Understanding of basic economics is vital in today's modern world.
No matter which government we live under, politicians will have to make choices on how to spend tax revenue, who to give or not give subsidies too, and at times voters themselves may enact cost-regulations or laws against others via a simple majority vote.
Knowing that production is a necessity of life, and that consumption can only arrive because of it will enable you to make rational decisions when faced with these situations.
To begin we look at the most basic of economics, pricing.
How does a price come about? What came before pricing? Is living without money a feasible idea? How does a change in supply or demand, or in both affect the price of a good? The following posts will bring to you the information necessary for an answer, one that you can only arrive at yourself.
The Exchange of Goods Transactions are common within our everyday life.
We give up something in order to obtain something; a metal coin for a loaf of bread, volunteering for a few hours for personal satisfaction of doing good, or working for being able to consume a desired product.
Exchange is the facilitation in all of this.
Thus, transactions in an economy can be defined as the exchange of goods, labor, or services between two or more people.
Before an exchange can take place, a few factors are needed: -Surplus of Production -Desire or Need -Ability to Exchange Surplus of Production means any left over good or service that one has produced and cannot consume any further.
A common example is a farmer of wheat, beyond what he can consume and store, any leftover wheat is a surplus crop.
With this surplus crop, our farmer can then exchange it for something else.
A surplus of production can also refer to services, which may not be as labor intensive, but still require time and energy to complete.
Beyond what one person can do for himself, he can offer his services to another person.
Maybe the farmer needs new shoes, or he wants a new tool for his farming activities.
His desire for products that he cannot produce or is not able to produce sufficiently will lead him to offer his surplus production to another person.
The desire to fulfill needs and wants is common, but our resources are limited.
Scarcity is always present, and as such our farmer must be willing to exchange what is necessary to provide him with his needs and desires.
The ability to exchange is a necessary component, not only because of distance between the two parties, which may or may not be a problem, but because each party must be able to offer something of value to each other in order for an exchange to occur.
If our farmer goes to a town that relies upon bartering in order to facilitate exchange, he may not be able to obtain new shoes.
This is because of the lack of a medium of exchange, such as money.
If a person comes to the farmer offering new clothes in exchange for wheat, the farmer will mostly likely not exchange.
The incentive to trade must fulfill each parties wants to a degree in order to finish the exchange.
The farmer requires shoes, and his self-interest will dictate to him that he needs to exchange his wheat for something in order to fulfill his desire.
At the same time, the farmer may face a disincentive to trade, in which when no item of value can be exchanged for his surplus, he may decide to keep his wheat a while longer.
If however the town had medium of exchange, the farmer could trade his wheat for this exchange unit and then be able to buy his shoes, enabling a transaction to occur.
Pricing and the Medium of Exchange Bartering has limited use in an economy, due to the coincidence of wants or needs that must occur in order for an exchange to take place.
Time has thus led many societies to designate something that can serve as a medium of exchange between two or more parties.
Money, coins and paper notes, typically serves this purpose, but it has varied across cultures.
Most mediums of exchange follow a few qualities: -Transportable -Divisible -High Value to the Culture -Not Easily Counterfeited Before metal coinage came into use, cultures typically used other commodities as a medium of exchange.
Where the number of cattle determines social status, exchanges could be made in this manner, though due to the large weight of the animal, the use of livestock to facilitate exchange was limited.
Grains, seashells, cigarettes, alcohols, and even salt have all been used by humans in the process of exchange.
History has shown though that metals have won the currency battle, with many of the first currencies being made up of copper, silver, or gold coins.
As metals are easily transported, can be divided both in production and in coin numeration, and are always in demand by a population, metal coins are still with us today.
Paper notes, bank promissory notes, and fiat currencies later came into use as money, and are the dominant form of mediums of exchange in the modern world.
The inherent advantage of having some type of money as the medium of exchange is that it eliminates the need for all parties to have the "correct" set of wants in order for exchange to take place.
Now, the farmer can sell his wheat to a merchant in town and then use that money to buy his new shoes.
Money is the medium, it can be taken away and trade can still take place but money enables for a greater expansion of trade when it is present under bartering.
It is also through money that we come to a price.
The farmer will attempt to sell his wheat on a price that will pay his expenses and generate him a sufficient profit for his work.
Remember, the price is not what money can be "got" from the produce.
What the produce is able to get in terms of consumption is the true "price.
" If the farmer is only able to afford one shoe from his production, that is the price of his labor.