Basic Economics Summary


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Originally published at: https://blog.12min.com/basic-economics-summary/

Whether we are interested in economics or not, it is part of our everyday lives.

So, why not understand the basics of it?

In today’s summary, we will explain just that – the basics.

Read on.

Who Should Read “Basic Economics”? And Why?

Readers who are not already familiar with the work of Thomas Sowell should look for the praises packed in blurbs from The Wall Street Journal, the American Enterprise Institute and The Washington Times.

Sowell offers a simple and understandable explanation of the fundamentals of economics.

However, his real goal is to explain how many of the societal catastrophes are a result of inadequate governmental politics.

We recommend “Basic Economics” for people interested in economics and politics, as well as all enthusiasts who want to understand the world we live in a bit better.

About Thomas Sowell

Thomas Sowell is an author exploring the topic of economics. He has taught economics at universities around the country and is the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution, Stanford University.

"Basic Economics Summary"

We all know that free markets enable economic growth and prosperity. They function better than any other kind of system.

But why? What makes them deliver good performance?

In economies controlled by the government, politicians decide who gets the goods which are produced, as well as how the resources are to be used.

Free markets, on the other hand, follow a more reliable guideline: prices.

If you are an economist than you know that prices do not represent the real value of the products. Instead, they reflect the scarcity and availability of resources.

Sometimes, the news is bad. When there are not as many products as people would buy, the prices are high.

However, you need to understand that it is not the prices which make products rare – they just reflect the reality.

And the reality can be expressed through the ratio of people who would like a certain product and the amount of available product.

This ratio never changes.

Other times, prices can deliver good news as well.

Consumers do not need to know about specific products to understand that there is plenty of it: prices tell them.

The best thing of all is that all of these changes are automatic.

Now, it is a fact that people buy more products when the prices are low, and fewer products when the prices are high.

Manufacturers, on the other hand, produce more goods when they believe when they can sell it at a higher price.

By the activity of these two rules, the free market determines the prices of all goods that are offered and bought.

Free fluctuating prices keep the markets in balance.

For example, when some products have high prices, more producers are drawn to those products’ markets. By producing more, they saturate the need, and prices return to their normal levels.

There are instances when governments try to regulate prices by using different types of control mechanisms. They usually set floors and ceilings on prices, but experience shows that ceilings lead to shortages and floors to surpluses.

Now that you understand that prices are mostly determined by the market and the demand and supply, we can conclude that the easiest way to increase profits is not to raise the prices, but to decrease production costs.

This is the point when economies of scale enter the picture.

However, companies can get too big. When they do, they stop functioning efficiently.

Hence, one more time we can conclude that everything is okay, as long as it is done in moderation.

Another point we need to take into consideration when we are talking about demand, are the salaries.

Salaries determine how much money consumers can spend to purchase the products and services they need.

Moreover, the consumer’s wage determines his or her place in the society. Since one’s societal status is a reflection of one’s salary, wages are the core of many debates.

However, much of these debates that are going on are misleading, since they overlook the fact that when some people earn more, it does not mean that others are making less.

Instead, we should look at the whole picture and realize that it is expanding. The price mechanisms work for each product, and they work for human labor as well.

The prices that society puts on labor, which we otherwise call salaries, are just reflecting the current reality. Some jobs are getting obsolete, while others notice an increased demand.

So, instead of focusing on the things we cannot change, we need to listen more to the market, since it is never wrong.

That way, we can learn how to adapt quicker – and be happier as a result.

Key Lessons from “Basic Economics”

1. The Change of the Market 2. The National Economy 3. International Trade

The Change of the Market

Whenever people discuss salaries, they make it sound like when one group of people notices an increased wealth, another group of people gets poorer.

However, you must understand that that is not the case.

The world is changing, and the new technologies create a new demand for a new type of workers. As a result, these people who meet this demand have higher wages, than those whose jobs have become obsolete.

Trying to “save” the jobs that are no longer needed and valued is doing no good.

The National Economy

Whenever people start talking about the national economy, they forget that it is much more complicated than just the basic measurements like the Gross Domestic Product and Gross National Product.

Even in these basic cases, economists cannot entirely agree.

This complexity makes it hard for governments to create a policy. And it is not rare that they use the wrong approach.

International Trade

International trade enables products and services to find a way to decrease the production costs. Some believe that trade benefits only the consumers, while it causes only damage to those who produce products domestically.

It is not logical, however, to protect less efficient producers, with higher production costs, just to “save” jobs. In the end, the customers are workers as well, who will pay more for products with much worse quality.

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“Basic Economics” Quotes

[bctt tweet="Fights over which individuals and groups get how big a slice of the pie create the kinds of emotion and controversy on which the media and politicians thrive." username="get12min"]

[bctt tweet=“Monopoly is the enemy of efficiency, whether under capitalism or socialism.” username=“get12min”]

[bctt tweet=“Treating the cause of higher prices and higher interest rates in low-income neighborhoods as being personal greed and trying to remedy it by imposing price controls and interest-rate ceilings only ensures that even less will be supplied to low-income neighborhoods.” username=“get12min”]

[bctt tweet=“The Hippocratic Oath taken by doctors begins: ‘First, do no harm.’ Understanding the distinction between systemic causation and intentional causation is one way to do less harm with economic policies.” username=“get12min”]

[bctt tweet=“It does not matter that a law or policy proclaims its goal to be ‘affordable housing,’ ‘fair trade,’ or ‘a living wage.’ What matters is what incentives are created by the specifi cs of these laws and how people react to such incentives.” username=“get12min”]

Our Critical Review

It is no wonder that “Basic Economics” (and Thomas Sowell) are so popular. The simplicity with which they explain complex ideas is astonishing.