Basic Economics summary

The basic principles of economics are universal. They operate in feudal, socialist, and capitalist societies, and they apply to all peoples, cultures, and governments. 

These principles are unchanging. Policies that caused the price of grain to rise in ancient Rome will have the same impact if you implement them in today’s India or European Union.  

Before we get into (some of) these principles, we need to begin by defining our terms. First off: what is an economy, anyway? One answer goes something like this: an economy is a system for producing and distributing the goods and services we require in everyday life. 

That’s a good start – but there’s something missing. Per this definition, the Garden of Eden, which, among other things, was a system for distributing goods and services, was an economy. But few economists would classify it that way because those goods and services were abundantly available: there was as much of everything as anyone desired. Without scarcity, there’s no need to economize – and thus no economics. Put differently, economics studies the choices societies make about the use of scarce resources that have alternative uses. 

Let’s break that down. Scarcity means that there isn’t enough of everything to satisfy everyone’s needs completely. What people want adds up to more than there is. In short, some needs will go unmet. The impossibility of satisfying all wants and desires is a constant in human history. At this level, feudal, socialist, and capitalist societies are just different institutional ways of thinking about the trade-offs that must be made due to scarcity.

That brings us to production. Economics doesn’t just deal with existing goods and services – it’s also more fundamentally about producing new output from scarce resources, or inputs.

As we’ve said, scarce resources have alternative uses. Water can be used to produce ice or steam, but it can also be used to cool power plants or dye jeans. If you have petroleum, you can produce gasoline and heating oil – or you can make plastics or asphalt or Vaseline. You can turn iron ore into paper clips, automobile parts, or the frameworks for skyscrapers. 

Every economy, then, has to decide how much of each resource to use for which purpose. These decisions – rather than the existence of natural resources – ultimately determine a country’s standard of living. There are, after all, resource-rich countries with relatively low standards of living, and resource-poor countries with high standards of living. The value of natural resources per capita in Uruguay, for example, is several times higher than in Japan, but real income per capita in Japan is more than double that of Uruguay.  

The difference-maker here is efficiency in production – that is, the rate at which inputs are turned into output. Efficient economies maximize output by minimizing waste and getting the most out of scarce resources; inefficient economies don’t. If you want to visualize this process, it helps to think about real things – the iron ore, wood, and petroleum that go into the production process rather than the cars, furniture, and gasoline that come out at the other end. Although economics is often conflated with money, currencies and cash are secondary. Money is an artificial device to get real things done. It’s the volume of goods and services, as well as the efficiency of their production, that determine how rich or poor a country is.