Let’s move on and talk about the three basic
questions that economics tries to answer.
Goods and services are objects that people
value and produce to satisfy wants.
What is produced varies across countries and
changes over time.
It really depends on what people want or need.
How to produce is determined by the technologies
and resources available.
The basic resources, or factors of production
as we will now refer to them as, are land,
labour, capital, and entrepreneurship.
Land refers to all natural resources.
Labour entails the work time and effort that
people devote to producing goods and services.
The quality of this labour depends on human
capital: the knowledge and skills people obtain
from education, training, and experience.
Capital includes the tools, machines, and
buildings that are used to produce goods.
Entrepreneurship is the human resource that
organizes the previous three resources in
a manner that produces goods and services.
The last question that we need to answer,
is that of who to produce for.
Who can consume goods is, in most societies,
determined by their income.
People earn their incomes by selling the services
of the factors of production that they own.
Land earns rent, labour earns wages, capital
earns interest, and entrepreneurship earns
profits.
Choices are made in self-interest of a person
thinks that the particular choice is the best
one available to them.
Choices made in the social interest result
in an outcome that is best for society as
a whole.
Resource use is considered efficient if it
is not possible to make someone better off
without making someone else worse off.
We keep changing the way we use our resources
until we reach this point of efficiency.
A lot of times people use the word ‘fairness’
when talking about the social interest.
It is a little difficult to define this, though.
For example, most people say that too much
inequality is unfair, but how much is unfair?
Where do you draw the line and say that inequality
below this point is fair, but above this point
isn’t?
Globalization is defined as the expansion
of international trade, borrowing and lending,
and investment.
It is on the whole regarded as a good thing,
but still has some negative effects too.
Globalization is in the self-interests of
consumers who want low-cost goods produced
in other countries and of multinational corporations
who produce in low-cost countries and sell
goods elsewhere.
Conversely, globalization isn’t necessarily
in the interest of low-wage workers in developing
countries who produce these goods.
Another downside, one which is becoming less
prominent nowadays is the existence of information-age
monopolies.
Microsoft is a great example.
Microsoft was able to sell computers at much
higher than market value at some point because
it was the only producer.
Microsoft’s profits increased, but many
people weren’t able to buy a computer as
a result.
Climate change is also a result of people
making decisions based on self-interest.
More often than not, the environment is harmed
when decisions are made in the pursuit of
self-interest.
Economic instability can also result from
banks who lend too much internationally in
the pursuit of self-interest.
Lending more allows banks to earn more interest.
But when banks extend loans to high-risk borrowers,
they increase interest rate to compensate
for potential defaults.
The only problem is that the probability of
a default is now much greater, increasing
the chances that the borrower will not pay
back their loan.
This could result in economic instability.
