Disclaimer: The book, “Basic Economics: A Common Sense Guide to the Economy,” by Thomas Sowell, is being used as a reference and textbook of sorts for this crash course in economics. Almost all content will be paraphrased from the book and simplified so as to provide a shorter easier to read summary of basic economics. All direct quotes will be in quotations. I do not own any rights to the book itself, and I encourage anyone interested in a more detailed explanation of economics to buy the book.
Economics is simple. It’s a science, just like physics or chemistry, that has laws that govern every system we can use to improve or decrease our standard of living.
But what EXACTLY is it?
Economics, according to the distinguished British economist Lionel Robbins, is “the study of the use of scarce resources which have alternative uses.” What does it mean when a resource is scarce? It means that there is a limited supply and the amount that people want adds up to more than there is. This is basically supply and demand. Different types of economies deal with supply and demand in different ways, some better than others.
What else is an economy concerned with? “Economics is not just about dealing with the existing output of goods and services as consumers. It is also, and more fundamentally, about producing that output from scarce resources in the first place – turning inputs into outputs.” Basically, economics studies the consequences involved with making decisions about how we use land, labor, and capital and any other scarce resources used in producing output. The amount of output in turn determines the standard of living in that specific economy/country.
The alternative uses of said scarce resources are also important to economics. For example, a scarce resource such as milk has many uses such as butter, ice cream, yogurt, cream, etc.. The question then becomes, how much of the resource should be devoted to each of its many uses? This question applies to all other resources with alternative uses as well, not just milk. Every economy deals with this question in a different way, and some do it more efficiently than others. The question is, what types of governments and economic systems do it the most efficiently?
Basically, economics comes down to supply and demand of resources, the allocation of those resources, how that allocation is determined, and how it affects the standard of living in a country.
This first “lesson” is very short because economics is simple. It is a science, but a simple one that’s easy to understand at its core. The details can be a little complex, but at heart it all reverts back to the allocation of resources and the consequences of that certain allocation.
The next lesson, coming on Friday, will be on “The Role of Prices.” In it, we will take a look at the overall role of prices in an economy, how they affect economic decision making, how they affect the allocation of resources, and how they affect the cost of said resources.
Congratulations on starting your crash course in Understanding Economics.