Foundational Concepts in Economics
That a free economy works at all is one of the most remarkable things in the human experience. How can billions of people acting in their individual self-interest—and knowing little about the particular purposes or wishes of others—nevertheless manage to cooperate and produce for one another an ever-increasing abundance of goods and services with nobody in charge?
Some basic economic concepts help us understand and appreciate that marvel.
This course has two main goals. The first is to help the reader learn “the economic way of thinking,” the foundational con- cepts economists use to make sense of the economy. Those concepts, on which the rest of economics is based, are pre- sented in Lectures 1–7: subjective value, scarcity, opportunity cost, thinking “at the margin,” comparative advantage, division of labor, and the famous supply and demand.
The second goal is to help readers understand why people need free markets to flourish. The underlying institutions of a free market—private ownership and freedom of exchange— are necessary to human well-being for three main reasons, addressed in Lectures 8–12.
First, we need the information that free-market prices give us. Market prices are a kind of telecommunications system; they communicate to everyone what everybody else individually knows about the availability of and need for various goods and services, and thereby they make it possible for us to coordinate our various actions.
Second, we need free-market profit and loss to guide business enterprise. Profit made in a free market signifies the creation of value for others; loss signifies the destruction of value. In a world where no one can be sure what to do today to make the world a better place tomorrow, this profit-and-loss guidance is indispensable.
Third, we need the incentives that free markets give us to serve others. In free markets, we all must consider the wishes of others in order to get from them what we want, because those others don’t have to deal with us. That is not the case where government force may be used to get what we want from others against their wishes. In brief, free markets provide everyone the knowledge, the guidance, and the incentives we need to produce for one another in an extended order of human cooperation.
Economics has great explanatory power. It helps us understand much of what happens in the social world, and how free people benefit others as they seek to benefit themselves. I hope you enjoy this presentation of why that is so.
In this series of lectures, Howard Baetjer gives an overview of a few foundational concepts in economics.
Baetjer outlines some basic concepts essential to understanding economics, including the natures of wealth and economic value.
Baetjer explains scarcity, the problem that any given good of finite supply can only ever be put to some of the many ends for which we might use it, and opportunity cost, the concept that taking one option costs us the benefit we would have gotten from taking the next-best option instead.
All economic behavior occurs through marginal thinking. The decisions of economic actors are “bit by bit” decisions, not all-or-nothing ones.
Building on the concept of opportunity cost, Baetjer explains how specialization and trade make us richer.
Baetjer explains the “demand” half of “supply and demand.”
Baetjer explains the “supply” half of “supply and demand.”
Having discussed supply and demand separately, Baetjer explains how, together, they describe the way markets operate.
Prices, explains Baetjer, are a powerful tool for getting people the knowledge they need to cooperate with one another in the market.
Continuing his discussion of prices, Baetjer explains what can go wrong when outside interference prevents genuine market prices from emerging.
The trial-and-error based profit and loss mechanism, says Baetjer, is an indispensable tool for guiding discovery and innovation in the economy.
Baetjer argues that the incentives inherent in market institutions outperform the incentives inherent in state institutions in getting people to properly consider the well-being of others when they act.
Baetjer illustrates the harmful effects of economic regulations and argues that we ought to instead prefer economic liberty.
About the Lecturer
Howard Baetjer is a Lecturer in the Department of Economics at Towson University in Towson, Maryland, where he teaches courses in microeconomics, comparative economic systems, and money and banking. He is the author of Free Our Markets: A Citizens’ Guide to Essential Economics (2013) and Economics and Free Markets: An Introduction (2017).