*This is a paper in progress. It is not intended to be a comprehensive review of economics but a quick and easy read summarizing some of the most basic components of the field off the top of the authors head. Never ending review and additions will be added to this paper.*
First Principle of Economics
The first principle of Economics is to assume that all humans are rational beings.
To be rational is defined as being self-interested.
To be self-interested is to make decisions on the margin based on the amount of cost to benefit that marginal decision will bring; and to make decisions that will only bring more personal benefit than the opportunity cost of the decision. The opportunity cost is the cost associated with the loss of benefit if a different decision had been made.
In other words, to be self-interested is to make the best possible personal decision in each given situation based on the personal cost or the personal
benefit. one’s personal needs, beliefs, desires, wants, hopes, experiences, etc. or in other words, self-interest would be based on a perceived ability to
increase one’s personal satisfaction whether though gratification, better standard of living, additional power, peace, security, etc.
This means that economics assumes that no one would spend a $100 dollars for food they hate and is difficult to obtain when food they love is available for $1 and is food they love. In the world of economics, this would never happen.
Economic benefit is measured in something called Utility with the units of utility being called Utils. Often benefit is measured on the margin, or by how much more utility is derived from doing or receiving the object one more time. Many activities in life have what is called diminishing marginal return or less benefit and more cost with every additional time engaging in the activity.
Economic cost is more than the dollar cost of an action, it is the also measured in the loss of time, leisure, and benefit that could be derived from other activities. This means that something has more cost if another activity with high utility is forgone to do the chosen activity.
Because individuals are rational, incentives matter.
An incentive is a policy, gift, bonus, reward, option, etc. that plays to one’s self-interest in order to influence behavior or outcomes. An incentive can
be employed at the individual level by rewarding oneself for doing an undesirable activity which would make something that is not in ones interest into one that is because the reward brings enough utility to override the negative utility of doing that same activity. Incentives can also be employed on a national scale to get the entire population to act in a pre-determined way.
Disincentives are the opposite of incentives, increasing the cost associated with an activity.
In the public sector, or government, an incentive is called a subsidy and a disincentive is called a tax. In the private sector, incentives are often
called sales or the lowering of prices while disincentives are making it more costly to go to another brand or adding fees.
The next major principle of economics is that wealth is built or created from production.
Material is strictly defined as something that can be used to create a good. A good is defined as something that the possession of brings utility to an
The conversion of material into a good is called production.
The personal value of production is relevant depending on how high the utility derived is from the good itself or what goods can be traded for. Therefore, production brings utility to the producer.
In economics, units of production are often called widgets.
By producing widgets, we gain in utility, as widgets are something that bring benefit.
Increasing the ability to produce either through innovation, advancement in technology, an increase in supply decreasing in cost, or increasing demand increasing benefit is what increases wealth or overall utility.
Specialization is the greatest form of increasing productivity.
Because Specialization increases productivity, trade benefits everyone. Trade allows individuals or businesses to become more specialized, allowing for more productivity, and sharing in more widgets and utilities with others who have also been able to be more specialized.
Again, Free Trade Benefits Everyone!
In order to make trade more efficient, a medium of exchange is necessary. Trading Raw goods or finished products is difficult due to a lack of exact
measures. A medium of exchange, called money, is a powerful tool to allow for more precise value.
Value is determined through scarcity.
The more scarce an item the more value it has. The more scarce an item and the more needed an item is, even more value is attached to that item. For
example, there is a finite amount of the element “gold” in the world. This finite amount makes gold more scarce and therefore an inherently valuable good even though it is actually not needed as an item for any other service. Water is the most needed substance on earth. In places where water is scarce, it is the most valuable good on the planet. Because water is not scarce, it has incredibly less value than gold per ounce.
Supply and Demand
Value is also valued in terms of price. Price is determined by the supply and demand of a good. The more supply is available on the market, the less value it has because it is less scarce. If supply stays the same, but demand for the item goes up, then the cost or price goes up due to increased scarcity. Supply and demand tend to find what is called an equilibrium.
In a free and open market void of force and coercion and free for anyone or any business to enter it, a natural equilibrium is formed and the price of an item or good tends to be at its lowest point.
In scenarios where there is not free or open entry to the market, such as one company owning the only diamond mines in the world, withholding the true available supply happens in order to increase the price and earn more income.
When one company controls a market and there is no or little entry to the market allowed, this is called a monopoly.
Monopolies, because they are still rational and are going to try and minimize cost and maximize benefit, restrict supply, pay less wages, have worse
quality and quality control.
An Oligopoly is when only a few companies control a market. In order to act more like a monopoly, oligopolies form what is called a cartel.
A cartel solely exists to restrict supply in order to set prices. Because supply is restricted, there is a natural incentive to cheat the cartel and sell
more than the assigned quota, this is why cartels naturally do not exist without the use of force or governments to use force to keep the cartel in line.
A union is a free market solution to a monopoly in order to force a monopoly to have an incentive to improve worker condition.
Unions cannot exist outside of a monopoly or in a free market without the use of government. With the use of governments, Unions create a less favorable working condition.