How An Economy Can Be Studied
An economy is a way of organizing production to fulfill demands for goods and services. It’s what we refer to as a “marketplace,” because it features lots of different sellers competing to win over customers with their products and services.
When enough people have adequate supplies of all the things they need to survive, then everyone can focus on meeting their own needs instead of spending time seeking out those resources. This stability allows individuals to devote more time towards other priorities like socializing, learning, and investing in long-term growth.
We could say that our society’s economic health depends on the quality of its individual members’ personal experiences. If someone else always gets the better end of the stick, then they will develop feelings of discontent or even anger towards the system, which could lead to destructive behaviors such as violence or suicide.
Alternatively, if everyone feels like they are sharing in the wealth, then individuals will feel connected to each other and the world around them, which is another important factor in fostering healthy relationships and environments.
With this understanding of how economies work, let’s take a look at some theories about why inequality seems to be rising in many developed countries today.
An exogenous shock is any event or experience that directly impacts your daily life, but outside of you. Examples are having a house burn down, being involved in a car accident, learning that someone close to you has cancer, or winning the Super Bowl.
All these events are external to you as an individual, but they still have large internal effects. They can shift the perception of how well your life is going, change what you consider important, and influence whether you feel like staying within the confines of your job to avoid embarrassment or advancing in your career because of lack of opportunities.
These types of experiences are very common in our society. People with first-hand knowledge of poverty describe it as feeling like you’re walking around hungry all the time. Having a major health problem changes people’s expectations about their own mortality.
People who experienced the death of a loved one often talk about how much their lives changed. A good number of high profile suicides were accompanied by depression, stress, or both. These factors clearly affect most people at some level, so it makes sense that they would have lasting effects.
An endogenous shock is anything that changes the environment in which people operate. These shifts can be positive or negative, but either way they have direct effects on how people behave.
A big example of this is when the stock market crashes. When the markets are diving, investors become more cautious about investing money in stocks. This cuts down on the amount of investment capital available to companies, so they must cut employee pay, benefits, etc.
This has a domino effect on other industries. For instance, take a look at what happened after the 2008 financial crisis. Many large corporations found it hard to get credit because people were nervous about whether or not they would survive the next downturn.
These businesses cannot afford to spend money right now, so they keep their payrolls low, which eventually trickles down to your local shopping mall.
When we talk about how economies work, one of the most important things to know is what we call aggregate demand. This is simply the total amount of money that people have in an economy at any given time.
We can look into two different types of aggregates when talking about demand. One is consumer demand, which is everything from food to clothes to houses to cars to gadgets to you get this – spending money on yourself! The other is investment demand, which is investing in businesses or buying new equipment for your job.
Both groups of individuals are involved in creating more of something by consuming it or putting more effort into making it. For example, if there’s a lot of hungry people in the world, then people will buy lots of foods so they don’t go hungry. In addition, companies will produce and sell more goods because there’s a lot of money to be made selling them.
A key concept in economics is aggregate supply, or how much product there is to be had given market conditions. For example, if there are only one million cars in the world, then we can talk about how many cars there are currently being produced.
The amount of production you have left after all current projects come to a close defines what the available supply of cars is at any moment in time. In other words, it tells us how many more cars there will be coming out of car factories moving forward.
This also applies to food, water, and other basic resources our bodies need to survive. As humans living in modern times, we often take these for granted but they play an important role in health and well-being.
When supplies run down, epidemics break out and violence erupts. This is why economists spend so much time studying trends in aggregate demand and supply.
The money supply
When we talk about economics, one of the first things we discuss is how to measure our economy. We look at GDP (gross domestic product), unemployment rates, inflation levels, etc., but what are all these numbers really telling us?
The most important number in this category is growth. Are we experiencing steady, strong economic growth or are there significant lulls in activity? More importantly, why are there gaps between periods of expansion?
We can’t answer those questions unless we understand how quickly or slowly money is being injected into our economy. This is called the money supply.
There are two main components of the money supply — currency units and credit cards. Both play an integral part in our daily lives, as we use them for purchases.
The financial sector
As we've seen, the economy as we know it is made up of three major sectors: business, government, and what we like to call the consumer market. Businesses produce goods or provide services, governments spend money, and individuals consume whatever products and services they have available for purchase.
In fact, one could make an argument that it's the individual consumers who are actually the main drivers of our economic growth. People will continue to buy things if there are no advertisements telling them not to!
While studying the finance sector is definitely important, focusing only on the banking industry can be limiting in terms of how much you learn about the overall economy.
For example, while learning more about how banks work may help you understand why some go bankrupt and why others get rich off of investing, ignoring the other two major components of the economy can distort your perception of what makes the economy thrive.
So before jumping into banking, take a look at the other two major parts of the economy first- the business side and the governmental side.
The following article will discuss some basic concepts related to both of these topics, along with some notes on the finance sector.
The labor market
A field that studies the economy are economists. Economists study how economies function, through studying what people do (labor) and where things come from (inputs). They also study how to make sure everything functions smoothly, by looking at how markets work.
Economics is not just about money; it’s about both! When we talk about economics as a field, what we mean is the discipline of learning about how our economic system works.
Economics is actually quite diverse. Some areas of research focus more on inputs or the production side of the economy, while others look at consumption, savings, or debt. There are even some schools that combine these concepts into one area!
All types of economics contribute to our understanding of why economies function the way they do. To tell whether an intervention will work, for example, you need to know how humans respond to incentives, and you need to understand how resources are spent in the long run.
Economic theories can be used to explain why certain behaviors occur, and if there are any patterns to seen behavior, then theories can be applied to new situations. This helps us formulate policies and strategies to ensure more efficient functioning of the economy.
Overall, economics gives us insights into how the world operates. It can help us predict how the economy will behave, and suggest ways to improve the efficiency of the economy.
The goods market
During most of our history as a civilization, we lived in small tribes or clans with little to no contact with people outside their tribe. As you probably know, this changed when early traders started going out more frequently to gather resources and sell their products to other groups.
As time passed, these sellers began organizing themselves into business firms that focused on one product or area of the economy. This is how the industrial revolution was able to take place, where large companies manufactured everything from cars to clothes to computers.
These big businesses are what made it possible for us to have industries like manufacturing or technology, modes of transportation like automobiles and airplanes, and something many of us take for granted – electricity!
Today, we still have mostly small scale trades, but they are done online or through things like eBay, Amazon, and Craigslist. Online shopping has become very common, which helps explain why stores exist!
The reason that stores exist is because people want to connect with each other by buying similar items, so they come together in organized groups to do so. Businesses use stores as a way to reach out to others about their products!
Stores also help protect buyers against fraud by providing a safe environment. For example, if someone claims to work at a company then can’t deliver the item due to unexpected circumstances, the store will likely refuse to send the item or give money back to them.