Economics on One Foot
How quickly could you sum up the principles of economics? While standing on one foot, Prof. Art Carden discusses the following economic principles in just over two minutes:
- Individuals strive to achieve their goals in the best ways possible.
- Every action has a cost.
- Incentives matter.
- Value is determined on the margin.
- Profits and losses help gauge value creation and destruction.
- Government interventions often have unintended and undesirable consequences.
Economics on One Foot
My name is Art Carden, and this is “Economics on One Foot.”
People act. This means that we choose goals, and we try to find what we think are the best ways to achieve those goals.
We have a lot of alternatives. This means that every action we undertake has a cost. We have to give up something in order to do something else. Since every action has a cost, people are going to respond to incentives. We’re going to do more of things that get cheaper. We’re going to do more of things that get easier. We’re going to do more of things that pay better. We’re going to do less of things that get harder. We’re going to do less of things that get more expensive, and we’re going to do less of things that pay worse.
Resources are scarce. They have a lot of different uses. And the value of a resource is determined by what you can do with one more unit of the good, not by the nature of the good itself. A bottle of water isn’t really worth a whole lot, because we have a lot of water. And one more bottle of water isn’t really going to add a whole lot to our satisfaction. A diamond is worth a lot, because we can do a lot of things with a diamond. I could give a diamond to my wife, which she would like a lot.
Profits tell businesses whether they’re using resources wisely or unwisely. A business that earns a profit is turning resources into something that is more valuable than those resources would be in any other line of employment. When a business earns a loss they’re using those resources to produce something that is less valuable than those resources could have been in some alternative line of production.
Sometimes people don’t like the outcome that the market produces. As a result they turn to the government, and the government uses force to change people’s incentives. These changes in incentives often have unintended and undesirable consequences like, for example, poverty from restrictions on trade, shortages from price controls, and unemployment from things like minimum wages.
My name is Art Carden. I’m an economist, and this has been “Economics on One Foot.”