Diamond
Active Member
Guide to the Economy
I am writing this guide in an attempt to educate those who are unsure of what the economy is and how it truly works. It is a very serious time for the entire world, because when the US enters depression it affects the entire world. It is not a totally complex topic to grasp, but it does take some reading. I'm going to begin with a quote which is widely know in the economics world; "Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scare resources" said Thomas Malthus.
Macroeconomics and Microeconomics: These are the two basic descriptions or branches of economics. Each of these is differently defined and attempts to separate the two systems of the economy.
Microeconomics- This is the branch of economics which closely examines the choices made by individuals concerning one industry, product or firm.
Macroeconomics- This is the branch of economics which examines the behavior and actions of the whole economy at one particular time, not as separate functions. In school you will usually study a combination of the two.
Three Basic Economic Questions: There are 3 basic economic question which are always held as a standard; meaning they are the same for every economist.
- What to produce?- This question is asking what product should the specific party produce which would be successful within the economy and better the economy overall.
- How to produce?- This question refers to the means of creation. Basically, it asks how will the specific party produce the product which was answered in the first basic economic question.
- For whom to produce?- You must decipher who your product will be produced for. This means that you must make sure the product you are making careful intrests the audience which you are aiming for.
What's the Problem With Economies?: There is one word which basically sums up the main fundamental economic problem which faces almost all societies or economies; scarcity.
Scarcity- This is the condition that results from society not having enough resources to produce all the things which people want. The term scarcity results from a combination of scarce resources and virtually unlimited wants. So, in more simplistic terms: Resources are scarce and peoples wants are unlimited, thus we don't have the resources needed to fulfill out wants.
Example:
You should know the difference from a want and need, if you already do then skip this small portion.
Want- This is a way of expressing a need, but is not needed for basic survival.
Need- This is a basic requirement for survival. A need could be something such as water, but on the economic scale it could be something such as money. Money is needed to purchase food and water, which is needed for basic survival, so it all ties together.
Factors of Production: There are four basic factors of production. These four factors influence how our economy creates wealth.
- Labor- Labor is very simple. If you work for pay, then you are preforming labor. You participate in some type of production with a mental or physical effort. Intangibles and skills are also considered labors.
- Land- This is anything which is not a result of human labor. Examples of this would be trees, lakes, creeks, ponds, grass, and forests. If you grow oak trees to sell for a profit, then you are making them for wealth. If you come across trees in a forest that were not man grown, then those are considered part of the land.
- Capital- Capital is basically another word for money. The nations wealth is considered the capital of a nation. Usually, capital, or wealth, is used to produce more wealth, somewhat like a never ending process. Your computer is a machine, the computer can be used to produce more wealth for yourself, therefor a computer is a machine that is wealth that is capital. This portion is a bit confusing, but if read twice or three times it is easily comprehended.
- Entrepreneurial resources- These are resources which are basically innovators. The term innovation means a new way of doing something. So, these people try to find new ways of doing things so that the would be more efficient on resources and the economy.
Types of Markets: There are two specific types of markets we will talk about today. These markets both relate to the circular flow diagram which I will depict below. Those two markets are Product Markets and Factor Markets.
Product Markets- These are markets where goods and services are offered for sale. So, if I work at a barber shop and I offer my services, haircuts, than I am offering a services therefor I work in a product market.
Factor Markets- These are markets where productive resources are bought and sold. So, if I work in a lumber sales industry I am selling resources, ie, wood therefor I am working in a factor market.
Circular Flow Diagram- This shows the high degree of economic interdependence in our economy. When I say interdependence I mean that there are multiple specific portions of our economy which rely on each other to prosper. For example:
Trade-offs and Opportunity Costs:
Trade-offs- Alternatives that must be given up when one is chosen rather than the other.
Example of a trade-off:
Opportunity Costs- Cost of the next best alternative use of money, time, resources when one choice is made rather than another.
Three Economists to Know
- Adam Smith- He wrote the book entitles "Wealth of Nations". This was about the ability and skills of a nation's people as the main source of wealth. He also felt that government should not intervene with business activity, which is also known as Lazes-Faire. He thought that there was an invisible hand which worked the economy, hypothetically. The three factors of the invisible hand were; supply and demand, competition and entry and exit.
- Karl Marx- He thought that unpaid labor was the source of of profit and the proletariat is exploited. The proletariat is the common population or the working class. By exploited he means that they are productively made use of.
- John Maynard Keynes- He introduced the mixed economy. The mixed economy is basically when people carry on their economic responsibilities or affairs freely with some government intervention, which is not totally hands off as Adam Smith said. He had an idea that we should pump money into the economy to in turn cause the prosperity of the economy.
Any questions? Feel free to post below and I will answer your questions. If you want a specific topic discussed I will hopefully cover it in a post below this. Thanks and I hope you enjoy.
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