Post 1: What Everybody Ought to Know about Economics
Learn the basics of micro and macroeconomics in this series of lessons.
I posted a thought on economics on social media. A friend said that we all understand supply and demand. The problem, as I saw it, was that she didn’t apply that understanding.
In this series, I will be teaching from Economics, 3rd Edition by Professor Timothy Taylor. I am providing the link so that you can take the course yourself. I found it quite enjoyable.
Governmental policy can be understood by knowing the principles covered in these lessons. It is important to know that economists look at statistical people. They want to know how people in general act. They don’t develop ideas based on individual examples. Think of economics as a way of thinking about problems.
According to Professor Taylor, there are three questions society must answer: “What should be produced? How should it be produced? Who gets to consume what is produced?” The answers to those questions fall along a continuum with complete individual control on one end and complete governmental control on the other.
Self-interests is one principle that can be effective when looking at behavior. People work, save, and purchase goods based on selfish motives. People and firms adapt to changes.
The idea that people change as incentives change is basis of economic policy. Prices are the result of the interaction of all buyers and all sellers. Prices are not based on what is moral or just.
Opportunity costs are the costs incurred because someone acted in one way instead of another. When I was in high school, a friend asked why I declined an invitation to attend a one-week trip to the state capital to learn about politics. He said, “Why won’t you go? It won’t cost you anything.” I said, “It will cost me whatever I will make while staying home.” Even as a teenager I understood opportunity costs.
Microeconomics is the study of how individuals, households, and firms interact. It looks at goods, labor and capital. Macroeconomics focuses on what I think of as the governmental or policy level. The focus is on how policies will affect trade, unemployment, inflation, and economic growth.
Division of labor refers to breaking the labor of a product into smaller tasks. Think of an assembly line. Professor Taylor states that there are three reasons why division of labor results in increased productivity.
Workers can focus on tasks that they are best at.
Workers become more productive with practice.
Economies of scale - a larger firm can produce at a lower cost than a smaller one.
Division of labor leads to a decentralized economy. If a person completes one step of a process, the completed product must be purchased. Imagine the farmer who produces wheat. The grain is made into flour. The flour is made into bread. The farm family must go to the store to buy bread. Ultimately, the end results of all products are in a store. Trade is facilitated by some form of currency. Compare that to the more centralized example of the local dairy that produces its own milk, cheese and ice cream to sell in its store.
Now which is worth more, a loaf of bread or an automobile? Who decides? We will begin to cover that in the next lesson on Supply and Demand.