Czytaj książkę: «Fascinating economy»

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ISBN 978-5-0051-9933-1

Создано в интеллектуальной издательской системе Ridero

Chapter 1

You may never have thought of it this way, but in some ways, economics is like a game. Games have players and rules. Games involve decisions and actions, and they always have a goal. The same is true about economics.

Still, there are some differences. In games, you typically get to decide whether you want to play. But no one ever asks you if you want to play the game of economics. In this game, you play whether you want to or not. That is because the game of economics is going on all the time. It is played at every second of every day in all parts of the world.

Since you are already playing the game of economics, you should know what kind of game it is and learn the rules. That way you can play it as well as possible.

Introduction

The study of economics is important because the economy – global, national, local, and personal – effects what you do every day. Economics influences the work you do, where you live, what you eat, how you dress, whether there is gas available for your car, and more. Economics also influences government policy and international relations including wars.

Understanding the basics of economics will help you make good personal financial choices and will help you make wise environmental and political decisions, as well.

We will start by learning that economics is not a collection of «other» people but a complex system in which every individual has roles and goals.

We will also explain the four fundamental questions of economics and how, depending on the way these questions are answered, the game changes. Very soon, you will be well on your way to understanding what the economy is all about and how it relates to your everyday life.

Some games are similar to each other. Take basketball and soccer, for instance. They both have two sides consisting of a set number of players. There are specific ways to score points. There is a winner at the end of a set amount of time. So, although basketball and soccer are different games, they have much in common.

But what about checkers and soccer? Maybe there are one or two similarities, but the ways to win are very different. In soccer, the team that scores more points wins. In checkers, a player who takes all his or her opponent’s pieces is the winner.

Is there anything that is the same in every kind of game?

Playing by the Rules

Are there any games that allow players to do whatever they want? No. All games have rules. There are important rules in economics, too.

In economics, the rules are usually laws. Laws are rules that define what is and is not allowed. For example, you cannot steal from others. That is a law, and it is also one of the rules of economics. Another law is that exchanges must be voluntary. Consumers cannot be forced to buy things. Voluntary exchange is a rule of economics, and it is also a law.

Rules and Properties

Games require that people play by certain rules, but that is not all there is to games. Games are fun precisely because there is more to them than just the rules.

In tag, we all know to avoid the person who is «it.» This is not a rule. There is no penalty if we do not follow it. But even though it is not a rule, it has an effect on how the game is played.

Anything that is not a rule but still affects how a game is played is called a property. The properties of a game follow naturally from the rules, but they also add something to the game that goes beyond the rules. This is how economics works.

Economic Properties

Like all games, economics has properties in addition to the rules. These properties affect how the game is played.

Remember: One of the rules of economics is «no stealing.» If you want to make an exchange, the buyer and seller have to agree on the price and then make the exchange. The rule, however, does not tell you how much the price will be. It could be any amount.

This is not true for all games. In Monopoly, prices are set by the rules. A railroad costs $200. But in economics, unless there is a specific law that sets the price, the amount is up to the buyer and seller.

How do prices get set if the rules do not set them? One of the properties of economics helps: Buy low, sell high.

Why is this a property of economics? The buyer is giving up something good: money. So, the buyer usually wants to pay as little as possible. The seller, on the other hand, wants to get as much money as possible. Buyers want lower prices, and sellers want higher prices. Hence, buy low, sell high.

While almost all buyers and sellers play the game like this, it is not a rule. You do not go to jail if you sell something for a lower price than you could have. You are not a criminal if you pay more for something than you have to.

In economics, there are a lot of properties. Sometimes, economists call them «laws,» but they are not laws like «no stealing» is a law. They are properties, like «buy low, sell high.»

One of these properties is called «The Law of Supply and Demand.» Despite the name, «The Law of Supply and Demand» is actually a property, not a law. This property can be complicated, but one part of it states that when the supply of something is low and the demand is high, then the price will be high. Why? It is related to the «buy low, sell high» property.

Let us say someone has a rare object, like one of the few original copies of the Declaration of Independence. What if you wanted to buy that rare object? You cannot steal it. That is a rule. And as a buyer, you want to pay as little as possible.

So, you offer a low price. But there are other buyers, too. If you want to buy this rare copy of the Declaration of Independence, you have to compete with the other buyers. Someone else also wants it badly, so they offer more than you. Now, you cannot go somewhere else to buy because it is rare. If you want it, you have to offer more. So, you do. But the other person offers more than you again. The price is going higher and higher. Why? Because of the «Law of Supply and Demand.»

No one is forced to obey this «law.» There is no Supply-and-Demand Police making sure this happens, but it happens all the time. Economists call this «The Law of Supply and Demand» instead of «The Property of Supply and Demand» because nearly everyone obeys it even though it is not actually a rule.

Outcomes

There is another feature common to all games. Every game has an outcome. Outcomes are the real heart of any game.

Outcomes also take place throughout the playing of a game. They result from plays or moves, but the idea is the same – one thing results in another.

Economics has many outcomes. A sale is a common example. When someone buys something, and the item and money change hands, that is an outcome. Later, we will take a look at other economic outcomes.

And the Winner Is – No One?

So far, we have seen that all games have certain features:

• Players

• Rules

• Properties

• Outcomes

It seems as if there is one more thing that is common to all games: a winner. Does an activity need a winner to be considered a game? Not necessarily.

Consider the game of tag. The players in tag are either «it» or «not it.» Which one is the winner? Do you win if you are not it? No, you are just one of the players who are not it. And being it does not make you the loser. You are just it until you tag someone else.

Tag has no winner because there is no rule that states when the game has to end. A game of tag does not end when somebody wins. It lasts until all the players decide to stop playing. Technically, a game of tag could go on forever. The same is true for economics.

Winners often get medals or trophies to show that they have won.

The Features of Games

To study economics, you need to understand how the various features of the game work. This means knowing about the different roles of the players and the rules they have to obey. It also means knowing about outcomes and understanding the properties that affect the way the game is played.

Economics is like a game. It has many of the attributes that all games have in common: players, rules, properties, and outcomes. But what kind of game is it? What do the players do?

Surprisingly, the answer is simple: Economics is a game in which players buy and sell goods and services. It has rules, properties, and outcomes that limit and direct how all that buying and selling takes place.

Goods and Services

Objects that fulfill someone’s needs and wants are called goods. You need food. A sandwich is a good that fulfills that need. Every time you buy a sandwich, you are a player in the game of economics.

What about things you want? Do you want to surf the Internet? A computer fulfills that want. A computer is a good. A DVD fulfills the want for entertainment, so it is a good, too. Just about every object fulfills some need or want.

All foods are goods, even if they do not taste good.

Sometimes our wants and needs cannot be fulfilled by goods, or objects. In that case, we might require a service. Services are actions or other types of assistance that customers need and want.

For example, when you need a trim, or you want to change your style, you get a haircut. But a haircut it is not an object. It is a service. Someone with a specific skill works to give you the trim you need or the style you want. Your stylist performs an action, or a service. However, he or she makes use of goods, such as scissors and a comb, to perform the service.

Giving someone a haircut is a service that requires goods like scissors and a comb.

Is Economics About Everything?

Not everything is a good or a service. For instance, when you pay someone to mow your lawn, you are buying a service. But when you mow your own lawn, you are just making the grass shorter.

In other words, an action that you perform for your own benefit is not a service. If you read a book, you are not doing anybody a service. You may be relaxing or learning. These are good things, but they are not services because you do them for yourself.

On the other hand, if you read a book out loud to somebody else, you are performing a service. A service is still a service even if someone offers it for free, but services rendered generally involve the exchange of money. The exchange might also be made using the barter system.

What Is Production?

Goods and services need to be made. This is known as production. Production is one of the things certain players in the game of economics do. A player who does this is known as a producer.

Production does not just happen. There are required to produce goods and services. Something needed for production is called a resource.

For example, you need flour to make a cake. The cake is a good, and the flour is a resource. Where did the flour come from? Originally, it came from a wheat field. So, the wheat field is a resource, too.

What It Takes to Make a Birthday Cake?

Let us say you want to make a birthday cake for someone. That is a service. It takes action to make a cake, and this action is valued. And it produces a good – a birthday cake. One of the main services in any economy is making goods. This service, called production, requires all kinds of resources. To make a cake, you need a kitchen. A kitchen is a resource.

Of course, you also need the stuff you make the good out of. If you are making a cake, you need flour and eggs and sugar and everything else in the recipe. These are some of the resources you need to make the cake. But you also need bowls, spoons, measuring cups, and a pan. These are resources, too. And finally, you need time and knowledge. In the end, you will put in a lot of effort. All of these things – time, knowledge, and effort – are resources.

Even a genie, who can make a birthday cake out of thin air, has to do something. Maybe the only action they have to take is saying, «Abracadabra.» But that still takes up the genie’s time and requires genie powers. Time and genie powers are resources. Even a genie needs some resources to produce a birthday cake.

Allocation

Resources are essential for production. But very few resources are easily available and ready to be used. Resources need to be found and set aside to produce specific goods. That is known as allocation.

Allocation involves making decisions. If you have a bag of flour, you have to decide whether you want to make cake or bread. That is a decision about the allocation of this resource.

Economics is a game of constant decision making. A lot of these decisions have to do with allocation.

Making decisions about how to allocate resources is part of many games, not just economics. A softball coach allocates players by deciding who plays what position and making the batting order.

What will you do with your flour?

Distribution and Consumption

Economics is about the allocation of resources to produce goods, but what do we do with these goods once they are produced? We use them, of course.

Using a good or a service is known as consumption. In the game of economics, people consume goods that are produced. When a player uses a good or service, he or she is known as a consumer.

Goods are rarely produced where they are used. If you have a piece of clothing with a label that says «Made in China,» it had to travel a long way to get to you.

Moving goods to consumers is known as distribution. Producers have to distribute goods to the people who want to consume them. Resources get distributed, too.

Perhaps you want to bake a friend a birthday cake, so you buy a bag of flour. Think of all the distribution the flour has to go through to get to you:

It starts out as wheat in a field far away. After harvest, it is sent to a flour mill. This takes resources, such as a truck, gasoline, and a driver. When the milled flour gets loaded onto another truck to be shipped to a warehouse, it takes more resources. From the warehouse, the flour is loaded onto more delivery trucks and taken to the store, requiring still more resources. Finally, the bag of flour has arrived at the store for you to buy. You become the final stage of distribution when you take the flour from the store to your kitchen.

Producing goods takes resources, and so does distributing them. You need trucks and trains and ships, and they need gas and tires and so on. These resources have to be allocated, as well. So, in addition to the allocation of resources for producing goods and services, economics is also about allocating resources for distribution.

Many goods that we use in the United States are made in other countries.

So, what is Economics About, Again?

You have seen that economics is about producing goods and services for people to consume. You have also seen that production requires resources, as well as decisions about the allocation of these resources. Finally, you saw that goods and resources need to be distributed from where they are produced to where they are used. If you put all of this together, you should have a good idea of what the game of economics is about.

Goals are a big part of economics. They help us avoid uncertainty. Goals also help us make crucial decisions.

Imagine you are playing softball. You know the rules, but you still have many decisions to make. Should you pitch a curveball or a fastball? Should you swing at a ball, or wait for a better pitch? Should you steal second base, or wait on first? Without a goal, it would be hard to answer these questions.

If you have a goal, the answers are obvious. If your goal is to win the game, you know what to do – throw your best pitch, try hard to hit the ball, and steal as many bases as you can without getting thrown out. These are the things that players need to do to win.

Economic Goals

In the game of economics, you need goals to avoid confusion and to know what to do with yourself. Different people have different goals, however. You may think the only goal in economics is to make money, but there are many different goals in economics.

Different economic goals affect how people approach making decisions in the game of economics. If your goal is efficiency, it is likely that you are going to allocate resources for the production and distribution of goods and services differently than a person whose goal is security or freedom.

Read through the list to see the different economic goals that people pursue. Each will be defined in the coming pages.

Goals for Playing the Game of Economics

1. Efficiency

2. Growth

3. Security

4. Equity

5. Freedom

Efficiency, Growth, and Security

The first three economic goals – efficiency, growth, and security – are goals that make a lot of sense. But that does not mean that everyone agrees these are the proper goals to pursue when deciding how to allocate resources.

• Efficiency refers to the use of resources in a manner that gets as much out of them as possible. Efficiency is a goal producer have, to provide more goods and services for society without using more resources.

• Growth means increasing the size, number, or output of goods or services. It makes sense to want growth, because in the economy, growth means more goods, more jobs, and more money.

• Security is protection against risk or danger. Because life is uncertain and bad things can happen, the economic goal of security encourages us to lessen the dangers we face.

It is Not Fair

Another economic goal is equity. Equity means fairness; It is the notion that everyone should be treated equally. If a game is not played fairly, then the outcome will be unfair. When a game is fair, it has equity.

Still, equity can be a tricky concept. Different people might have different ideas about what is fair. Also, it is not always clear what is fair in a particular situation. Is it fair that one person has a lot while someone else has nothing?

Questions of fairness are not always easy to answer. Maybe the person with less does not deserve more. Consider the fable of the ant and the grasshopper.

The Ant and the Grasshopper

The ant worked hard all summer, building a house, and stocking up on supplies for the winter. The grasshopper danced and played the summer away. When the winter came, the ant had plenty of food to survive. The grasshopper had no food and died of starvation.

What is Fair?

Competing ideas about what is fair is a common problem when pursuing the goal of equity. This makes equity a problematic goal for economics. Although equity is a good thing to pursue, it is rarely obvious how to achieve it.

At the end of the story on the previous page, the grasshopper had nothing, and the ant had plenty. Is that fair? It depends on your perspective.

View the Ant and the Grasshopper to hear each side of the story, from the ant’s industriousness to the grasshopper’s cluelessness.

I’m sad that the grasshopper did not know what to do to prepare for winter, but I do not think it is fair to take food from me to help keep him alive. That would be rewarding the grasshopper for his lack of foresight and punishing me for my industriousness. It is not fair to punish someone for doing the right thing.

I do not think it is fair that I should have to starve. I have never seen the winter before, so I did not know what would happen. No one told me I would have to build a house and gather supplies. Do I deserve to die in the cold because I did not know about the harsh conditions I would have to face? Since I did not know, it is not fair to let me die. Would not it be fair to take some of the ant’s food to help me out?

Let Freedom Ring

Another important economic goal is freedom. Just like equity, however, freedom is a tricky concept. It can mean different things to different people.

Freedom in economics is defined as the absence of an obstacle or constraint. But what is the obstacle or constraint, and how can it be removed? Different obstacles and constraints present themselves to different people in innumerable situations.

The Statue of Liberty represents freedom, but not everyone defines freedom the same way.

The Two Faces of Freedom

It is normal for people to have different ideas about freedom. Freedom is the absence of an obstacle, but the obstacles people face are not always the same, so their ideas about freedom can be very different.

For a teenager, one obstacle might be rules set by one’s parents. For a parent, an obstacle to freedom might be his or her struggle to earn money for the family.

In the game of economics, different ideas about freedom lead to different ways of looking at the allocation of resources. If you think of freedom in terms of people making their own choices, you might believe that producers should get to decide how goods and services are produced without any constraints. But if you think of freedom as the absence of economic struggle and need, you might believe the government should tell the producers what to make and how much to charge so that everyone’s basic needs can be met. These different views of economic freedom lead to different ideas about how an economy should function.

Conflict Over Goals

With goals that are sometimes incompatible, economics can lead to conflict. Do you want efficiency, growth, security, equity, freedom, or some combination? You need to have some goals, but someone else will inevitably have different goals. No matter what you want, there are bound to be other people who want something else. This can create conflict.

This means that there is more to economics than the allocation of resources for the production and distribution of goods and services. Economics is also about setting goals that affect how these allocation decisions are made.

We All Need Goals

You cannot play a game without goals. How else can you make important decisions? But people often disagree about the goals they have for playing a game.

Things are no different in the game of economics. The goals people have for the economy might be different. They might even be incompatible sometimes. Nevertheless, you need goals to play this or any game.

Humans have wants and needs that are often greater than what is available. Thus, people face scarcity as a basic fact of life.

You might think that there are plenty of goods and services available to you. But what would happen if the world stopped producing the thing you need or want? Eventually, the supply would run out. When goods and services become hard to find, it leads to scarcity.

You saw before that economics is about the allocation of resources for the production and distribution of goods and services. The problem of scarcity is the reason that this is necessary. If there were plenty of goods and services to go around, no one would need to make allocation decisions. Scarcity is yet another reason why everyone plays economics.

People can face shortages of important goods.

What Is to Be Produced?

Because scarcity is a fact of life, people have to work to try to increase supply in order to meet demand. Different people want different goods and services. If there were unlimited resources, people everywhere could have what they wanted.

Since resources are not unlimited everyone has to make tough decisions about what to do with the resources available. One big question that needs to be addressed in any economy is this: What is to be produced?

Because of scarcity, deciding what is to be produced involves also deciding what not to produce.

Remember your bag of flour? You can allocate the flour for making bread for sandwiches. But what if it is your friend’s birthday? If you use the flour for bread, you cannot make a birthday cake. Before you start producing something, you have to decide what to produce.

Allocating resources often involves deciding to produce one thing instead of another.

Getting Organized

Once it is decided what will be produced, there are still more questions to answer. It takes organization to produce and distribute goods and services.

There are all kinds of ways to organize production. There could be factories, offices of varying sizes, or people working at home. There could be different people who specialize in different jobs, or everyone could take turns doing all the different jobs. Production might go on 24 hours a day, seven days a week, or it could be kept to certain working hours.

This is just a short list of the different options. There are many methods of organizing production. How do people decide on the best way to organize production? The economic goals people have will affect how this question is answered. This can again lead to conflict.

The goal of efficiency requires a form of organization that has as little waste as possible. One good way of eliminating waste is to have different workers specialize in different jobs. But if equity is the goal, specialization might not be the way to go. When you divide up production into different tasks, some of the tasks might be harder than others. Equity could mean giving each of these workers a chance to do the easier, cleaner job. But what if freedom is your main economic goal? In this case, production would have to be organized to give workers different choices, and workers would have the freedom to decide what jobs to take.

Who Gets What and Where?

The questions do not stop once decisions about production have been made. You saw that goods often need to be transported from where they are made to where they are used. This is distribution. There is more to distribution than just transportation, however.

Getting goods to the people who use them means making decisions about who gets what. Because of scarcity, some people will not always get what they want. So, the game of economics involves answering a third question: How are goods and services to be distributed?

In other words, how shall we decide who gets what?

If you want equity or security, producers probably need to be told what to produce. Their choices could end up being incompatible with those goals. The government can make sure that everyone is secure, or that goods and services are distributed fairly. But when the government decides how goods and services are distributed, that takes away free choice. Producers are told what to produce and where to send it. A different way to organize distribution is not to organize it at all, to leave it up to people’s free choices to decide what gets produced and how goods and services are distributed. This might result in an unfair distribution, or one that leaves some people insecure, but it would not involve the government telling people what to do.

A Variety of Resources

Organizing an economic system involves making decisions about what is going to be produced and how it should be distributed. That takes care of most of the game of economics.

Still, there is one final question to be answered: What is the most effective allocation of resources?

There are all kinds of resources that go into production and distribution. Remember all the resources needed to make a birthday cake? There are a lot of them: an oven, a timer, ingredients, utensils, time, knowledge, and effort.

Production and distribution usually involve a long list with very different types of resources. The flour needed for the batter is a different type of resource than the oven needed to bake the batter, or the time needed for the whole process.

Deciding how to allocate resources means you have to pay attention to where the different resources come from.

It takes many different resources to make a cake.

The Factors of Production

The types of resources needed for production are known as the factors of production. There are three different factors of production: land (in economics, the term land refers to any natural resource on, under, or over the land), labor, and capital.

Land is useful for making things. Fields are used to grow food, and water or wind can be used to produce energy. And land is not just what you see on the surface of the Earth. It also includes things that can be found underground. Things like coal and iron – even steam and water come from underground. These natural resources are all useful for producing things.

Some goods spring directly from the Earth, but it takes some work on the part of humans to make all goods. Even a wild blackberry has to be picked by someone before it can be eaten. All production requires a human touch. Labor is the work that humans do to take natural resources and turn them into useful products. Sometimes the labor is physical. Sometimes the labor involves coming up with ideas. Whatever form labor takes, these human resources are just as necessary as natural resources.

Capital is the final type of resource needed for production. Capital resources are goods that have been produced by humans to make more goods. Capital includes machines like bulldozers and cement trucks. It also includes buildings like factories and other structures such as dams and oil wells.

The term capital also refers to the money used to pay for other resources. Like other forms of capital, money has been created by humans to help with the process of production.

You can see that playing the game of economics involves answering a lot of different questions. There are four fundamental questions faced by people in all economic systems.

The way these four questions are answered tells you a lot about the way decisions are made in different economic systems. When these questions are answered in different ways, you end up playing different games.

Another major element in economics is the concept of supply and demand. The fundamentals of supply and demand change depending on what type of economic system you are dealing with, however, so this concept cannot be included in the fundamental questions of economics, in general.

The Four Fundamental Questions

1. What is to be produced?

2. How is production to be organized?

3. How are goods and services to be distributed?

4. What is the most effective allocation of resources?

You have seen that there are different economic goals that can be pursued: efficiency, growth, security, equity, and freedom. It can be difficult to decide among them.