Chapters:
Introduction
Psychologist Abraham Maslow framed human needs in a five categories. These ranged from basic survival needs up through personal fulfillment. Disagreements exist regarding the ways a person fulfills needs. Yet, people are motivated to satisfy these needs in various ways.
This idea is important to understand economics. If food, shelter, insurance, friends, and trips to the Grand Canyon were freely available in an unlimited supply, all needs could be met. This is not the case because items we use to meet our needs are scarce, as are the means by which we acquire them. So decisions have to be made about what, how much, and when we buy them. At the same time, we have to figure out how we will obtain the means - think money and how to earn it - to buy them. This involves choices regarding time and offering something of value to others so they will willingly exchange what they have for what you want.
In other words, to get the money to pay for your needs, you have to offer something of value. Usually that's your time as an employee, but you have to create value for your employer and their customers, and that's how you get paid. You might be an entrepreneur and offer something else of value to your own customers to make money to buy what you need.
People seek to satisfy one or more of the five needs Maslow noted. To do this, they turn to the marketplace. In the marketplace, incentives signal, generally through price, to potential buyers what may be the best value in satisfying a need. In the above video, Beth bought strawberry jam for her breakfast. If she had limited funds, and grape jelly was on sale, she may have bought grape jelly instead. If she didn't like grape jelly, she would have been willing to pay a higher price for the strawberry.
Watch this video as Johan Norberg briefly highlighted why incentives are important:
Economists refer to needs satisfaction as utility. At the same time, prices signal to sellers what and how much of a good or service to offer. If the price of a good or service increases, buyers may want less of this, and sellers may wish to supply more.
Time is a second type of incentive to which people pay attention. If someone has to work 8 hours in a day, needs 7 hours of sleep, spends one hour going to and from school, and an hour on making and cleaning up dinner, there remains only seven hours in the day. Four hours going to and from a baseball game is valuable time that could be used elsewhere or for another purpose. Something that saves time could be valuable.
We don't have to worry about whether a motive is self-serving or charitable. This is because trade for mutual gain (or perceived mutual gain) is common. If both people agree to and are happy with a trade/transaction, they both consider themselves "winners" in the transaction. In a large and diverse marketplace, people who value affordable basics can buy what they want. At the same time, those who value helping others can buy products or services that benefit others. Society is better off, overall. Each person in a transaction gains something of value that they would be less likely to have otherwise.
If you have a baseball card that I want, and I'm willing to pay you $50 for it, we agree to do it, and we're both happy with the outcome. I have less money, and you no longer have a baseball card, but I value the card more and you want the money more. Because no one forced us into this transaction, it's voluntary, and we're both satisfied.
Consider this video that expands on the voluntary nature - and morality in the motive - of this type of transaction:
The scarcity of money and time can be expanded to include nearly every aspect of one's life. Scarcity means there is a limited supply. This forces people to choose how much money to spend on things, how much time should be allocated to an activity, and how much one's labor is worth.
You may have heard the expression "there's no such thing as a free lunch." This means that in order to receive something, something must be spent. For example, imagine you go to the local supermarket and you see a table that offers free ice cream. Is this really free? You have to walk over the table, spend some time interacting with the server, and then eat the ice cream. You have spent time and effort that could have been used to do or acquire something else. This is an opportunity cost, or tradeoff.
Also, what if the ice cream is not that good or your favorite? Then the value of the free item is not the same as it could have been had you been given your favorite. While this example may seem trivial, many other decisions involve significant time, effort, and resources. Thus, what you choose, even if it is labeled free, matters and has a cost.
Producers also don't give anything away for free. That's because there are costs associated with bringing the free product or service to you. Was the ice cream in the previous example free? No, the store had to pay for it before it could give it you. Is healthcare from the government really free? No, because the healthcare is paid for by taxes. Taxes are scarce monetary resources taken from others who cannot spend the money on things they want. Also, the government healthcare involves other costs, such as administrators who design and manage the system. What is spent on administration means that some of the taxes that would go to healthcare are diverted to other uses, making it less efficient and, some would say, wasteful. Waste makes the next available alternative more valuable relative to the current option. Waste represents a type of opportunity cost.
Buyers gain the means to acquire goods and services by providing value to others. They can do so by selling labor and/or the products of labor and one's capital, such as land, a building, or materials that can be used to produce something of value. In other words, people earn income to buy goods and service by selling something of value to others.
If you can design game apps for smartphones that people want to play, you can trade for items you value, like a car (less efficient), or for currency. If you are good at explaining things, you can work as a teacher. You are more efficient when you focus on what you do best and trade with others for what you are not good at. This is known as comparative advantage. Economists describe this as maximizing benefits to you by focusing on what you do best and trading for the rest. So, rather than try to build a car yourself (assuming you know how to do this), you can work as a teacher (if this is what you are good at). Then, let others who are good a building cars make them. You then use the money you earned to buy a car and, maybe, teach the children of those who build cars.
Finally, another important factor in the exchange of products and services between buyers and sellers in a market place involve title. Buyers are confident they can keep what they acquire from sellers when they know the seller both owns what is being sold and voluntarily chooses to sell it. This allows the buyer to do whatever he or she wants with it, including reselling to someone else.
In our car example, the legal title to the car documents the seller's ownership, and the right to legally transfer possession to someone else. So if you buy it, that title is transferred to you.
The rule of law, grounded in contract, assures buyers and sellers that they are legally entitled to the result of the marketplace exchange. Without this confidence in title to property and the rule of law, prices would be higher. They would reflect the risk of losing the property or service and the supply would certainly be reduced, as only disreputable buyers and sellers would represent the market.
View the following video in which Hernando de Soto briefly discusses the absence of the rule of law in the developing world:
For example, if you purchased a car from someone, and it turned out the car was stolen (in other words, the seller did not have legal rights to it), the police could take the car away from you and return it to the rightful owner, leaving you out of luck, having lost the money you paid to the car thief.