The Economy
The economy is the system of production, distribution, and exchange of goods and services. In this section we will discuss the market mechanism and its limitations. We will also consider the role of the state and its function for the economy. We will differentiate between capitalism and a market economy.
The following graphic shows a flow diagram of the economy; comments are below.
(quoted from: Taylor, T., & Teaching Company. (2005). Economics. Part 1 of 3 Part 1 of 3. Chantilly, VA: Teaching Co. page 12)
The circular flow diagram shows the economy as consisting of three markets, and it shows how households and firms interact in those markets.
The market for goods and services (first box) shows that households generate the demand, and businesses act as suppliers.
The flow cycle is reversed for the labor market (second box.) Households are the suppliers of labor, and businesses are in need of workers and employees. Wages function as prices in the labor market.
In the financial capital market, all savers are suppliers of capital, whether they are individuals or businesses, while all borrowers are demanders of capital. Interest rates are the prices in the capital market.
Ten Principles of Economics
Quoted from: Gregory Mankiw: Principles of Economics, 3rd Edition, p. 5
This is one of the main textbooks about economics. The following rules are a good starting point for discussions, but take them with a grain of salt.
PRINCIPLE #1: PEOPLE FACE TRADEOFFS
PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN
PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES
PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF
PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
PRINCIPLE #8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES
PRINCIPLE #9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY
PRINCIPLE #10: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT