What is Economy
Scarce: when the sum of what everyone wants is greater than the total amount of resources
It is not money, but the volume of goods and services that determines the wealth of a country
Economic is the science of allocation with resources with alternative use
The Role of Prices
Price largely determines the allocation of resources
Price does not cause scarcity but a reflection of the scarcity
- It can be used not only for transactions but also provide incentives for people to utilize those resources
- Also, can be a guide for producers to make things consumers want
Its nearly impossible for governments to keep track of the prices of all the resources. It's best to have a free market handle it
Unmet needs: since there are limited resources, there will always be unmet needs. Meeting one need by shifting resources may cause the unmet of others
Price Control
Rent controls provide incentives for people to build luxuriate apartments that are not affected, which increase the cost of living instead
When the price is artificially controlled, demand is high and producers can get away with lower quality items
Scarcity is when there isn’t enough resources. Shortage is a price phenomenon
An Overview of Prices
Prices and fees are often high in low-income districts not because of greed but because it takes more resources and risk compared to higher income
Producers are more likely to produce more when prices are high and opposite when prices are high and less when prices are low
- This incentive can explain many of the price regulation disasters in history
Making things artificially cheap often means many will be wasted
The Rise and Fall of Business
Cooperations are still controlled by human and are led by the decisions of humans
Free market washes out those companies who are not in the trend and can provide better service at lower prices
- Companies often have to be in a loss in order to stay in the competition (ex. Intel and AMD)
The Role of Profits and Losses
Profits give incentives for companies to sell and create and stay ahead
When companies get too big, it becomes hard to manage and be creative
- This is why restaurants are always smaller than steel mill
Middle man often exists because they can handle a particular phase more effectively
The Economy of Big Companies
In big cooperations, ownership and management are often separated
A monopoly would harm the prices for consumers since they can set whatever they want
Regulation and Anti Trust Laws
Many laws and regulations do not consider the cases of substitution or multi-domains
A monopoly should not be about market shares but the ability to keep competitors out
Market and Nonmarket economy
Government institutions are usually monopolies while private ones have competitors
Enterprise has always to be alert about new upcoming technology since scarce resources always go the most efficient use
Productivity and Pay
Wages is another way to demonstrate the allocation of resources with
People with the same merit may still have different productivity because outside fees such as bribe, transportation fee etc.
Minimum Wage Laws
Minimum wage can cause higher employment, especially among unskilled workers
- It benefits those who already have a job, but harms those who are unemployed and are from outside looking in
Social Problems in Labor Markets
Poverty is not about distribution, but the poor cannot produce enough due to circumstances
Job security laws make people harder to fore and decrease the incentives for companies to hire, therefore lower the employment rate
Investment
Investment often involves the risk of not using the resources in alternative use.
People tend to overlook the risk since it is usually invisible but see the end result (factories, hotels etc.) since the product is visible
People condemn not enough pay for the factory workers while forgetting the risk the company took to build it
When natural resources become scarce, the price would rise and cause people to conserve and shift to other resources
Stocks, Bonds, and Insurance
Stocks have higher reward because people are taking higher risks for it
Bonds are fixed guaranteed return after a certain amount of time, but it also suffers the risks of inflation
Because many people do not want to deal with risks, they pick someone who is professional at dealing with risks (insurance) and pay a premium
Special Problems of Time and Risk
If the government regulates risks and prices, people will conduct in not normal risky behaviors since the government got their back
Economic speculation transfer risks to others who know how to handle them
By avoiding discrimination for different races, insurance has to charge higher premium prices to cover the risk
Politicians usually only have short-sighted for the years they have an election and not consider future consequences. Usually, their consequences are suffered by people running later
- Most citizens don't consider the correlation between policies years before and the current consequences and instead blame on current politicians
National Output
National output is hard to compare even within a nation through a span of decades because the standard of consumer good has increased
National output is hard to compare with other nations because each produces different products
- It's best to compare per capita in similar countries in a similar timeframe
Money and Banking System
Money is not wealth, it is just a way to transfer wealth or incentives to create wealth
When some crisis hits a nation, people may be worried about the national currency, and the value of gold rises
Inflation happens when the government prints too much money to pay back debt or money circulation is too fast, money loses value
Deflation happens when money printing is outpaced by the growing output, making debts harder to pay off and people less likely to purchase since price keeps going down
The Function of Government
Property rights can prevent owned resources from going extinct, ex. Lumbering companies won’t let trees go extinct. It is often those that are not owned go extinct such as air and water
Honesty plays an important role not just morally but economically
- Sometimes policies Like rent control makes honest costly
Political timeframes are usually shorter than economical timeframes
- Politicians would do things that win them votes but might hurt the economy in the long run
Government Finance
Apply tax on the rich might drive them away and therefore actually decrease the tax revenue. A good balance must be found
Borrowing money debts from other countries to pay for its development doesn’t make sense because the future generations have to pay it and a country is outpaced its ability to develop
Government not only transfer resources but reallocate them as well
- Often the reallocation of resources does not have the maximum net benefit in mind
Politicians take advantage of the fact that many things people considered desirable are expensive and therefore subsidized the supplier of the goods to make it affordable, however, people are actually paying more for it from their taxes
- Building new community centers or stadiums is more glamorous for elected officials than fixing bridges and bad roads, yet fixing roads may be more beneficial to the economy as a whole
Social Problems in the National Economy
Politician have the tendency to do something yet nothing beneficial can be done and their action might even lead to negative consequences
Unlike private companies, politicians can’t admit and correct their mistakes due to votes and pride
International Trade
Absolute advantage: a nation ability to produce Resources more cheaply than others
Comparative advantage: the ability to produce resources givens the opportunity cost
Raising tariff and restricting imports may cause revenge restrictions from other countries and therefore affect the economy as a whole
International Transfer of Wealth
International transaction and investment is not a zero-sum game. It creates wealth and opportunities for both countries
Lower wages in poorer countries are not necessarily exploitation but opportunities for both parties to grow
Immigrants are not the same. Some might contribute more wealth while some might contribute more crime
A strong currency doesn’t necessarily mean a good economy
International Disparities among countries
The economy of a country is heavily affected by geography, location, climate, culture, timing, and many factors and cause disparities between nations
- Europe has more coast and water which makes it good for trading etc
- Since each country is different in its natural resources, it’s difficult to have total equality
- Geological and cultural isolation can do serious harm to the economy
Myth about markets
Brand names allow competition for improvement in the industry and reduce uncertainty for consumer
A non-profit organization often lose competitive advantage against profit-seeking organization since they do not have the motivation to keep things going and sometimes use fear instinct to get donations
Non-economic Values
Since resources are scarce, fulfilling the needs of one party often means harm the benefits another
- We need to distinguish those who are genuinely poor and those who are young and don’t have much yet
History of Economic
There are many schools of economics even before it becomes a profession
Wealth can be for individuals or for the well-being of a nation or for humanity in general. Therefore the approaches vary
Phillips curve: inflation and unemployment have a stable and inverse relationship
The economy is about systematic change rather than individual preferences
Parting Thoughts
An economic fallacy is usually based on 3 factors
- Think of competition as zero-sum game
- Ignore competition in the market place
- Ignore the long term consequences of policy
Non zero-sum: policy are sometimes made to favor one party over the other, therefore causing an imbalance in the transaction
