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“We begin our journey into the world of economics. I thought i would begin with with a quote from one of the most famous economists of all time. The scottish. Adam smith.
And he really is kind of the first real economist in the way that we view. It now and this is from his the wealth of nations published in 1776. Coincidentally. The same year as the american declaration of independence.
And it s one of his most famous excerpts. He generally indeed he being an economic actor. Neither intends to promote the public interest. Nor knows how much he is promoting it by directing that industry.
So that the industry in control of that individual actor in such a manner as its produce may be of the greatest value. He intends only his own gain he intends only his own gain and he is in this as in many other cases led by an invisible hand to promote an end. Which was no part of his intention and this term led by an invisible hand to promote an end. Which was no part of his intention.
He is saying look when individual actors just act in their own self interest that often in aggregate leads to things that each of those individual actors did not intend then he says. Nor is it always the worst for society. That it was no part of it so it was not necessarily a bad thing by pursuing his own interest. He frequently promotes that of the society more effectually than when he really intends to promote it so this is really a pretty strong statement.
It s really at the core of capitalism. And that s why i point out that it was published in the same year as the american declaration of independence because obviously america the founding fathers. They wrote the declaration of independence. The constitution that really talks about what it means to be a democratic country.
What are the rights of its citizens..
But the united states with its overall experience of an american is at least as influenced by the work of adam smith. By this kind of foundational ideas of capitalism. And they just both happened to happen around the same time. But this idea is not always that intuitive individual actors by essentially pursuing their own self interested ends might be doing more for society than than if any of them actually tried to promote the overall well being of society.
And i don t think that adam smith would say that it s always good for someone to act self interested or that it s never good for people to actually think about the implications of what they are doing in an aggregate sense but. He is saying that frequently frequently this self interested action could lead to the greater good could lead to more innovation could lead to better investment could lead to more productivity could lead to more wealth more a larger pie for everyone and now economics is frequently and when he makes a statement. He is actually making a mix of micro economic and macro economic statements. Micro.
Is that people individual actors are acting out of their own self interest and the macro is that it might be good for the economy or the nation as a whole and so now modern economists tend to divide themselves into these two schools or into these two. Subjects microeconomics which. Is the study of individual actors microeconomics. and those actors could be firms could be people it could be households.
And you have macro economics. Which is the study of the economy in aggregate macro economics and you get it from the words micro the prefix refers to very small things macro refers to the larger to the bigger picture and. So micro economics is. Essentially how actors actors make decisions or.
You. Could actually say allocations allocations. decisions. Or.
Allocations allocation. of scarce. Resources. And you hear.
Scarce resources. A lot. When people talk about economics. And a scarce resource.
Is one you don t have an infinite amount of for example love might not be a scarce resource. You might have an infinite amount of love. But a resource that would be scarce is something like food or water or money or time or labor. These are all scarce resources and so microeconomics is how do people decide where to put those scarce resource how.
Do they decide where to deploy them and. How does that does that affect prices and markets and whatever else macro economics is the study of what happens at the aggregate to an economy. So aggregate . What happens in aggregate to an economy from the millions of individual actors aggregate economy.
We now have millions of actors and often focuses on policy related. Questions so do you raise or lower taxes or what s going to happen. When you raise or lower taxes. Do you regulate or de regulate how does that affect the overall productivity when.
You do this so it s policy top down top down questions and in both macro and micro economics. There is especially in the modern sense of it there is an attempt to make them rigorous to make them mathematical. So in either case you could start with some of the ideas. Some of the philosophical ideas so of the logical ideas to say someone like adam smith.
Might have so you have these basic ideas about how people think how people make decisions. So. Philosophy. philosophy of people of decision.
Making in the case of micro economics..
decision. Making and then you make some assumptions about it or you simplify it . Let me write this you simplify it and you really are simplifying. You say.
Which isn t true human beings are motivated by a whole bunch of things we simplify things so we can start to deal with it kind of a mathematical way so you simplify it so you can start dealing with it in a mathematical sense. So this is valuable to clarify your thinking. It can allow you to prove things based on your assumptions. And so you can start to visualize things mathematically with charts and graphs and think about what would actually happen with markets.
So it s very valuable to have this mathematical rigorous thinking. But at the same time it could be a little bit dangerous because you are making these huge simplifications and sometimes the math might lead you to some very strong conclusions conclusions. Which you might feel very strongly about because it looks like you ve proven them in the same way that you might prove relativity. But they were based on some assumptions that either might be wrong or might be over simplifications or might not be relevant to the context that you re trying to make conclusions about so it s very very very important to take it all with a grain of salt to remember that it s all based on some simplifying assumption and macro economics is probably more guilty of it in micro economics.
You are taking these deeply complicated things that are the human brain. How people act and respond to each other and then you are aggregating it over millions of people so it s ultra complicated you ve millions of these infinitely complicated. People all interacting with each other so it s very complicated many millions of interactions and fundamentally unpredictable. Interactions and then trying to make assumptions on those trying to make assumptions and then doing math with that that could lead you to some conclusions or might be leading you to some predictions and once again this is very important this is valuable it is valuable to make these mathematical models with these mathematical assumptions for these mathematical conclusions.
But it always need to be taken with a grain of salt. So then you have a proper grain of salt. So that you are always focused on the true intuition. And that s really the most important thing to get from a course on economics.
So you can truly reason through what s likely to happen maybe even without the mathematics. I. ll leave you with two quotes and thse quotes are a little bit a little bit funny. But they re really i think helpful things to keep in mind.
When you go deep into the mathematical side of economics. So this right over here is a quote by aflred knopf. Who was publisher in the 1900s and i m assuming what he is talking about as the incomprehensible. He is referring to some of the mathy stuff that you see in economics and hopefully we re going to make this as comprehensible as possible you ll see there is value in this.
But it s a very important statement he is making oftentimes. It. s taking a common sense thing it. s taking something that s obvious that s obvious and it s very important to always keep that in mind to always make sure that you have the intuition for what s happening in the math or to know.
When the math is going into a direction that might be strange based on over simplifications or wrong assumptions. And then you have this quote here by lawrence j. Peter. Most famous for peter s principals.
A professor at usc. He predicted yesterday didn t happen today and once again important to keep in the back of one s mind because especially relevant to macro economics. Because in macro economics. There is always all sorts of prediction about the state of the economy about what need to be done about how long the recession will last what.
Will be the economic growth next year what. Will inflation do and they often prove to be wrong in fact few economists even tend to agree on many of these things. And it s very important to realize that because oftentimes when you are deep in the mathematics economics might seem to be a science like physics but. It s not a science like physics it.
Is open . It is open to subjectivity. ” ..
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