You know where the word economics comes from? Ancient word one who manages households.
So according to ancient Greeks your housemaid is an economist. ;)
Bad jokes aside, what be the parallels between a household and economics?
Let's talk about cooking. You need to decide who will cook. What materials you need, who will buy them. How much you need to cook. See that parallels?
Just one more thing, add the selling to this, and we have got all the parallels to the economics.
Just like parents manage the budget of the home, well because the salary they get is limited. (Kids, remember that when whining for the silly toy are desperate for.) The society too has limited resources. Clearly, this scarcity is the reason we need economics.
Economics is the study of management of scarce resources.
Since you have scarcity, what you do is you decide to create a give and take situation. We all do this all the time in our daily lives. I will explain this to you, and in return you will share this blog (please :P).
Free markets that we see (At least in most countries) are the only way our societies have decided that works. It may not be perfect or the best...but if you come up with some other way, you will won a nobel prize.
Now let me introduce two terms- Equity and efficiency.
Equity in markets means benefits from the resources should be distributed fairly (not equally). And efficiency means that the society gets most that it can in the process. (of course you could find this far from the truth, but in theory this is how it is supposed to work. Inefficiencies etc. are for another day).
Now that we know about equity and efficiency, we should know about how decisions are made.
For that, you have to analyze the opportunity costs. Cost-benefit analysis. Which decision gives you the perfect balance of low cost and more benefits.
The smart people make these decisions at the margin. They don't ignore the small incremental changes to the the plan that already exists. Winning.
So when there are alternatives, the smart people choose the one which has more marginal benefits.
So according to them trade is like a win-win thing and it makes everyone better off.
But the thing to observe here is that there is no central authority. It just works by itself. It's like a hivemind.
This. is. Market economy.
So what happens when a market fails?
Yeah, it does fail.
It happens when a single entity like a firm or a person has too much power to affect the market.
We also compare the economies. How do the living standards compare? we compare it by average personal incomes. Or productivity- how much of total was produced per hour of worker's time.
You must have heard the word inflation being thrown around. It's what happens when prises rise right? Its one of the causes is too much printing by the govt.
There is also a trade of between inflation and unemployment. So that's why you see people being laid off in times of inflation.
