Economic 101

• Economics is the study of how individuals, institutions, and society choose to deal with the condition of scarcity
• People are constantly engaged in the struggle to survive, make ends meet, and thrive given the relative scarcity they face
• Economics has been around for a long time, with philosophers studying scarcity and choice before it was named economics
• Adam Smith, considered the father of modern economics, was initially known as a moral philosopher
• Economists study the decision-making of individuals, institutions, and nations, developing theories to explain behavior and testing them against real-world data
• Microeconomics focuses on the decision-making of individuals and businesses, primarily concerned with markets for goods, services, and resources
• Markets are central to understanding microeconomics, with a focus on efficiency, information access, and market participants
• Macroeconomics studies how entire nations deal with scarcity, analyzing systems for the allocation of goods and services
• Macroeconomists ask questions about measuring the economy, unemployment, the impact of money changes, government policies, and economic growth
• Scarcity is the universal condition due to insufficient time, money, or resources to satisfy everyone's needs or wants
• Resources, known as factors of production, include land, labor, capital, and entrepreneurship
• Land encompasses all natural resources, divided into renewable and nonrenewable resources, with rent as the payment for land
• Labor includes unskilled, skilled, and professional workers, each category paid wages based on their skills and abilities
• Capital refers to tools, factories, and equipment used in production, not money, and is the product of investment
• Allocative efficiency occurs when marginal benefit equals marginal cost, leading to the greatest benefit for society
• Whenever a factor of production is used, a cost is incurred due to the limited nature of resources, leading to trade-offs and opportunity costs
• When using resources like land, labor, capital, or entrepreneurship for one purpose, you lose the ability to use them for another purpose, known as trade-offs
• Opportunity cost is the next best alternative use of a resource
• Implicit costs, also known as opportunity costs, are more difficult to assess compared to explicit costs like labor and raw materials
• Marginal benefit is the benefit of a decision, while marginal cost is what it costs to produce or consume one extra unit of a product
• Economists make assumptions that include:

  1. Nothing else changes (ceteris paribus assumption)

  2. People are rational and behave rationally

  3. People are self-interested
• Mercantilism was an early theory of trade where countries aimed to export more than import, leading to competition and distortions in trade
• Adam Smith's insights led to the end of mercantilism, advocating for free trade and specialization in what a country produces best
• Comparative advantage theory states that countries should specialize in what they produce at the lowest opportunity cost and trade for what they need
• Absolute advantage exists when a country can produce more of a good or service than another, while comparative advantage exists when a country can produce a good at a lower opportunity cost than another
• Comparative advantage in brain surgery: Art only sacrifices half of a hit song for every brain surgery, while Paul sacrifices a whole hit song for the same surgery
• Specialization recommendation: Art should specialize in brain surgery and Paul in songwriting to maximize their comparative advantages
• Efficiency vs. comparative advantage: Efficiency doesn't always determine who should do a task; consider the opportunity cost and comparative advantage
• Theory of comparative advantage: Helps understand how economies change; e.g., the shift from low-skilled to high-skilled economies in the US over 60 years
• Example of comparative advantage: Comparing American and Bangladeshi students in T-shirt production to understand opportunity cost
• International trade benefits: Free trade creates wealth through mutual benefit; example of wealth creation through voluntary free trade
• History of international trade agreements: From bilateral agreements to GATT and then the WTO to reduce trade barriers and promote free trade
• Benefits of free international trade: Increased living standards, economic growth, and wealth creation among member countries
• Arguments against international trade: Concerns about environmental impact, labor rights, human rights, and loss of national sovereignty
• Trade barriers: Tariffs, quotas, and embargoes are tools countries use to regulate international trade for various reasons
• Tariffs: Taxes on trade used to raise revenue or protect domestic industries; downsides include inefficiency and reduced tax revenue
• Quotas: Limits on trade to restrict imports; can lead to higher prices, lower quality, smuggling, and manipulation by foreign firms
• Embargoes: Bans on trade with another country to punish offenses; e.g., the US embargo against Cuba
• Economic systems: Traditional, command, and market economies answer basic economic questions of what to produce, how to produce, and whom to produce for
• History of economic systems: Evolution from traditional to command to market economies, influenced by thinkers like Adam Smith