Principles of Economics #1: Introduction

Let’s truly start this blog off with the first issue of ‘Principles of Economics’- a series where we will go through some of the fundamentals of the subject. The purpose of this is to teach the basic applications of economics.

Why do we need an economy? What even is it?

These questions may sound elementary, but most people that haven’t given the concept a second thought probably will find they can’t come up with a good answer. Many high school/secondary school students wonder about the difference between business studies and economics as school subjects because some teachers even cannot answer these questions.

Believe me, I get it. I didn’t know the difference either.

Therefore, it is vital that we start off with these basic questions. Let’s start with the first one; an economy is a system within which goods and services are traded and consumed. Economies can exist on many different levels. The City of New York, for example, has its own economy that consists of the trades going on within. Obviously, many in New York trade with those from other places too, so economies are almost never closed systems (unless they’re isolationist, which is a story for another time).

An example of a much larger scale economy is the economy of the world. As nations are becoming more interconnected and interdependent than ever before, it is becoming more common to hear the term ‘global economy’. The need for such a concept arises from the fact that not all nations have access to all the resources and products they need. This explains why even though the UK is a relatively rich nation with a large economy, it still needs to trade with countries like Saudi Arabia and Canada for oil. Some countries trade more or better products than other countries and so may have more powerful economies with more leverage over the market as a whole.

That explains what economies are, but why do they exist? Why can’t everything be free? Why can’t everyone get everything? (Again, these questions sound basic, but think about them seriously.)

Because ‘money doesn’t grow on trees’. Or anything for that matter.

In other words, because the human race is confined due to physical limitations to being unable to practically access the entire universe, there isn’t an endless supply of anything. For this reason, we need to find a way to allocate resources. ‘Allocation of resources’ is a common term one may hear when studying economics that basically means ‘deciding who gets what and what goes where’. We don’t have an infinite amount of anything, so we have to make do with what we do have.

Think about it like this. For whatever reason, there are 100 people that want a certain type of rock. If there are unlimited rocks, then everyone can get them. There doesn’t need to be any trade of goods involved because people can go out and obtain them easily. Everyone can live happily ever after with all the definitely-very-interesting rocks in the world they want.

Now, imagine there are only 50 rocks that they can access. All of a sudden, we have a problem. Not everyone can get a rock. Some even may want multiple, but only 50 people max can possibly get rocks. This is when an economy is established. There is no formal process whereby this occurs; instead, it is a result of human nature. The 100 rock-desiring people realize that it is not easy to obtain rocks. Those who will and those who won’t end up with rocks is decided through whatever system of economy is in place. Does the government step in and distribute the rocks to the poor? Do private entities sell the rocks to individuals at a mutually agreed upon price? Regardless of how they are allocated, an economy has been created.

Thus, economics is the study of how people make decisions in a resource-scarce world and how economies should be run. Hopefully, this article helped you understand the most basic principles of economics and kindle some interest for the subject matter. I haven’t come up with a posting schedule yet, but I’ll see you in the next post nevertheless!