A Living Economy

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What Is An Economy?

People define "an economy" in a number of ways. For example, Wikipedia says that

  • An economy consists of the economic system of a country or other area; the labor, capital, and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area.

A somewhat simpler way to think about it is:

  • An economy is the production, exchange and ownership of things of value in an area such as a city, state, or country, or even the world.

which is to say, an economy deals in how people make, trade, and store "things of value", a broad category that includes

  • Money
  • Land and other real estate, like apartments
  • Goods, things that people make, buy, and sell, from a pencil to a car
  • Services, another broad term covering anything that someone does for someone else, like giving computer help at a hotline or waiting tables at a restaurant.
  • Labor is how economists talk about the work that people do, so that "buying labor" means paying people to do work. In this analogy, someone's wage is the cost of their labor.
  • Intellectual property gives rights to the creators of, for example, books, music, or art (copyright), and designs for machines, pills, or agricultural or manufacturing methods (patents) to make money from their creations.
  • Stocks and bonds are promises to give money in the future. A stock is technically part-ownership of a company; its value is tied to how well the company is doing. A bond is a promise from a company or a government to pay back a certain amount of money after a certain amount of time - a loan that a person makes to an organization, instead of the other way around.

Things of value are exchanged when they are bought, sold, or occasionally traded.

Some Terms and Concepts to Know

I talked about many different things that can affect an economy, including:

  • The law of supply and demand says that the price of a good or service increases when there is high demand or low supply, and decreases when there is low demand or high supply. Here demand is how much of something people are willing to buy, and supply is how much of it people are willing to sell.
  • Competition comes about when two suppliers offer the same good. (Suppliers can be companies selling a good, professionals offering a service, or workers applying for a job.) Competition should cause the price of the good to decrease and the quality to increase so that it looks more attractive to buyers.
    • A seller that does not face competition - which is to say, they're the only people offering what they sell to a certain group of people - has a monopoly. Monopolies are often prohibited because they can keep prices high and quality low.
    • Competition can also come from replacement goods, which are things that satisfy the same need or desire (transportation, food, entertainment) as another even though they come in a different form, so people may switch to them when prices get too high or quality gets too low.
  • Bankruptcy happens when someone can no longer pay their bills, or repay debts, particularly when they can't afford all the losses that defaulting (failing to pay) would cause. When people enter bankruptcy, a trustee organizes their bankruptcy, which is to say, they sell all of the bankrupt person's nonessential stuff, up to a certain value for certain items. For example, you can keep them from taking up to $125,000 of value for your house.

Useful Resources

You can find someone talking about economics and money on just about any corner of the internet. Be cautious, though - there are a lot of very strong opinions floating about, and not all of them come from a careful consideration of economic knowledge (and those that do are often not very accessible). Look for reputable sources, and particularly ones that give several opinions. Here are some places where you might start:

  • Freakonomics gives some very interesting perspectives about lots of things, particularly in economics.
  • The New York Times Economix blog discusses current events in economics from several viewpoints, although it is less accessible a lot of the time.
  • Paul Krugman is an eminent contemporary economist, although he is also very opinionated, and can sometimes be less accessible.
  • You can learn a lot about what's happening in the economy just from the news. As you might have guessed, I'm especially fond of the New York Times; I think it's an especially balanced and thoughtful source of reporting.
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