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<p>The term “economics” is thrown around in various capacities. It’s a popular <a href="/8012-college-majors-career-guide.html">college major</a>, it’s discussed frequently on financial news programs, and you’ll hear about it in business and political discussions. </p>
<p>We’ll explore the concept of economics and its broader implications in straightforward terms so you can gain a deeper awareness of how this social science impacts business and the world around us.</p>
<h2 id="what-is-economics">What is economics?</h2>
<p>Economics is a social science that studies financial choices and outcomes, such as how people and countries use resources. Those who study economics analyze the production, distribution, and consumption of various services and goods. </p>
<p>In general, the goal of economics is to learn more about the choices people make to get what they want. </p>


<h2 class="wp-block-heading" id="microeconomics-vs-macroeconomics">Microeconomics vs. macroeconomics</h2>


<p>There are two primary economic segments: microeconomics and macroeconomics. Both microeconomics and macroeconomics provide logical ways to review problems and formulate solutions.</p>
<h3>What is microeconomics?</h3>
<p>Microeconomics focuses on individual financial health. It delves into personal concerns like income, consumer habits, credit, savings and investments. For example, microeconomics may examine how an individual or family uses their available resources, taking into account their income, consumer spending, saving habits, credit products and investments. </p>
<p>In other words, microeconomics looks at smaller and more specific issues in an economy. Professionals in the microeconomics field might study the way families decide how to spend their money or how individual businesses operate.</p>
<h3>What is macroeconomics?</h3>
<p>Macroeconomics looks at the economy on a larger scale, examining factors that impact an entire economy, such as <a href="/3443-what-is-inflation.html">inflation</a>, price levels, unemployment, economic growth and economic decline. Macroeconomics uses a broader lens to examine a country’s bigger picture. </p>
<p>Macroeconomics analyzes the production, consumption and distribution of resources. It also encompasses saving rates, investments, employment and the public policies that affect it all. </p>
<p>Macroeconomics issues someone might study include the factors that influence a country’s wealth, <a href="/3617-gdp-definition.html">gross domestic product (GDP)</a>, trade imbalances and negotiations. Someone in the macroeconomics field may also look at a country’s <a href="/3484-fiscal-policy.html">fiscal policy</a>, and the reasons why countries enter a <a href="/3493-recession.html">recession</a> or a depression.</p>
<p>While individuals make microeconomic choices when they buy something, save or borrow money and invest for the future, macroeconomics affects these choices via inflation, <a href="/4384-compound-interest-formula.html">interest rates</a> and the job market. Understanding macro can help you make the best microdecisions. <strong>[Related article: </strong><a href="/11097-negotiating-tips-business-loan.html"><strong>5 Tips for Negotiating a Business Loan</strong></a><strong>] </strong></p>

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<h2 class="wp-block-heading" id="economics-is-about-choices-and-decisions-not-just-money">Economics is about choices and decisions, not just money</h2>


<p>Though economics is widely associated with money, it also involves weighing different choices or alternatives – many of which do not involve monetary issues, according to the Library of Economics and Liberty (<a href="http://www.econlib.org/" target="_blank" rel="nofollow noopener">Econlib</a>). </p>
<p>The organization notes that the decisions you make every day can be considered economic choices. For example, should you spend an hour a week volunteering for a worthy charity or send money to that charity? Should you take a job to help support relatives or save for your future? <strong>[Related article: </strong><a href="/6162-decision-making.html"><strong>Techniques and Tools to Help You Make Business Decisions</strong></a><strong>]</strong></p>
<p>In his 1932 book <em>An Essay on the Nature and Significance of Economic Science</em>, former London School of Economics professor Lionel Robbins features an all-encompassing economics definition that is still used today: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.” Robbins’ words encompass economics as a study about much more than money.</p>
<h2 id="what-are-some-examples-of-economics">What are some examples of economics?</h2>
<p>Two of the most crucial economic applications are the stock market and trade deals.  </p>
<ul>
<li><strong>Stock market:</strong> One of the most significant examples of economics at work is the stock market, where investors can buy and sell shares of publicly traded companies. Stock market trading affects individuals <em>and</em> countries, so both microeconomics and macroeconomics are involved. Nearly every developed country in the world has stock markets. An economist studies the markets to understand what is influencing stock market fluctuations. </li>
<li><strong>Trade deals:</strong> A key example of macroeconomics comes in the form of trade deals. When countries negotiate trade deals, they discuss import and export laws, tariffs and taxes. All of these macroeconomic considerations influence those countries’ citizens in a microeconomic way.<strong> [Learn more about </strong><a href="/7720-small-business-taxes.html"><strong>small business taxes</strong></a><strong>.]</strong></li>
</ul>
<h2 id="why-do-we-study-economics">Why do we study economics?</h2>
<p>Economics is particularly relevant because it examines and studies some of the most critical resources on earth, including soil, lumber, raw materials, fish, minerals, coal and oil.  </p>
<p>Because resources can be limited – and some are scarce – how they’re distributed and used is crucial to understand. Access to these resources impacts the well-being of everyone, making economics one of the most impactful of the social sciences. </p>

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<h2 id="who-are-some-famous-economists">Who are some famous economists?</h2>
<p>The list of influential economists is long, but it generally starts with the Scottish philosopher Adam Smith. Smith is widely hailed as the father of economics because of his pivotal book, <em>The Wealth of Nations</em>, published in 1776.</p>
<p>One of the most famous economists in recent times is Stanford University’s Kenneth Arrow. In 1972, Arrow was awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for “pioneering contributions to general equilibrium theory and welfare theory,” according to the Econlib. Arrow’s work on the economics of uncertainty remains an authoritative source for other economists.</p>
<p>American statistician Milton Friedman received the 1976 Nobel Memorial Prize in economic sciences for his research on consumption analysis, monetary history and theory, and stabilization policy.</p>
<p>Other famous historical economists include David Ricardo, Thomas Malthus, John Stuart Mill, Karl Marx, Alfred Marshall, John Keynes and Irving Fisher.</p>
<p><em>Chad Brooks contributed to the writing and research in this article.</em></p>

Gain a broader insight into economic applications and principles. 

What Is Economics?

<p>The power of compound interest can work either for or against you as a consumer. If you have a deposit account at a bank, you will earn interest on the amount you deposited as well as on the interest your money has already earned. Conversely, if you have credit card debt and carry a balance from month to month, interest will be added to the amount you owe, which has already accrued interest.</p>
<p>These are the factors that determine how much compound interest will increase the value of your assets or liabilities:</p>
<ul>
<li>Interest rate</li>
<li>Balance</li>
<li>Length of time</li>
</ul>
<p>Whether you are saving or <a href="https://www.businessnewsdaily.com/11286-borrowing-against-401k.html">borrowing money</a>, it’s always wise to track the effect that financing fees will have on the balance. Unless you’re a math wiz, though, you won’t be able to compute the figures in your head. You can work out the compound interest on your own with a mathematical formula or plug the numbers into an online calculator. However you do it, knowing how much compound interest can help you achieve your financial goals or can hinder your progress is a worthy endeavor.</p>
<h2 id="what-is-compound-interest">What is compound interest?</h2>
<p>Interest is the fee a lender will charge you for allowing you to use their money. Instead of just repaying the amount you borrowed, a charge is added to the balance. Lenders apply interest to installment loans, credit cards and other financial obligations. Banks also pay interest to people who deposit money at their institution because you are letting them use the money to make loans.</p>
<p>There are many ways that interest can be calculated, but the compound interest method is most often used for credit cards and bank deposit accounts. With it, interest accrues on the initial principal as well as the accumulated interest of a deposit or a debt.</p>
<p>By compounding interest, a principal amount can grow at a faster rate than if the simple interest method were applied. That’s because simple interest is based entirely on the percentage of the principal amount and not on any of the applied interest. This method is often used for car loans, <a href="https://www.businessnewsdaily.com/16184-term-loan.html">term loans</a> and some student loans.</p>
<p>Is this starting to sound complicated? In essence, compound interest works this way: Imagine depositing money into a savings account and leaving it there. The bank will first add interest to the amount you deposited. The next time the bank assesses interest, it will be on the amount you originally deposited <i>plus </i>the added interest. That means you are earning money on the principal plus what the bank has already given you.</p>
<p>For this reason, compounding interest on a savings account can help you build a nice nest egg with relatively little effort on your part.</p>
<p>The downside of compounding interest occurs when you owe money. For example, imagine you ran up a sizable bill on your <a href="https://www.businessnewsdaily.com/26-small-business-credit-cards.html">business credit card</a>. Instead of paying in full, you pay partially and move the remainder to the next month. The bank will add interest to that debt. If you continue to push that balance off, the next time interest is calculated, it will be on the balance that already grew with the interest that was added the prior month.</p>
<p>Therefore, compounding interest on a debt can add up quickly. The bank is charging you for the convenience of revolving the balance.</p>
<h2 id="simple-interest-vs-compound-interest">Simple interest vs. compound interest</h2>
<p>To see how compound interest is calculated differently from simple interest, just do a side-by-side comparison with the same terms. Here is what it would be for each method, on $4,000, with an annual interest rate of 8% over the course of four years.</p>
<h3>Simple interest example</h3>
<p>Simple interest is calculated by multiplying the principal (P) by the rate (R) by time (T). This would be the calculation for the above example:</p>
<blockquote>
<p>$4,000 x 0.08 x 4 = $1,280</p>
</blockquote>
<p>So, in four years, the total interest would be $1,280 and the balance would grow to $5,280.</p>
<h3>Compound interest example</h3>
<p>Compound interest is calculated by applying the interest to the principal as well as the accrued interest, after each year. Breaking it down:</p>
<ul>
<li>After the first year, P x R x T (which, in this case, is 1) = $320, the new principal would be $4,320.</li>
<li>At the end of the second year, P x R x T = $345.60, which is added to the old principal, creating a new principal of $4,665.60.</li>
<li>At the end of the third year, P x R x T = $373.25, which, added to the old principal, is $5,038.85.</li>
<li>Applying this formula again for the fourth year gives a new principal of $5,441.96, or with a total interest earned of $1,441.96.</li>
</ul>
<p>Compared to the simple interest, the compound interest is $161.96 more.</p>
<h3>Compound interest formula</h3>
<p>The example above illustrates the concept of compound interest, but you can use another formula that is much simpler than calculating for each year and adding on. This is the formula:</p>
<blockquote>
<p>P x (1+r)<sup>t</sup> = Future value (FV)</p>
</blockquote>
<p>In this formula, “P” represents present value, “r” represents the interest rate as a decimal, and “t” is the time period expressed as an exponent. This formula can also be used to work backward, which is useful when you want to establish a goal of saving a specific amount of money in a fixed time period. In other words, if you know your target FV and would like to figure out your needed present value, you can work the formula backward:</p>
<blockquote>
<p>P = FV ÷ (1+r)<sup>t</sup></p>
</blockquote>

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<h2 id="components-of-compounding-interest">Components of compounding interest</h2>
<p>When you want compounding interest to work in your favor because you are building funds for the future, keep the components of compounding interest in mind. For growing your money, you will want the following components.</p>
<ul>
<li><strong>High interest rate:</strong> This should be the highest interest available and for which you can qualify. Deposit account rates are tied to the rates set by the <a href="https://www.federalreserve.gov/" target="_blank" rel="noopener">Federal Reserve</a>, though they do fluctuate based on the bank, so it’s best to shop around.</li>
<li><strong>High balance:</strong> You will also want to add to your balance so it grows, not just with interest but with regular deposits.</li>
<li><strong>Long time period:</strong> The longer you allow the funds to grow, the more compound interest will add to the principal. Through regular investments, a savings account can grow to quite a large amount. The younger you are when you start saving and contributing, the more time compounding can work to your benefit. While the results may seem slow at first, perseverance can really pay off. For example, a $5,000 annual contribution to an <a href="https://www.businessnewsdaily.com/15140-retirement-savings-strategies-entrepreneurs.html">IRA</a> for 45 years, with an average 8% return, can deliver retirement savings of more than $1.93 million, which is eight times the amount contributed.</li>
</ul>
<p>The flip side of growing money, of course, is losing it. That’s easy to do when compounding interest is calculated on a <a href="https://www.businessnewsdaily.com/6363-debt-vs-equity-financing.html">debt</a>. Again, keep the components of compounding interest in mind. This time, you will want the following components.</p>
<ul>
<li><strong>Low interest rate:</strong> Seek out the credit product that has the lowest interest rate possible. While it’s best to keep debt to zero, if you do need or want to pay it off over time, a low interest rate is key.</li>
<li><strong>Low balance:</strong> Using a credit product that calculates interest with the compounding interest method can become an extraordinarily expensive endeavor when the balance is high. Make every attempt to charge only the amount you can afford to pay in full by the due date.</li>
<li><strong>Short time period:</strong> If you do have to pay a big balance in installments, make your payments as large as possible so you do not extend the date unnecessarily. A $5,000 credit card debt with a 25% interest rate that you pay over five years will cost you $3,805 in compounded interest. If you shortened the term to 12 months, the compounded would be $702.</li>
</ul>
<h2 id="compound-interest-a-powerful-friend-or-foe">Compound interest: A powerful friend or foe</h2>
<p>In the end, compounding interest is a powerful way to either increase or decrease the value of your savings or debt. You have considerable control over this process. By calculating what you could earn with regular deposits, you can plan for your dreams, from <a href="https://www.businessnewsdaily.com/5767-business-ideas-low-cost.html">starting your own business</a> to retiring in luxury. And by calculating what you could lose by allowing a balance to accrue excessive interest, you can make better decisions when shopping and managing your accounts. The choice is yours.</p>
<p><i>Elaine J. Hom contributed to the writing and research in this article.</i></p>

Compound interest could result in a little money becoming a lot of money over time. Here's how to calculate compound interest when saving money or taking a business loan.

How to Calculate Compound Interest

Start Your Business

Startup Funding

<p>Considering using a credit card to finance your startup? For some entrepreneurs, it’s the only way to get your new business off the ground. A <a href="https://clutch.co/consulting/resources/startup-funding-sources-new-businesses" target="_blank" rel="noopener">2020 survey</a> by market research firm Clutch found that 13% of the respondents relied on plastic for startup capital.</p>
<p>According to Odysseas Papadimitriou, former senior director at Capital One, financing a new venture with credit cards can be great, but risky. Papadimitriou, now CEO and founder of credit card comparison marketplace WalletHub, gave us the lowdown on charging business expenses to a credit card.</p>

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<h2 id="pros-of-using-credit-cards-as-startup-capital">Pros of using credit cards as startup capital </h2>
<p>While it may sound like a risk to borrow funds to finance your new business endeavor, there are some good reasons to do so. </p>
<p>“The pros of <a href="https://www.businessnewsdaily.com/1733-small-business-financing-options-.html">using a credit card to finance a startup</a> extend well beyond convenience, though that is certainly an important factor,” Papadimitriou said. Whether you use the card you have or apply for a new account, the benefits are compelling. </p>
<h3>Maximum equity</h3>
<p>In general, people willing to take the risks associated with <a href="https://www.businessnewsdaily.com/4686-how-to-start-a-business.html">launching a startup</a> believe they have lucrative ideas on their hands. Maintaining control, therefore, can be attractive. </p>
<p>The further you can take your business idea without outside financing help, the more of your company’s equity you can keep for yourself and the less oversight you’ll have to deal with. So when you use a credit card, your company’s interest stays with you.  </p>
<h3>Low- or no-interest deals</h3>
<p>The ubiquity of low interest rates has made it common practice for banks to offer appealing packages to creditworthy individuals and business owners. Many credit card issuers offer 0% interest rates for a limited time. Some are for new purchases while others are for balance transfers. </p>
<p>Escaping financing fees for a year or more on upcoming or past purchases can help your company’s bottom line. Just one compelling example is the Slate Edge by Chase, which offers 0% APR on purchases and balance transfers for 18 months. There is also no balance-transfer fee, which is typically 3% of the amount you shift over.</p>
<h3>No collateral requirement</h3>
<p>Request a business loan or line of credit from a bank and be prepared to offer <a href="https://www.businessnewsdaily.com/16217-business-collateral.html">collateral</a> – such as inventory or property, since many of these products are secured. However, most credit cards are unsecured, so you won’t need to scrape up funds to enjoy access to the credit line. <strong>[Related: </strong><a href="https://www.businessnewsdaily.com/15674-unsecured-business-loans.html"><strong>What Is an Unsecured Business Loan?</strong></a><strong>] </strong></p>
<h2 id="cons-of-using-credit-cards-to-jump-start-your-enterprise">Cons of using credit cards to jump-start your enterprise</h2>
<p>Of course, there’s also a host of potential problems associated with financing a startup by credit card. You need to know what they are before applying for and using a card to get your business off the ground. </p>
<h3>Intertwined business and personal expenses </h3>
<p>When you use a credit card to fund a business venture, the distinction between your business and personal finances can blur. You will need to keep all of those changes totally separate, which requires dedication. If they do become mixed your accounting will be off, which will make tax time more complicated because you’ll have to sift through line items to identify <a href="/7720-small-business-taxes.html">deductible expenses</a>. </p>
<h3>Potential credit score damage</h3>
<p>No matter how confident you are that your company will be a success, nearly all startups are inherently risky. When you use a credit card as a source of funding, you are gambling with your personal credit score. Everything you do with the account will be recorded on your credit reports, and if you charge too much or miss payments your score will decline. That will put you in a tough spot when you want to apply for other credit products. </p>
<h3>Personal risk for a lawsuit</h3>
<p>If your company doesn’t succeed, the debt you incurred with the credit card will be your financial and legal responsibility. Collectors may attempt to recoup what is owed not only from your company’s assets, but also your personal income and assets. You can be sued for the unpaid balance if you don’t satisfy the liability.  </p>
<h3>No guarantee for lender</h3>
<p>To qualify for a business credit card, the issuer will assess not only your ability to pay, but your personal credit standing. If you’ve had problems with credit in the past, your credit report and credit scores may already be damaged. If that’s the case, you may not qualify for the best cards to help you launch or grow your business.</p>
<h3>Low limits</h3>
<p>Because credit cards are typically unsecured, the issuer takes considerable risk in granting a large credit line. For this reason, spending limits may be lower than they are for secured loans and lines of credit. Credit cards usually tap out at the $50,000 mark. If you need to borrow a substantial sum, a credit card alone can leave you short on essential funds. </p>
<h3>Ease of overextension</h3>
<p>Spending more than you can afford to pay back quickly is remarkably easy with a credit card. If you do, you will end up in debt that can follow you for years. Because many credit cards have high <a href="https://www.businessnewsdaily.com/4384-compound-interest-formula.html">interest compounds</a> and rates, the financing fees will make the balance very expensive. And if you do want to apply for different financing options, that debt can make you ineligible, particularly for loans with preferable terms. </p>
<h2 id="how-to-finance-a-startup-with-a-credit-card">How to finance a startup with a credit card</h2>
<p>If you still want to finance your business with a credit card, here are some tips to do it the right way. </p>
<h3>1. Create a charging plan.</h3>
<p>Before you make even a single charge, decide what the credit card is for. You may want to use it exclusively for certain expenses, such as shipping or marketing. Whatever you do, never put everything on the card and hope for the best. If you open a 0% APR card, you have more flexibility with charging and rolling over balances, but make sure you satisfy the debt before the regular rate kicks in. </p>
<h3>2. Commit to short-term debt.</h3>
<p>Make a habit of paying off the entire balance by the due date. By doing so, you will be guaranteed a 30-day interest-free loan. There may be times when you do want to pay over time, but don’t extend it much longer than three or four months. Calculate how long it will take to delete a credit card debt in a few installments, and then commit to that payment schedule until you’re back to a zero balance. </p>
<h3>3. Maximize rewards.</h3>
<p>A reward-heavy credit card can be a business owner’s best friend. If you get a new card that comes with an introductory bonus, you’re off to a lucrative start. Charge an expensive purchase and the issuer will give you a substantial amount of points or cash back.</p>
<p>For example, Bank of America’s Business Advantage Unlimited Cash Rewards Mastercard offers a $300 online statement credit after charging $3,000 within the first 90 days of opening the account. Whichever rewards card you obtain, use it according to your charging plan to keep the rewards coming. You will benefit from the process by paying the balance before interest is applied. </p>
<h2 id="alternatives-to-financing-a-startup-with-credit-cards">Alternatives to financing a startup with credit cards</h2>
<p>Although credit cards can be an excellent addition to your business wallet, other options exist. </p>
<h3>Personal capital </h3>
<p>Don’t look past your personal financial capabilities. If you have money set aside in savings or in an investment account, consider tapping into it. You may also use the equity in your home with a home equity line of credit (HELOC) or sell valuable items and use the proceeds to cover some costs. In fact, the more of your own cash you invest in your business, the more carefully you are likely to spend it. </p>
<h3>Business loan </h3>
<p>A business loan that you take out from a bank, credit union or online lender is perfect for major expenditures that you want to repay over time – such as renovations and costly equipment. The interest rates are typically lower than they are for credit cards, and the fixed monthly payments take the guesswork out of what you need to send every month. Check out what is currently available with our overview of the <a href="https://www.businessnewsdaily.com/8448-best-business-loans.html">best business loans for 2023</a>. </p>
<h3>Friends and family</h3>
<p>People who love and trust you may be willing to lend you money for your company. However, you will have to be very cautious with this type of loan. A valued relationship is on the line if it doesn’t work out and you can’t pay the person back. Each party needs to be on the same page: Write all of the terms down, including what you will use the money for, and how and when you will repay it. Both parties should sign the document and file a copy. </p>
<h3>Outside investors</h3>
<p>Another funding option is finding wealthy individuals to be <a href="https://www.businessnewsdaily.com/9078-angel-investor-funding-reasons.html">angel investors</a> in your startup, or a <a href="https://www.businessnewsdaily.com/4252-venture-capital.html">venture capital</a> firm that’s interested in backing your idea in exchange for a stake in your company. </p>
<p><a href="https://www.businessnewsdaily.com/4134-what-is-crowdfunding.html">Crowdfunding platforms</a> – like Kickstarter and Indiegogo – are another way to generate spending money. In exchange, you may have to send the supporters products, equity or interest on the loan. </p>
<h2 id="finding-the-right-funding-for-your-small-business">Finding the right funding for your small business</h2>
<p>No matter where you get the funds to launch your business, there will be pros and cons. With any method, simply throwing money at a startup does not guarantee success.  </p>
<p>“Efficient use of this money, as well as a lot of hard work and a little bit of luck, are also essential,” Papadimitriou said. A conservative borrowing approach is almost always your best bet. </p>
<p><i>Business News Daily staff contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.</i></p>

Erica Sandberg