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The Foundations of Economics

When a disaster strikes a community, there is always a frenzy for resources.  In the case of a blizzard, many people might go without power, water, or food.  The consistent event of natural disasters poses a problem for all societies.  Understanding economics can help with responses to disasters and also give insight to how a group of people functions in the inevitable event of a natural disaster.

To start off, Economics is the study of how people seek to satisfy their needs and wants by making choices.  In the case of a blizzard, an economist would look at how a consumer or city would work to satisfy the need for resources.  The problem with resources is that they are scarce.  Scarcity is the offspring of constant wanting by consumers.  There are only limited quantities of a resource, but constant demand.  This is different than a shortage, where a resource is only unavailable for only a period of time.  Scarcity is always a given, and never ending, while shortages are only for a period of time.  In the case of a blizzard, shovels might enter a period of shortage driven by a natural disaster.

The Factors of Production

Looking at where the shovel actually comes from and is made involves the factors of production.  There are three categories of the factors: Land, Labor, and Capital.  The materials used to make the shovel come from the land, or any natural resource used to produce a good.  This includes the wood for the handle, or the steel for the blade.  The shovel is assembled by people; the labor factor.  And finally, the shovel best associates with the capital factor because it is a human made item used to produce other things more efficiently.  The shovel efficiently helps a laborer get rid of fallen snow.  These three ways of producing goods are an essential backbone to economics because they give an answer to where products come from.

When a blizzard hits, a society has to think of the trade-offs they will do.  Trade-offs are basically all the options a person has when making a decision.  Because items are scarce, and sometimes go through a shortage, people can not choose every option they have.  This might mean spending money on an expensive shovel, or buying food and water.  The opportunity cost is a type of trade-off, but it is classified as the second best choice that a person could choose.  A person could buy the shovel, but they must weigh the opportunity cost of not having enough money to buy food and water.  Additionally, a person thinking at the margin who is buying food will weigh the costs and benefits of buying one more waterbottle, or loaf of bread.  Thinking at the margin is making a decision on buying one more unit of something.

Depending on the type of economic system one has, the different ways a society will respond to a blizzard.  An economic system is the method used by a society to produce and distribute goods and services.  There are four types of economic systems: traditional, market, command, and mixed.  Examples of these types include African tribes (traditional), Hong Kong (market), North Korea (command), and the United States (mixed).  If the blizzard hit the United States, the government and the normal market will work together to approach the issue.  Because the government is a mixed economy, the term guns or butter arises.  Guns are essentially used to associate with a government’s military costs, while butter is consumer goods.  Hopefully a government would choose butter over guns, and help a suffering society.  Safety nets come into play when a person faces economic struggles.  If a person becomes injured during a natural disaster, an ambulance would arrive to help the person.  Safety nets are important because a society does not like uncertainty.  These nets, in advance, protect people in the case of an accident.

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The Components of Adam Smith’s Invisible Hand

Thinking all the way back to the shovel, everything comes down to the consumer.  Economies are driven because all people have self-interest. Self-interest is exactly as it sounds, doing something for one’s own profit.  If a man’s driveway is covered in snow, he will go buy a shovel to help himself.  Additionally, self-interest motivates a market economy because it controls prices; most gain for least amount of money.  Competition is the rivalry between two producers trying to gain consumer’s money.  Competition is the regulating force behind an economy.  If there were only one store in a city that sold shovels, the owner could potentially raise prices to whatever he or she wanted to because their store is the only place to get the item people need.  However, due to self-interest, if there is a competing store nearby that also sells shovels people will go to the store with the lower price.  The two stores balance each other and keep each other’s prices low.  This is an important part of the self-regulating economic system.  The two forces, self-interest and competition, working together make up what is known as the invisible hand.  Invisible hand is a term coined by Adam Smith to establish that drive behind a self-regulating market.

Overall, understanding how economics work is an essential part to the survival of a community.  It is important to know how to respond to any disaster, and economics helps a society figure that out.  A blizzard is only one example of how to relate economic terms to a situation.  In class, we read about the crab market in the Chesapeake Bay.  We took that example and matched up the economic terms with the situation.  From this we learned why there was a problem, who it effects, how to respond to the issue.  It was not a coincidence that the foundations of economics matched up with the story; these terms can apply to everything.

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