Some Basic Economic Discussion
In order to properly discuss a number of important issues of the day (immigration, gasoline prices, net neutrality, etc..) a certain level of economic education is required. Now, I’m not talking about some of the stuff you’ll learn in your standard Econ 101 or Econ 102 class, all of the jargon, some of the more advanced supply curve stuff…I’m talking about the type of common sense economics you’d learn in a book like Thomas Sowell’s _Basic Economics: A Citizen’s Guide to the Economy_. Though I’ve taken those economics classes in college, I’ve found that I’ve learned more from reading Dr. Sowell’s book than I did during the 2 semesters of economics education in school. I will try to use the knowledge I’ve accumulated over the years to try and explain a couple of fairly basic, yet commonly misunderstood items.
The first topic I’m going to discuss is a shortage. Probably the biggest misconception about shortages is that a shortages represents an actual physical lack of something (as in, there isn’t physically enough milk for everyone to have enough milk to drink), but this understanding is quite off from what a shortage really is. A shortage means that there is not enough of something for everyone to get what they want, at the current price. There is the key: “at the current price”. Too often people forget to remember that prices have a profound effect on our economy, especially with the distribution of goods. Let’s look back at the milk example again. Let’s say a gallon of milk costs 50 cents. Well, at 50 cents everyone in the neighborhood would probably go to the store and buy some, to the point where the store sells out. When the next person comes into the store, there will be no milk. This is a shortage. Of course, part of the issue is that at 50 cents, people might buy more milk than they’d buy if say, the price were $1.00, and probably more than if the price were $2.00, and progressively up to the point where the milk costs too much for people to buy anything. So if person X buys 3 gallons of milk at 50 cents, they might only buy 1 gallon at $2, and that last person who strolled into the store in the evening and found no milk when it was 50 cents, might find plenty of milk left at $2.00. To sum things up, prices help regulate how much of something someone buys.
The second topic I’m going to discuss is common a misconception about profit, namely, if you’re making a huge profit, you must be charging a lot more per item than it cost you to make said item. A simple example can show how it is possible to make a profit without charging much above cost. Let’s say, for the sake of example, that I develop a new drink, something that catches on as a replacement for both coffee and soda, so people can drink it at all times during the day. If everybody loves this drink and can’t get enough of it, I could conceivably charge as much as I wanted per bottle right? I mean, even if it costs me $1.00 to make a bottle, I could charge $10 because everybody wants it, right? That’s actually not the case (due to a principle known as “substitutes and complements” that’s a little off topic…), so I’ll charge $1.50 per bottle. So I’m only going to make 50 cents a bottle, how could I make any money? Well, if I end up selling 10 million bottles of the stuff, I’ll end up making 5 millon dollars in profit. The basic principle here is I want to increase the number of transactions that have small little profits, instead of having a smaller number of transactions that have a proportionally larger profit. As Dr. Sowell points out, this is the principle behind large grocery stores; they count on people buying a large number of items per visit as smaller profits that add up to a large overall profit. In summation, if people buy a lot of something, a company can make a large profit even if they hardly charge over the cost it takes to make that something.
Though I doubt I just explained those two principles as well as Dr. Sowell does in his book _Basic Economics: A Citizen’s Guide to the Economy_, I hope that provided a little economics background that will help in understanding a few issues that I plan on tackling next. it’s unfortunate that our school system does not provide a strong foundation on the principles of market economics, but thanks to people like Dr. Sowell, there are still ways for people who to get the information they need.