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Basic Economics
A Citizen’s guide to the Economy
By
Thomas Sowell
Author of the Vision of the Anointed
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Economics is the study of the use of scarce resources, which have alternative uses.
When a military medical team arrives on a battlefield where soldiers have a variety of
wounds, they are confronted with the classic economic problem of allocating scarce
resources, which have alternative uses. Unless their time and medications are allocated
efficiently, some wounded will die needlessly.
The inherent reality is that there are not nearly enough beachfront homes to go around
and prices are just a way of conveying that underlying reality. When people bid for a
relatively few homes, these homes become very expensive because of supply and
demand. But it is NOT the prices that cause the scarcity. Even if Congress were to
declare that beachfront homes were a basic right of all Americans, it still would not
change the realities of the situation.
Prices act as a guide for consumers and producers. A free market economic system is
sometimes called a profit system, when it fact it is a profit and loss system. And the
losses are equally important for the efficiency of the economy, because they tell the
manufacturer what to stop producing.
Resources tend to flow to their most valued uses. From the standpoint of society as a
whole, the COST of anything is the value that it has as in alternative uses. The real cost
of building a bridge are the other things that could have been built with that same labor
and material. There is also a scarcity of time to consider and the alternative uses of that,
as well. The cost of watching a television sitcom or soap opera is the value of the other
things that could have been done in that same time.
In a price-coordinated economy, any producer who uses ingredients that are more
valuable elsewhere is likely to discover that the costs of those ingredients cannot be
repaid from what the consumers are willing to pay for the product. There will be no
choice but to discontinue making that product with those ingredients.
Prices
There are all kinds of prices. The prices of consumer goods are the most obvious
examples but labor also has prices called wages or salaries, and borrowed money has a
price called interest.
Price changes in response to supply and demand. These changes in price then direct
resources to where they are most in demand and direct people to where their desires can
be satisfied most fully by the existing supply.
A sudden and widespread destruction in housing in a given area means that there may not
