Economics 101

Economics defined by textbooks is the study of the allocation of scarce resources that have multiple purposes.

First of all, all resources are considered scarce because they cannot be delivered to the marketplace all at once.

Secondly, multiple purposes indicates that the item in question can be used in different types of finished products. For example oil. Oil can be refined into gasoline and jet fuel but it is also used in plastics.

Price then is used to allocate these scarce resources.

For example, suppose you own land around a small lake and you divide that land up into small parcels big enough to build a house according to local codes. In that process you have 100 parcels of land for sale. If you sell each parcel for $1,000 your gross is $100,000 which is a nice amount of money to have.

However, at that price, I would suspect that all your parcels of land would be sold in a very short amount of time and you would have none left.

But, if you sold each parcel of land for $10,000 or $50,000 they would not sell as quickly but you would still have parcels of land for the future in case land values increased which in all likelihood they will.

If you had an item that was used for multiple purposes like oil or milk let's say which also has multiple purposes the same as oil, how would you set price to allocate your milk to the various people that needed or wanted it?

Your price then would be based upon the various demands that were presented to you. If a cheese manufacturer that needed your milk is willing to offer $100 for a case of milk but a bread manufacturer is willing to offer you $150, who would you then sell it to. Obviously to the bread manufacturer because it would result in a greater amount of revenue for you.

So, economics can be that simply and revolves around 2 key components: SUPPLY & DEMAND. And, each one of these can be increased or decreased in order to manipulate the price in the favor of the supplier or the one demanding, typical referred to as the user or consumer.

If the supply increases but the demand stays the same, then the prices drops. If the demand is high and the supply is the same then the price increases. And, the economy rocks back and forth or up and down accordingly.

In some cases, supply can be intentionally reduced to superficially force prices to increase and an example of this is OPEC cutting back on oil extraction. Of course, there are other factors to consider here as well which revolve around the capacities of oil refineries.

A country or company can extract as much oil out of the ground as is humanly possible but if the oil refineries are already operating at 100% capacity then refined oil getting to the marketplace will be delayed and that roadblock could also force prices to increase.

The world is at the mercy of these refineries because it is too costly to build any additional refineries, so the only solution is to find ways to reduce the refining process time which would enable more output. But, I doubt any of those solutions are in our near future.

Many people that I have talked to have indicated to me that in no uncertain terms that they could care less about economics because it is too difficult to understand and does not really pertain to their careers.

I don't know whether to call these individuals naïve, silly, ignorant, or stupid but it is clear to me that they do not have a grasp on reality. No matter what one does in life, such as: artist, actor, plumber, electrician, CPA, doctor, lawyer, athlete, government worker, scientist, nuclear physicist, chemist, or volleyball coach some form of business knowledge will be required because no doubt you will be operating with a business, either as an employee or as an entrepreneur.

And, in all those cases, you will be spending your income on items whose prices are predicated upon supply and demand. In fact, your initial salary out of college seriously revolves around the mechanics of economics.

Whether you graduate in the Fall, Spring, or Summer, each graduating class faces the same economic issue: due to leaving college as a result of graduation, there is an increase of people looking for jobs in the marketplace or an INCREASE IN SUPPLY. That increase will put pressure on salaries to remain the same or to decrease, based upon economic modeling which is simply predicting how the marketplace will react in given situations.

So, you are a graduate and just like everyone else, and the supply is up... how do you compete or show product differentiation (which could increase your salary)?

Employers do not hire you because of your grades... No... they hire you because of the perceived value you offer them that someone else does not. And, this is how our economic system works.

Now, don't you wish you had taken a business class or two or at least an economics class?