How Money Works
How Money Works

Economics in Infographics: 5 Concepts Simply Explained

Economics in Infographics: 5 Concepts Simply Explained

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… 

1. Adam Smith’s “invisible hand” | Market equilibrium

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.

2. Fisher’s quantity theory of money | Circulation and value

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 behavior 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.

3. Marx’s labor theory of value | Wages and demand

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!

4. Revenue vs. net income

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!

5. Shares and shareholders | Financial instruments

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.

Buy the book

Buy the book

How Money Works How Money Works

A user-friendly guide to understanding key financial concepts, How Money Works takes a highly visual Read more

A user-friendly guide to Read more

$20.00

Related products

Related products

How Food Works How Food Works

How Food Works is your own friendly nutritionist, on hand to debunk common food myths and give you the Read more

How Food Works is your own Read more

$20.00

How the Body Works How the Body Works

A bold, accessible, illustrated guide that delivers real scientific information on how the body works with a Read more

A bold, accessible, Read more

$20.00

How Business Works How Business Works

Understand the sometimes-confusing business world with How Business Works, a user-friendly guide to Read more

Understand the Read more

$25.00
Share this:
Hide
© 2017 Dorling Kindersley Limited. Registered Number 01177822, England. Registered Office: 80 Strand, London, WC2R 0RL. 'Dorling Kindersley', 'DK', 'Eyewitness' and the open book logo DK are trade marks of Dorling Kindersley Limited.
DK Books