In this video we hightlight the importance this video addresses the importance of systemic thinking in understanding the economy.
In a holistic view, the economy is seen as a system where all the different parts are interconnected. This means that when one part of the system changes, it can affect the other parts. You can watch the video below to understand the importance of holistic thinking.
The information in this video is based on an original personal view of Thomas Sowell's "Basic Economics" book, which is a must-read for anyone who wants to understand how the economy works.
What is Economics
Economics is about the allocation of resources that have alternative uses. It studies how people use resources to produce and exchange goods and services.
It introduces the term scarce or scarcity, which could be defined as the sum of what everyone wants being more significant than the total amount of resources.
This means, in reality, there are not enough resources to satisfy what everyone wants. To solve that, it introduces the concept of price, which determines the allocation of resources.
Businesses and individuals seek to purchase those goods and services that they believe offer the best value for money. This leads to some resources becoming under-utilized or not utilized at all, as they are not considered worth the price.
Economic efficiency and social welfare are affected by creating situations where resources are not being used most efficiently or beneficially possible.
Price does not cause scarcity but is a reflection of scarcity. High demand for a good in low supply means that the price will be high, and sellers will want to get as much money as possible.
So prices are not used only for transactions but also to make people utilize resources efficiently and create a market for those resources. This leads to better allocation and utilization.
In a free market, producers are guided by consumer demand to make things people want or need. This is more efficient than having the government try to keep track of the prices of all the resources.
There will always be unmet needs due to the limited resources available. When resources are shifted to meet one's needs, it often results in the unmet needs of others. This is an unavoidable unfortunate reality.
Price Control it's a highly complicated process that leads to the opposite effect than the intent.
Many cities have implemented rent control policies to keep housing affordable, which have the opposite effect by making business developers build luxury apartments not subject to rent controls. This increases everyone else's living costs, as less affordable housing is available. While rent control policies may seem like a good idea, they often do more harm than good.
In a free market, prices are set by the interaction of supply and demand. When the government artificially controls prices, it distorts this process.
This can lead to shortages of desired goods, as happened in the United States in the 1970s when there was a government-imposed price ceiling on gasoline. As consumers have no choice but to purchase what is available, producers are getting away with offering lower-quality items.
Scarcity is when there aren't enough resources to meet demand, but the shortage happens when the price of a good or service cannot meet consumers' demand. This can lead to rationing and black markets.
There are various reasons why prices and fees tend to be high in low-income places. One of the reasons is that it costs more to do business in these areas, with more resources and risk involved.
Additionally, businesses in these areas have to contend with challenges that their higher-income counterparts do not. It is essential to remember that businesses are not doing this out of greed but rather out of necessity.
Prices are one of the main drivers of production because when they are high, businesses are more likely to produce more to take advantage of the higher prices.
When prices are low, businesses are less likely to produce because they are not making as much profit. This can explain many of the price regulation disasters in history.
Making things artificially cheap often means resources will be wasted, which has been the case throughout histor.
The Rise and Fall of Business
Cooperations are still controlled by humans and are led by the decisions of humans.
However, cooperation has become increasingly complex, and the role of humans has become more limited. Today cooperations are controlled by algorithms and other automated processes, which has led to a more efficient and effective way of running cooperations.
Still, it has also led to a loss of control for humans. The free market is an essential part of our economy. This washes companies that are not in the trend and can provide better service at lower prices.
It is also suitable for the economy because it keeps businesses on their toes and ensures that they provide their customers with the best products and services. While it may seem counterintuitive, companies often have to be at a loss to stay in the competition.
They can keep prices low and competitive by taking a loss on their products, but this may not be the most sustainable long-term strategy—the Role of Profits and Losses.
With the right mix of products and services, a company can find the right market and make a profit which can be used to reinvest and help it grow. Also, profits can be used to pay shareholders dividends, giving them a return on their investment.
When a company becomes too large, it can become challenging to manage and be creative. Creativity may become stifled in a company bogged down in bureaucracy, which can lose touch with its customers and what they want.
To avoid this, companies need to be aware of their size and ensure they are still innovative and responsive to their customers.
The Economy of Big Companies.
In big cooperations, ownership and management are often separated, leading to different goals and agendas between the two groups. Cooperations should keep these groups aligned to avoid conflict and maintain a successful business.
It is easy for corporations to become monopolies in non-developed countries where entrepreneurship cannot represent a challenge. This could harm consumers since prices would be set at whatever the monopoly wanted.
There is no competition to keep prices down, and the monopoly would have no incentive to keep prices reasonable, affecting low-income consumers.
A monopoly can be about market share, but only if the company has a commanding share. For example, if a company has 80 percent of the market, it is a monopoly, but at 50 percent, it may be unable to keep competitors out.
Anti-Trust Laws
This way, we have regulations and Anti-Trust Laws. The inconsistency across laws and regulations can confuse companies trying to operate legally. It is essential for companies to be aware of the laws and regulations that apply to them and to ensure that they comply.
Government institutions financed by taxation could establish by legislation as monopolies. Because scarce resources always go to the most efficient use, it is essential to be aware of new technology and how it can be used to improve efficiency and stay ahead of the competition.
Productivity and Payment.
In a market economy, wages are one way to signal the relative value or scarcity of different kinds of labor. By setting wages, businesses help ensure that these scarce resources are used efficiently to produce goods and services.
Factors contributing to someone's productivity are found in each person's different work ethics.
Some people are just naturally more productive than others. It is no secret that having a job comes with many benefits, and those who are employed often have an easier time than those who are not.
It is essential to remember that not everyone has the same opportunities when finding employment. Others may not have the necessary qualifications or experience.
This is where the issue of unemployment comes into play. Unemployment can adversely affect an individual mentally and physically.
In some cases, it can even lead to homelessness, but it is crucial to remember that not everyone is in the same boat regarding employment.
Those who are fortunate enough to have a job should be mindful.
Social Problems in Labor Markets
Poverty is not about distribution; the poor cannot produce enough due to circumstances. The lack of resources and opportunities available means they cannot generate the income needed to escape poverty.
In many cases, poverty is perpetuated because the poor lack the education and skills to find good jobs. Even when jobs are available, the low wages and poor working conditions make it difficult for the poor to make ends meet.
The high cost of living also makes it difficult for the poor to afford necessities. Job security laws make it harder for companies to fire employees, decreasing the incentives for companies to hire new employees, which lowers the employment rate.
While these laws may provide some security for workers, they come at the expense of employment opportunities for others.
Investment involves the risk of not using the resources for alternative use.
When an individual or a company invests in a new project, they use resources that could be used for other purposes, such as expanding their current business or investing in another project.
This risk is often taken to gain a higher return on investment, but it is still a risk. People tend to overlook the risk of invisible environmental factors when they can see the product's result.
For example, when people see a factory or a hotel, they don't often think about its environmental impact. There are several hidden environmental risks that we take for granted, and they can have a severe impact on our health and the environment.
When you see a product, consider the invisible environmental factors that may have contributed to its creation. People often condemn the company for not paying the workers enough, forgetting the risk the company took to build the factory in the first place.
The increased price would also lead to research and development of new technologies to extract or use the resources more efficiently. For example, stocks have higher rewards because people take higher risks.
However, if the company does poorly, your investment will lose value. While there is always some risk when you invest in stocks, the potential rewards are much higher than other investments.
While there is always some risk when you invest in stocks, the potential rewards are much higher than other investments.
Bonds are fixed-income investments, meaning they guarantee a return after a specific time but also suffer from inflation risk, which can cause you to lose money.
When inflation increases, the purchasing power of your bond's fixed interest payments decreases.
Unique Problems of Time and Risk
If the government regulates risks and prices, people will not engage in risky behaviors as the government will be there to back them up. This could lead to people taking more risks than they would normally, as they would feel protected by the government.
In addition, this could also lead to higher prices for goods and services, as businesses would need to account for government regulation. Financial speculation can transfer risks to others who know how to handle them. For example, suppose you are worried about a stock market crash. You can transfer that risk to a professional hedge fund manager who knows how to handle it and may even make money.
This can be beneficial for both parties involved.
Politicians are considering the consequences of their actions in the years leading up to an election. This can have negative consequences for those who come after them, leaving them to deal with the fallout.
Most citizens quickly blame current politicians for the consequences of previous policies. The current situation is a result of years of bad policymaking.
The previous administration's policies have set the country on a course that is difficult to change. It isn't easy to compare national output over decades because the standard of living and the quality of consumer goods and the standard of living has increased.
Every country has different resources and capabilities, meaning they produce different things, and even if two countries produce the same thing, they may use different methods, making comparisons difficult. To accurately compare the economic performance of different countries, it is best to compare per capita in similar countries in a similar timeframe.
Money and Banking System
While money is certainly a way to transfer wealth, it is not wealth itself is simply a means of exchange that allows us to trade our goods and services for those of others.
True wealth is created through the production of goods and services that have value. While money may be a necessary component of our economy, it is not the only factor determining wealth. The real wealth of a nation is its people and their ability to create and innovate.
Inflation is a problem that can occur when the government prints too much money to pay back debt or when money circulation is too fast. When this happens, money loses value, and prices for goods and services increase, which leads to a decrease in the standard of living for citizens.
Deflation is a decrease in the price of goods and services when money printing is outpaced by the growing output, making debts harder to pay off and people less likely to purchase since the price keeps decreasing. This can lead to a recession.
The Function of Government
Property rights are a critical mechanism for preventing owned resources from going extinct. For example, lumbering companies are incentivized to prevent trees from going extinct because it would impact their business negatively.
Resources that are not owned, such as air and water, are often allowed to go extinct because there is no one with a vested interest in preserving them. This highlights the importance of property rights in protecting our natural resources.
Honesty plays an important role not just morally but economically. Dishonesty can lead to costly mistakes, errors, and inefficiencies.
It can also lead to mistrust and suspicion, damaging relationships and hindering cooperation. In the workplace, honesty is essential for building trust and maintaining morale.
Additionally, customers and clients are likelier to do business with companies they perceive as honest. This is also available in politics; in most cases, politicians would do things that win them votes but might hurt the economy in the long run.
This could be due to a lack of understanding of complex economic issues, a short-sighted focus on the next election, or simply a desire to pander to special interests. Whatever the reason, it is clear that political decisions don't always reflect what is best for the economy, which can have serious consequences.
Government and Finance
There is always a debate on how much taxes should be applied to the wealthy. Some people believe that increasing taxes on the rich might drive them away and decrease tax revenue.
Others believe a reasonable balance must be found to maintain a healthy economy. It is important to remember that taxes are just one part of the equation when it comes to the economy.
Borrowing money from other countries to finance development is a short-sighted policy that ultimately hurts a country's long-term prospects. Not only do future generations have to bear the burden of repaying the debt, but a country can quickly become saddled with debt that outpaces its ability to develop.
This is a recipe for disaster that can lead to economic collapse. Developing a financial plan that includes responsible borrowing and spending is far better.
The government not only transfers resources but reallocates them as well. This is done to ensure that the resources are best used to achieve the desired objectives.
The government may reallocate resources to different areas or use different methods to achieve the desired objectives.
To ensure that resources are used in the most efficient way possible, it is essential to consider the net benefit when making decisions about resource allocation.
When resources are reallocated, the process often does not consider the maximum net benefit that could be achieved.
This can lead to sub-optimal outcomes and missed opportunities.
Politicians often take advantage of the fact that many people consider desirable items expensive. They subsidize the supplier of the goods to make them affordable for the public, but people pay more for the item from their taxes. This is a common tactic used by politicians to gain support from the public.
Elected officials are often more interested in building new community centers and stadiums than fixing bridges and bad roads. While building new facilities may be more glamorous, repairing roads is likely to benefit the economy. Roads are a vital part of a country's infrastructure and are essential for transportation and commerce.
If they are in poor condition, it can lead to delays and increased costs. Repairing them is a more efficient use of resources and will ultimately positively impact the economy.
Politicians' decisions usually create Social Problems in the National Economy.
International Trade
To have an absolute advantage over other nations, a nation must be able to produce resources more cheaply than its competitors.
This means that the nation must have access to the necessary resources and be able to produce them at a lower cost. The nation must also have the necessary infrastructure and technology to make production more efficient.
The term "comparative advantage" describes the economic benefits arising from a country's ability to produce certain goods and services at a lower opportunity cost than its trading partners.
A country has an advantage in producing a good or service if it can produce it at a lower opportunity cost than any other country.
For example, it takes two workers in India to produce one unit of cloth and three workers in China to produce the same amount. India has a comparative advantage in the production of cloth.
Comparative advantage is the basis for international trade theory, which argues that countries should specialize in producing goods and services. Although raising tariffs and restricting imports may seem like a good idea to protect the economy, it could backfire if other countries take revenge by doing the same thing.
This could lead to a decrease in global trade, which would ultimately affect the economy as a whole. Both international trade and investment are win-win propositions. They create wealth and opportunities for both the countries involved.
Each country produces the goods and services it is best at producing, and then they trade those for the goods and services that the other country produces.
This increases the overall wealth of both countries involved. Foreign investment can help to jumpstart an economy, create jobs, and improve infrastructure.
The discussion of whether or not lower wages in poorer countries are exploitative is complex because it can be seen as taking advantage of a vulnerable population.
There is no easy answer, but it is essential to consider the perspectives of both the workers and the businesses. Lower wages may be exploitative for the workers, as they are not paid a fair wage. However, for businesses, lower wages may be seen as an opportunity to invest in a workforce and help them to grow.
Ultimately, it is up to the individual to decide whether or not they believe lower wages in poorer countries are exploitative. It is essential to remember that there are two sides to every story and that both parties have the opportunity to benefit.
A strong currency is not always indicative of a good economy. A country with a strong currency may have a robust economy, but other factors are at play.
A strong currency may result from various factors, including a strong central bank, a healthy trade balance, and high foreign investment—International Disparities among countries.
A country's economy is heavily affected by geography, location, climate, culture, timing, and many factors.
Understanding the factors that affect a country's economy is essential to make informed decisions about trade, investment, and economic policy.
Europe has an abundance of coastlines and waterways, which makes it an ideal location for trade and commerce. However, each European country is different regarding its natural resources, which can create inequality. Nonetheless, Europe remains an attractive destination for business and investment.
Geological and cultural isolation can seriously harm the economy, but this is a myth. While it is true that such isolation can lead to higher costs and slower growth, the overall impact on the economy is relatively small.
Brand names allow competition for improvement in the industry and reduce uncertainty for consumers. By choosing a brand name, consumers can be sure they are getting a product that meets their needs and expectations.
Competition among brands encourages companies to improve their products and services, which benefits consumers. Having a brand name also reduces uncertainty for consumers because they know what they get when purchasing a product. Non-Profit organisation.
For various reasons, a non-profit organization may lose a competitive advantage against a profit-seeking organization.
Non-profits may not have the same motivation to keep things going and may instead rely on fear instinct to get donations.
Additionally, profit-seeking organizations may be better able to invest in marketing and other initiatives to increase their visibility.
Ultimately, it is essential for non-profits to consider their strategies carefully and how they can best compete against profit-seeking counterparts.
Non-economic Values.
When allocating resources, it is essential to consider how it will impact not just those receiving the resources but also those who are not. Since resources are scarce, fulfilling one party's needs often means harming another's benefits.
In many cases, it is necessary to weigh the needs of different parties against each other and decide based on what will result in the least harm. When we think about poverty, we often think about those who are genuinely poor and don't have much.
However, we must distinguish between genuinely poor and young people who don't have much yet. The latter group includes many young people working hard to improve in life. They may not have much yet, but they can improve their situation with time and effort. The poor group, on the other hand, includes those who are genuinely struggling and don't have the resources or the ability to improve their situation. We need to help both groups, but we need to be aware of the distinction between them.
History of Economic.
There are many schools of economics, even before it becomes a profession. Some of the more well-known schools of economics are the Keynesian school, the monetarist school, and the Austrian school.
The different schools of economics offer different explanations for how the economy works and different policy recommendations for what to do about it.
Wealth can be for individuals, a nation's well-being, or humanity's general. Therefore, the approaches to obtaining wealth vary. For individuals, wealth may be obtained through personal effort or inheritance. Wealth may be obtained through economic activity, such as trade or production for a nation.
For humanity in general, wealth may be obtained through charitable work or the development of new technology. That is to say when it is constantly changing and evolving.
This is not to say that there is no room for individual preferences in the economy. However, these preferences must be secondary to the system's needs. The economy is a living, breathing entity, and it must be allowed to grow and change to stay healthy.
An economic fallacy is usually based on oversimplification, confirmation bias, and cherry-picking. By oversimplifying a complex issue, it's easy to create a false dichotomy or make an invalid generalization.
Confirmation bias leads people to seek information that supports their beliefs while ignoring information that contradicts them.
Cherry-picking is the selective use of data to support a particular conclusion while ignoring other relevant data. All three of these factors can lead to dangerous and costly economic decisions. It is essential to maintain focus on your own business to achieve success.
By ignoring the competition, you will be better able to achieve your objectives. It is often easier for policymakers to focus on the immediate consequences of their decisions rather than the long-term implications. However, ignoring the long-term consequences of policy can lead to severe problems down the road.
By failing to consider the long-term effects of their actions, policymakers may inadvertently make decisions that harm the people they are trying to help.
This can ultimately erode public trust in the government and make it harder for future policymakers to enact effective policies. This often results in the disadvantaged party feeling resentful and can lead to conflict.
To avoid this, it's essential to ensure that all parties involved feel they are being treated fairly. I
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