Introduction to Economics

There are lots of people who pretend to understand Economics, but there are very few who really do understand Economics. If you dive into Economics and race towards your exams without taking the time to properly understand the key concepts at the heart of the subject, it will hardly be a surprise if you end up amongst the fakers rather than amongst the true experts.

This book is intended for students who are considering studying Economics, for students who are soon to begin a course in Economics and for those who are already studying Economics. Really, it is for anyone who would like to firm up their understanding of the key concepts at the heart of this fascinating and incredibly important discipline.

Please read these sample chapters to see if this book is likely to be helpful to you:

Introduction to


Money and Resources

  Before you can learn what Economics is, it is really going to help if you can first clear your mind of some of the common, but fundamentally misleading misconceptions about what Economics is actually about.
  The biggest misconception about Economics concerns money. This would come as quite a surprise to most of the population, but Economics is not about money. Most people seem to think it is, but it isn't! Just take a deep breath and bear with me on this one - I'm an expert!
  Think of it like this: We use money to buy food, housing, books and thousands of other goods and services. The money goes one way (to the person or business we buy those goods from) and the food, housing and books go the other way (to us, the consumers of those goods) - but it's the food, housing and books that are the really important things. If these important resources continued to be supplied, but no money changed hands, we'd be OK - we could carry on as before. On the other hand, if money moved, but no resources were supplied, we'd all starve to death. That's the difference in importance between money and real resources!
  Money is relatively unimportant. We can survive without money. This, after all, is exactly what the human race did for many thousands of years. Instead of using money, early man simply used a system of bartering - people would simply swap things they had plenty of for other things they didn't produce themselves. Many people didn't even use bartering. They simply met all their needs for themselves, by harvesting the bounty of the natural world around them.
  Money is very useful, of course, as it allows much more complex trading than would be possible with only a bartering system. However, this doesn't make it more important than the actual resources we need to survive. We can survive without money, but we cannot survive without real resources.
  Furthermore, as a species, if we had less money, this needn't make us any worse off at all. Imagine that tomorrow, as if by magic, half the money in the world simply disappeared. Every individual person looked in their wallets, purses, under their mattresses and in their bank accounts - and found that half their money was missing.
  This would undoubtedly cause a lot of head scratching. However, it is not a disaster. Although we'd all have less money than before, we wouldn't have lost any of our real resources. We'd still have the same number of farms, people, houses, cars and factories as before. If you think about it, all we'd need to do would be to cut the prices of everything in half, and we'd be able to carry on pretty much exactly as before.
  Yet, turn on the news almost any day of the year and you could easily get the impression that all the world's economic problems are due to a lack of money. Politicians or commentators might argue that we can't afford to build new schools or provide better healthcare because we don't have enough money. They might claim that we don't have enough money to provide everyone with a decent pension and a comfortable retirement at a reasonable age. Such claims, however, are nonsense! They're complete fiction!
  If lack of money really was at the heart of all our economic problems, we could simply print more of it. Our governments are never actually going to literally run out of money. They have the legal right and the facilities to print as much money as they could ever possibly want or need.
  Of course, simply printing loads of money wouldn't actually solve our economic problems - but that's because lack of money isn't the cause of our problems in the first place. Printing money might only cause prices to go up - and that's because, whilst we can pretty much magic more money up out of thin air, we can't magic real resources out of thin air.
  Economics is not really about money. It's about real people, real resources and real achievements. It's about looking at how we, the people who live on this planet, use the real resources available to us and how we can organise ourselves more effectively so that we can make better use of those resources and achieve more as a result.
  Sometimes, we genuinely lack the necessary natural resources to get an important job done. More often than not, however, we only lack resources because we have squandered them. We've failed to make proper use of the natural resources available to us. We've wasted them. We've failed to organise ourselves effectively. These are the problems we really ought to be dealing with.
  Unfortunately, with politicians and commentators in the media banging on endlessly about a lack of money, a sort of brainwashing effect takes place and both these people and the general public come to believe that movements of money are actually more important than the movements of real resources - as if the money paid for food is more important than the food itself and the people who eat it, and as if the money paid for books is of greater economic value than the education those books can provide.
  It is this ridiculous and misleading assumption about the overriding importance of money that prevents people from understanding Economics. Far from economists being obsessed with money, it is the ability to see the world in terms of real resources and real people, rather than in terms of money, that is the hallmark of a real economist. You must purge your brain of this obsession with money if you are ever to be a skilled economist.
  Unfortunately, most people seem incapable of doing this. They've been brainwashed for so long, it's become almost hard-wired into their brains to assume that economic difficulties are always the result of a lack of money. It doesn't matter how carefully you explain to them why this is clearly nonsense, they refuse to accept that it is. (I hope you're not one of these people!)
  It is important to realise that misplaced 'money-think' crops up all over the place and gets in the way of us, as a society, identifying the causes and finding the solutions to our economic problems. You'll be reading an article by a newspaper columnist or listening to a politician on the radio. They might even seem to be making some sort of sense, as if they actually understand the issue in question. Then they'll go and blow it all by making some ridiculous remark about the country's economic problems being due to a lack of money. Why don't they just round off by claiming the moon is made of cheese?


  Far from being about money, Economics is very much about people. In fact, it might very well be viewed as a branch of psychology. The decisions people make, the way people make decisions, the motivations behind their decisions and the factors and influences that affect their decisions - all these matters are fundamental to Economics.
  It is sometimes said that Economics is the study of humans in the everyday business of life. It's about how humans go about meeting their needs and pursuing their desires and ambitions. Another useful definition is that Economics is the study of human behaviour in relation to the use and allocation of resources. These are not universally-accepted definitions, but think about it and you'll realise that there's a great deal of psychology involved in pretty much everything Economics gets involved in.
  What is the market price of a house? Well, ultimately that depends upon the decisions made by individual humans. It depends on the decision made by the owner as to how much they are prepared to sell it for. It depends on the decisions made by prospective buyers as to how much they are prepared to pay for the house in question. It depends on decisions made by bank managers as to how much they are prepared to lend to the prospective buyers.
  Revenues, profits, production levels, advances in technology, inflation rates, GDP, tax receipts, demand, educational standards - these all depend on the cumulative effects of decisions made by millions of individuals. The state of the markets, the state of the nation and the state of the human species as a whole depend rather precariously on the decisions of millions of individual human beings.
  When studying how people behave and trying to predict the future, it is important for economists to remember that humans are not entirely rational creatures. The question of how rational or irrational people are is at the heart of many issues in Economics. Sometimes, people follow clear, logical patterns of behaviour, but they also have the capacity to be irrational and illogical. Humans, as we know, can be moody and sulky, flippant, irresponsible and reckless.
  The failure to understand that Economics is fundamentally about human psychology, is at the heart of people's misunderstandings about Economics.
  Economics is a science, but economic choices and thus economic theories are always at the mercy of human psychology. People change. Human beings are capable of changing, adjusting and adapting. That's why we're such a successful species! This also means, however, that Economic theories can sometimes have a limited shelf-life.
  For a time, people may behave in a predictable way and, consequently, a particular economic theory may prove useful for a while - but, one day, people may start to behave in a different way and a new theory may be needed to predict future behaviour. This doesn't mean that the original theory was wrong or that it wasn't useful at all - only that it may not be accurate for all time.
  For example, you might have a theory that house prices follow a 'bubble' pattern of several years of rapidly rising prices, followed by a sudden drop (the bubble bursts!) and then the whole cycle starts again.
  The reason this pattern may occur is that, when house prices rise, people often imagine that prices will continue to rise. They may believe that there is easy money to be made by buying houses and then selling them for a profit later on. The chance of easy money sees lots of people clambering to buy houses and this does indeed cause prices to rise further.
  Then, having paid a lot for their houses, some people start to struggle to make their mortgage payments. People start to realise that house prices have become ridiculously high and that people can't really afford such high prices. A degree of panic sets in - and house prices suddenly collapse as people scramble to sell property before prices fall even further.
  This theory about how house prices behave may appear to be correct - for some time - but, if people start to recognise this pattern, they'll start to realise that rapidly rising house prices are often a precursor to a collapse. This knowledge makes them more cautious about buying property in the first place. They're no longer willing to pay so much for a house. As a result of such forward-thinking, the house prices bubble may never occur in the first place.
  So, people change. They adjust their beliefs and their behaviour and economic theories have to adjust in turn. This doesn't mean, however, that the economists who came up with these theories were incompetent or that Economics is not a valid, scientific discipline. Economics is a science. We study patterns, but these are not the immutable patterns of physics - they are patterns of human behaviour and subject to change as humans change and adapt to the changing world they live in.
  By recognising and remembering that Economics is a branch of psychology, we can avoid getting stuck with economic theories that, whilst they may have proved very useful in the past, no longer fit the way people are behaving now or how they are likely to behave in the future.
  So, Economics is, in many ways, a branch of psychology. Understanding people helps us understand our economy. What is, perhaps, even more interesting, however, is how studying our economy can help us understand more about people.

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