My aim is to give you the basics of economics in one lesson. If you are considering studying economics or studying now this post will be a useful summary. If you are in the workforce and have no academic interest in economics it will be of great value, as it will explain the way the world works when in comes to money and markets.
I have tried to skip all the verbose language and name dropping like Misses, Hayek, Jevons, Menger, Benthan, Walras etc. I want to give just a brief outline of economics in one lesson with lots of simple graphs.
I also have skipped the mathematics of economics. I think this is something that academics like to scare undergraduates with and tell them it is important. In my opinion pure theory is the what economics is about, and not some mathematical ornamentation for the ivory tower professors to compete with each other for journal publications. Economics is everyone’s business and there is a life time of verbal theory to keep people busy without intimidating people with equations.
Economics is about markets. In a market people exchange goods and services. The market could be a vegetable market or e-commerce on the Internet, it could also be a market for money. Why do people come together, they come together to solve the fundamental problem of economics. That is scarcity.
Microeconomics in one lesson
Microeconomics is really what economics is about. As an undergraduate I always prefered studying macroeconomic issues because that what was in the headlines and was connected to hot political issues. However, microeconomics is a the base in of economics as it explains how people interact in a market to solve the problem of scarcity.
How prices are determined
How limited goods are rationed – Price is the primary way goods are rationed. There are also forms on non-price rationing like standing in line to wait for something, but a free market and price is the most efficient way to ration scares goods.
Price is determined by only by supply and demand. Never is cost or what you or someone else has paid for an item have any relation to price. Nor is there anything called a natural value of any object. Karl Marx was wrong to think value is determined by the amount of labor that went into something. The value of an object subjectively, that is what someone believes it is worth. You do not believe me?
If you are going to buy a stock on the stock market do you care what the person who will sell it to you paid for it? Do you care what he thinks it is worth? I do not. A lot of confusion in finance and investing comes from people believing things have natural value.
Consider the diamonds water paradox and price . That is water which is invaluable for life is cheap while diamonds that have little intrinsic value are expensive. The Austrian thinkers emphasised that value is subjective.
Real life economic lesson 1 – Since value is determined subjectively or more precisely by supply and demand rather than any intrinsic or natural value, making money is easy. You need not spend a lifetime doing this, it is more about understanding the need of the market place . Lastly, in my experience there is almost no correlation between salary and real value. Do not believe the work your way up the corporation myth. It is perceived value and not real value that is important. This is economics 101.
The neo-classical school of economic thought emphasised marginal utility. The idea here is that people are rational and make decisions on perfect information (this is debatable but generally). This allows them to maximize utility and profits.
Utility is a level of value or satisfaction, you might even say it could be measured in utils. I get 10 utils from playing the computer game civilization, while another person might get 11 ultils from reading the theory of Alfred Marshall. Again value is subjective. We all have indifference curves however, each additional unit of something we get starts to decrease the value of it to us personally no matter how we value you it.
That is if you eat one apple your get a lot of ultils, lets say 10 units. However, the next apple gives you only 8 and the next apple only will give you 5 ultils etc.
Real life economic lesson 2 – If you want to do business in a developed country that has a reasonable purchasing power to satisfy demand of basic goods, the best way to make a profit is find a niche. If you can find a small niche that the public does not have, you will get higher utility. Instead of selling toys, sell educational toys. Something there is not as much supply of. Things are too competitve in a global economy to bring a commodity product to market, as people are already far along their marginal utility curve. Find something new and unique and this will give people the greatest utility and you the greatest chance to make a profit.
Now from a profit side of marginal economics, that is the economics of a firm the key equation here is profits are maximized where marginal cost equals marginal revenue (benefit).
Indifference curves –
Everything in life is a trade off. Money for food, free time for work time. The fact that we are all different makes the world go around. Yes everything has a price, even time, and there is where the idea of opportunity cost comes from. I might hold an investment for 10 years waiting for it to go up, while I could have simply sold it for a loss and bought another investment.
Real life economic lesson 3 – If you want to make money in the stock market, consider the opportunity cost of holding an asset. Lose your pride and try to optimize.
If you want to understand microeconomic theory, further than my short micro-economics in one lesson (I hope to be updating and building on), I would recommend two books. They are actually mystery thriller books by an author Marshall Jevons (pseudonym). One is called Fatal equilibrium and the other is Murder at the margin. Why read boring writings about people’s opinions on economics when you could learn microeconomic theory from some mysteries?
Macroeconomics in one lesson
When most people think of economics they think of GDP, inflation, debt, imports and exports. This is what economics is on the news. Further, many bright people and even economic think tanks have very different opinions how macro economic policy operates. They have their own theories on political economy. Take it from the guy who runs Political-Economy.com, Adam Smith as basically right.
Since I think everyone knows what GDP and taxes are etc, I think I can skip the basics and move to the key point of macro economics. Government crowds out private investment. Anything that the government does free people can do more effectively. There are some exceptions like public goods, but generally let the markets work.
Government involvement in markets rewards backward thinking people and penalizes the forward thinking people. Redistributions of wealth simply mean you will be working for another man’s wife.
I live in a post communist country. There was real poor here. Poor in America is like rich in Eastern Europe. Do you understand?
An example of economics in one lesson for political economy
Think about microeconomics before you think about macroeconomics. You are some guy selling vegetables in a market. You know what to do to maximize your profit. Then some guy in a suit, looking a little like an agent from the movie the Matrix, come along and tell you what to do. He either takes some of your profit and gives it to someone else. He regulates the price or he puts some money in your competitors pocket to help him create a better vegetable stand. Maybe your competitor is making super profits doing something risky, and you are making zero economic profits. Then when he is in trouble the guy with the suit comes to you and take some of your money and bails him out. Not only is the consumer punished but the producer seller and everyone else is. All you want to do is sell your carrots.
Capitalism is good when people act on their own enlighten self-interest (Adam Smith) everyone wins society moves forward in a positive way. When there is government intervention, everyone loses. The market can not adjust and we sit in a long-term disequilibrium.
If anyone wants to dispute this be my guest. I do not care if you are a PhD in Economics or an advisor to the president of the United States, if you think governments should bailout or stimulate anything, you are wrong. Even the banks. Let them fall and collapse and a more disciplined dynamic system would emerge. Now we are stuck in debt that will hold us back for the next 50 years. It would have been better to give people money, they could have started new businesses with it.
Economics in one lesson comes down to this. Let the markets work.