Random thoughts on the basics of economics

At its basic level, economic growth involves an increase in the production of goods and services. Real growth - that is, economic growth adjusted by population - is thus a function of efficiency: an increase in the production of goods and services per head of population. This implies an increasing efficiency in production. In a market system, efficiency is measured by profits and price. In any system (market or otherwise), efficiency is measured by total cost.

Profit: When goods and services are cheaper to produce, private companies make higher amounts of profit.
Price: When goods and services are cheaper to produce, consumers pay less.
Total Cost: When goods and services are cheaper to produce, the total cost of production and consumption to the economy is lowered.

The economy suffers when:
  • The total cost of purchasing these goods and services goes up - total cost being price plus total cost of ownership plus total cost of production. Cost involves more than price.
  • The measurement of price and cost becomes opaque due to changes in the value of money, which acts as a unit of measurement. (Money is simply the means by which society orders the economy around. Money acts as a unit of exchange, a unit of measurement and an asset that is subject to the laws of supply and demand.)
  • Investment bubbles occur within a market system. A bubble is inherently unproductive.
  • An economy produces and consumes goods and services that it does not need (eg, most Western nations can survive on half the food they consume without any real negative effects to the economy)

If there is no increase in the efficiency of production, the economy moves into a steady state, neither growing nor declining (the model proposed by Robert Solow).

An increase in the efficiency of production usually results from technological change (also pointed out by Solow)

While the market system is the most widely used economic system, government forays into an economy have proven to sometimes work and sometimes not. The only pragmatic reason for a government to inject itself into an economy (ie by producing goods and services itself) is if it is able to be more efficient than the market in the area being affected (there are other reasons than being pragmatic though).

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