10 Facts about Economics
Paula Stöckelle, 30th November 2020
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Economy is a very complex subject and deals with many different topics. In this Blog I am going to give you ten facts that will make you an Economics-Pro.
First up: the Abraham Maslow’s hierarchy of needs. It concerns the five human
needs which are sorted by their urgency and without having the one at the bottom
you can’t climb up to the next stage.
The first category are the psychological needs like water, food, breathing and
sleep, that are necessary for surviving. In the second row we have the safety
needs which are not essential but making live way easier. The next topic is love
and belonging needs like friends or family for feeling loved by others and having
people to talk to. The last and least reached needs are esteem needs and self-
actualization. They are all about being independent and fulfilling one’s dreams.
The next topic is a very important one, especially right now in the times of the climate crisis. I am talking about Resources. Without them everything would pretty much consist of wood and soil. If they are gone, they are gone, and it would take millions of years until they are refilled. Therefore, we must live sustainable in order to save Resources for the generations to come.
Regarding the scarcity of Resources there are two principles for making a decision. Either you reach a given goal with the smallest input possible (= Minimum Principle) or you reach the best output possible with a given input (=Maximum Principle).
Then there is the Circular Flow Model of a Market Economy. It is about the flow of goods, services and recourses and the flow of money between households and firms. In the first circuit firms supply goods and services for their customers needs and in return for that the customers or households pay for them. The second circle shows the providing of Labor, Land and Capital by households to firms which pay wages in return for that.
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For the fourth point we are looking at the 4 different types of division of
labor.The first one is the division within an enterprise so for example the marketing, the accounting and so on. Then there is a regional division because not everything exists everywhere which leads us to the international division, which is also called globalization in which China, for instance, plays a very big roll. The last type divides labor into three economic sectors within one country like for example the Primary sector with agriculture. An upside of the concept of dividing of labor would be the higher productivity per worker, however their work is very monotone and not very challenging after some time.
Next, we have the Market model by Marshall which shows two curves concerning price
and quantity. The demand curve (blue) shows, that the higher the price is, the fewer people
will buy the product. On the other side, the supply curve shows that the higher the price is,
the more supplies the seller has. With this topic it is also good to know the definition of a
market: On a market, sellers and buyers meet and agree on prices.
Furthermore, Money means a lot in economics. “Money, everything you can use for
payments” (Friedman). There are a few different functions of money like the means of
exchange, the preserving of value, the calculation and financing. However, the value of it
doesn’t stay the same forever. If money loses value and the level of prices rises, we call that inflation but if money gains value and the level of prices decreases it is called deflation. Both aren’t good and according to the European Central Bank an inflation of a maximum of 2% is constantly appearing.
Now there were some economists that invented new types of economies. The first one was Karl Marx who devised the planned economy where pretty much all the important economic decisions, like for instance who produces what for whom, are made by the state, who plans everything certainly with the help of a planning agency. However, there is no private equity on the means of production.
Next up: The Free Market Economy by Adam Smith, who thought of giving the responsibility of decisions making to the private sector instead of the state. The government only provides the legal frame like a little public sector, little taxation and public spending.
The third type is a mix between the two already mentioned one: The Eco-Social Market-Economy, invented by John Keynes, Walter Eucken and Nicolas Roegen. It basically is a free market economy where the state does interventions for correcting the worst market failures and caring for the poor people and the environment. This is the model that Austria has been using since 1995, when it joined the EU.
For our last subject I want to talk about the measurement of economic activities, forged by Joseph Schumpeter. He thought of giving the ups and downs in the economy names and calculating with the GDP (Gross Domestic Product), the total yearly income in an economy. If the GDP rises it means, there is an economic growth which is good for incomes and jobs but bad for the environment. The opposite is happening if the GDP goes down and there is a recession.
The peak is called boom and the lowest point is called slump and if it goes up again after a low point, we call that recovery.
I hope economy is better understandable now and you learned something new with those ten important subjects.
