microeconomics of our personal finances and the macroeconomics of the world’s biggest banks.
Don’t be intimidated by shares, bonds, and derivatives! These infographics from How Money Works are here to lay out some classic economic theories and financial processes in a straightforward way.
Get ready to understand economics, beginning with…
Even kids selling lemonade on their front lawn will feel the push and pull of price competition!
In 1776, the Scottish economist Adam Smith suggested that, in a competitive industry, a seller’s self-interest limits the price rises they can demand. This is because if they charge too much, buyers will stop purchasing their goods or lose sales to competitors willing to charge less. This can have a deflationary effect on prices and ensures that the economy remains in balance.
Even if money did grow on trees, it might not be great for the economy. Since the birth of modern economic thought, economists have tried to work out how the quantity of money in an economy affects prices and the behaviour of consumers.
Irving Fisher, for example, argued that there is a direct link between the amount of money in the economy and price level, with more money in circulation increasing prices.
The German economist Karl Marx argued that the real price (or economic value) of goods should be determined not by the demand for those goods, but by the value of the labor that went into producing it.
Anyone who’s held down an un-fun summer job will certainly agree!
Time to balance the books. For investors trying to decide whether a particular company represents a good investment opportunity, net income provides a method of understanding the way a business is run and is a guide to the real profit it is making, rather than just the revenues it generates.
Revenue earned is the starting point, and the cost of tax, banking charges, staff costs, and any other expenses are deducted from this figure. But everyone isn’t always truthful about it! Some companies omit certain expenses from their circulations to make net income appear higher, while others inflate earnings to make profits appear higher, for example by including projected future earnings.
Here’s a bonus fact: In the first quarter of 2016, Apple’s net income was a whopping $18.4 billion – the highest quarterly profits in history!
Shares are units of ownership in a corporation that are available for investors to buy or sell. Companies issue shares when they need money to invest or pay off costs. When an investor buys a share, they become a shareholder and own a small part of the company. Here’s how an example might work:
A company needs shares to expand its operation. It decides to offer shares to the public via flotation on the stock market.
The company issues shares at $10 per share. The shares are made available via an Initial Public Offering (IPO) at an agreed price.
Individual investors receive their shares at the issue price, in this case $10. The shares can then be bought and sold on the stock exchange.
After the IPO allocations, the company makes the shares available on the stock exchange where prices are affected by market performance.
After six months the shares gain 10% in value. Shareholders who sell shares they bought at $10 have now made a profit of $1 per share.
After another six months the company pays a dividend of $1 per share. Investors still holding their shares gain this $1 profit.
How Money Works is a highly visual, user-friendly guide to understanding everything financial. From mortgages to the stock market, and Bitcoin to crowdfunding, it has everything you need to master economics, whether you're starting your own small business or looking to get started in investing.