Have you ever wondered how eggs end up in your fridge? It is not the conscious attempt of the chickens, nor is it the intention of the poultry farmers to ensure that the world is not egg-less. The farmers work to earn profit, and you buy the eggs to satisfy your own demand. You do not know the farmers, the farmers do not know you. The only force that connects you to the farmers is the invisible force of the free market.
This is the idea behind the INVISIBLE HAND, an econ term first introduced by the father of economics, Adam Smith. It is the very idea that if everyone is left to pursue their own self-interest (i.e. compete in a free market), the invisible free market force (aka, the invisible hand) will work its magic and bring the economy to equilibrium, where social benefits are attained without people actively and deliberately trying to achieve them.
Have you ever found yourself sitting, staring at something like a pencil, wondering what it is composed of, where it came from, how it ended up with you? Milton Friedman did. A pencil, its different components made by different groups of people of different origins and put together by the force of free market coordinated by price. This won't fascinate you until you think of all the processes and troubles you, yourself, would have to go through to make a single pencil with the same quality as what you are using now (taken into account of how inexpensive it is!). Then you will realize that the market is awesome!
This is flesh and bone what the study of economics is about! Watch it, I recommend!
*Note: If you hate reading facts, then jump right into the story. I have already marked it for you. I, however, encourage you to read everything if you are not a Cambodian or Laotian or Thai who shares similar tradition, culture and religious belief. Very useful information provided.
Never before have I been so fascinated by Economics. Writing this article is the only way I can think of to express my impression on an awesome story I had the opportunity to witness with my own four eyes. The story I am going to tell you is about the birth of a small market economy driven by the laws of supply and demand coupled with the aligned incentives of different economic agents.
Let me start by giving you a bit of an overview of Cambodia and poverty within this country.
My apology. As stated above, I noticed some mistakes. Well, not mistakes in a strict sense, but more like something that can potentially cause confusion. I have just realized that I really need to insert this paragraph somewhere in the text, and no where can I fit it in better than at the beginning of the article.So let me clarify one thing. I want to make it clear to all of you of there. Long story short, capitalism is about private ownership. Free market is about the freedom in exchanging of goods and services. Simply speaking, capitali...
In economics, nothing is more fun than observing words and thought of economists being animated in the real world, in our everyday life. One of the earliest economic concepts I came across was none other than income effect and substitution effect, the two popular terms which every economist is so fond of. They are very simple and easy-to-digest concepts, to be honest.
Income effect basically states that the more you earn or the more income you generate, the more you consume. For example, assuming you really like cake. When you earn $1000/month, you can only buy 1 cake/week. That is the budget cap because you need to spend your money on other necessities like utilities (water, electricity, internet...), healthy food, gas for your car, etc. But once you get promoted to a much much higher position and end up earning $10,000/month? Your entire house rains cake. You might even buy a fridge s...
Somehow, this article is one of the most read on this site. I feel somewhat guilty for not updating this earlier. When I first wrote this, I just obtained my bachelor's degree in Econ, and admittedly, the way I thought about economics back then was not very rigorous and might have left this article with a lot more room to improve. So, this update simply introduces a more refined definition, and hopefully, will leave fewer readers confused. Thanks for visiting and reading what I have to share here.
Before we proceed any further, rationality must first be clearly defined for us to be on the same page. Rationality, in a nutshell, is all about sensible and justifiable decisions based on a set of principles. But, let me define rationality in a more rigorous manner. A rational individual...