Basic Economics
I recently read the book, Basic Economics by Thomas Sowell.
This is a great book on economics I think everyone should read. The logic of economics is important to guide understanding of the World around us and basic human behavior.
Here are some concepts he describes (often using entertaining examples):
Prices - Set by Supply and Demand
- Prices convey information - they provide insight into the availability of resources or scarcity. Their change can suggest insight into the state of things (maybe there is more now or less).
- Price largely determines the allocation of resources
- Price does not cause scarcity but a reflection of the scarcity
- Price are used for transactions and also provides incentives for people to utilize those resources
- Price guides producers to make things consumers want
- Wages also demonstrate the allocation of resources
Scarcity vs Shortages
- Scarcity is when there aren't enough resources.
- Shortage is a price phenomenon
- When the price is artificially controlled (like with rent controls), demand is high and producers can get away with lower quality items. Price controls bring prices up by decreasing supply: examples provided in the book include New York City rent control and 1970s price control on gasoline
Production and price regulation
- When prices are high: Producers are more likely to produce more
- When prices are low: Producers are more likely to produce less
- Making things artificially cheap often means many will be wasted
Risk and Resources
- Prices and fees are often high in low-income districts because it takes more resources and risk compared to higher income areas, not because of greed.
Profits and Losses
- Profits give incentives for companies to sell and create and stay ahead
- When companies get too big, it becomes hard to manage and be creative
Efficiency in the market
- Scarce resources always go the most efficient use
- Middle man often exists because they can handle a particular phase more efficiently
Minimum Wage Laws
- These laws:
- Benefit those who already have a job
- Harm those who are unemployed and are from outside looking in
Money and Banking
- Money is not wealth -> it is a way to transfer wealth or incentives to create wealth
- Inflation happens when the government prints too much money to pay back debt or money circulation is too fast, money loses value.
- Deflation happens when money printing is outpaced by the growing output, making debts harder to pay off and people less likely to purchase since price keeps going down
International Trade
- Absolute advantage: a nation ability to produce Resources more cheaply than others
- Comparative advantage: the ability to produce resources given the opportunity cost
- International transaction and investment is not a zero-sum game. It creates wealth and opportunities for both countries
- Lower wages in poorer countries are not necessarily exploitation but opportunities for both parties to grow
- Immigration is not the same. Some immigrants might contribute more wealth while some might contribute more crime
Other
- Since resources are scarce, fulfilling the needs of one party often means harm the benefits another
- We need to distinguish those who are genuinely poor and those who are young and don’t have much yet
- Incentives matter: Think about tips at restaurants, rent control, etc
- Taxes: Either don't tax goods or resources or tax all equally.
- It distorts the prices of goods and services.
- If doing it for the poor, it would be better to just give them money as it would not distort the prices of the goods and services.
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