Human beings need a number of things in order to survive: food, clothing, housing. Economics is a science devoted to the study of everything in relation to these necessary goods. The words economy and Economics come from the Ancient Greek οἶκος (house) and νομός (norm, government).
Thinking about money, work, how to get a place to live, how to make ends meet, are often a source of anxiety for most people. Ethics, as a discipline involved in human beings’ happiness and dignity, must address these problems affecting so many people in such a deep way.
As Economics is a science devoted to the administration of necessary goods, it is only of those goods that are scarce and need to be paid for. If there were an endless supply of these goods then Economics would be unnecessary. On the other hand, there are goods, like love or talent, which are not economic goods, as they cannot be sold or bought. We cannot sell or buy human beings either. Setting the limits of economic and non-economic goods is one of the tasks of Ethics.
Fundamentals of Economics that all citizens should know
Economy issues –money, work, savings, debts, businesses and mortgages- are very important in our lives. It is therefore necessary that all citizens have clear notions about how the economy works. Lots of political debates both on TV and the press deal with these issues and, if we do not understand them, then we cannot act as responsible citizens.
What is money? It can be anything people want it to be –literally. It is easy to think of money as pound notes or euro coins, but money is anything that a majority of people can agree on as a means of exchange. If enough people in one town are willing to accept doughnuts as money, then doughnuts are money -at least for the people in that town. They might run into trouble when they try to spend those doughnuts in other towns, however.
Before coins or paper money, people exchanged (traded) fish for stone tools or leather goods for wood. This method of exchanging one thing for something else is called barter. It is still in use today: Sue might agree to fix David’s electrical wiring if David agrees to figure Sue's income tax. They've exchanged services, not goods, but they've still bartered.
The difference between barter and money is the situation. Money can be used in most situations; in the case of barter, each individual must have something to exchange that the other individual needs or wants. Sue and David can agree to swap electrical work for accounting, but Harold, another accountant, might insist on being paid in dollars and cents. Harold may not need any electrical work done, and he can spend dollars anywhere.
Supply and Demand
Two of the most basic concepts in Economics are supply and demand. These are really two separate things, but they are almost always talked about together.
Supply is how much of something is available. For example, if you’ve got 9 CDs, then your supply of CDs is 9. If you’ve got 6 apples, then your supply of apples is 6.
Demand is how much of something people want. It sounds a little bit harder to measure, but it really isn’t. To measure demand we can use a very simple numbering system, just like the supply one. If 8 people want CDs, then we can say that the demand for CDs is 8. If 6 people want apples, then we can say that the demand for apples is 6.
Did you notice that the CDs supply was one more than the CDs demand? Did you also notice that the apples supply was equal than the apples demand? We’ll get to that in a minute.
Let’s see how supply and demand in a market interact to determine how much of something is sold and bought, and what the price is.
The crucial ideas are that supply and demand are determined separately. The sellers determine the supply. The buyers determine the demand. In a free competitive market, the price of whatever it is moves up or down until the amount supplied equals the amount demanded. When the price stops moving, you have what is called equilibrium.
Excess demand is the amount demanded minus the amount supplied. If excess demand is negative, the amount supplied is bigger than the amount demanded, and you have excess supply.
Excess demand and excess supply are important because they encourage competition that tends to make the price change. Excess demand tends to induce competition among the buyers that forces prices up. Excess supply tends to induce competition among the sellers that forces prices down. Equilibrium is reached when there is no tendency for the price to move either way. At equilibrium there is no excess demand or excess supply.
Higher demand makes both the price and the quantity sold go up. Lower demand makes both the price and the quantity fall. Also, when price falls, demand increases.
This continues to happen until, the quantity supplied equals demand. This method generally works for most commodities, because the suppliers could store the commodity for future use. Also the general assumption is that at a price of 0 (dollars, euros or pounds), the demand is infinite.
- What is Economics?
- Where do the words economy and Economics come from?
- Explain the relationship between Ethics and the economy.
- What is the task of Ethics in the field of Economics?
- What was the economic method before the invention of money? How does this method work? Do people still use this method nowadays? Give an example.
- Explain the concepts of supply and demand in your own words and give examples.
- Explain the concept of equilibrium.
- Give an example of how at the price of 0, the demand is infinite.
State capitalism vs. free market
A free market is a market structure in which the distribution and costs of goods and services, wage rates, interest rates are coordinated by supply and demand with no external regulation or control by government or monopolies. A free market contrasts with a controlled market or regulated market, in which government policy intervenes in the setting of prices. An economy composed entirely of free markets is referred to as a free-market economy. It can also be called liberal economy or free capitalism.
For much of the past 40 years, the long-running, 20th-century contest between state and market had appeared settled. The strong, post-Reagan economic performance of the U.S. based on deregulation and free market appeared to confirm the virtues of liberal economic policies, while the collapse of the Soviet Union and the capitalist revolution in China proclaimed the death of state-dominated systems. Free capitalism had emerged a clear winner.
Or so it seemed. After the 2008 financial crisis, the debate over the proper role of the state in a modern economy has been reopened. In the U.S., President Barack Obama promotes more active government policy to create jobs. In Europe, politicians are grappling with how to regain competitiveness through liberalisation while still maintaining the extensive social protection of their welfare states.
There appears now to be a crisis of capitalism because our economic model cannot produce sustainable growth, adequate income or employment creation.
Emerging markets like China, however, have generally maintained their growth despite the devastating global downturn. So as the market economies of the West fail, some have asked if “state capitalism,” that mix of market forces and state control, can produce better economic results.
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.
Unlike in a free-market economy, the government would have considerable indirect influence over the economy through fiscal and monetary policies designed to counteract economic downturns and capitalism's tendency toward financial crises and unemployment, along with playing a role in interventions that promote social welfare.
In Spain there is a mixed economy and it is recognised as such in our Constitution.
Businesses and Ethics: Social Responsibility
Over the past few decades, social responsibility has become an increasingly important topic of discussion in all aspects of life in the United States. Although nearly everyone has an intuitive idea of what it means to be socially responsible, there is no hard and fast definition of this term. Normally, people try to be socially responsible by doing what they think is the most beneficial to others in a given situation. For an average individual, practicing social responsibility could mean recycling, picking up after your dog, driving a fuel efficient car or taking public transportation whenever possible, or being honest with others.
Social responsibility extends beyond individuals to larger entities like businesses. Social responsibility is becoming more and more important in the business world these days, both because socially responsible actions are the right action and because businesspeople are finding that social responsibility is profitable. In many cases, consumers and investors alike are more likely to support companies who have a reputation for being socially responsible. Thus, large companies who pursue socially responsible courses of action could end up on top in competitive markets.
Investors and consumers alike are interested in making sure that the companies they support are doing the right thing for the environment and for society.
Some organisations like Greenpeace keep watch over businesses who do not comply with environmental regulations. Greenpeace campaigns are very strong and can make big corporations rectify.
The World’s Greatest Problems
In a survey carried out by Eurobarometer EU citizens were asked to rank which problem they thought constituted the biggest threat to the world. The survey was conducted in June 2011 and it shows the top 10 biggest problems in the world for Europeans. Here is what they were most concerned about:
Number 10- Not a Clue
Two percent of the people surveyed said they're still thinking about what the world's biggest problem is. They answered that they simply didn't know.
Number 9 - Proliferation Of Nuclear Weapons.
Three percent of the EU considered the proliferation of nuclear weapons the one thing that is going to bring the world to destruction. The numbers seemed to be higher in South-East Europe, with Cyprus, Bulgaria and Greece among the most concerned.
Tied Number 7 - Armed Conflict
Four percent of the EU believe that war is the biggest problem. The fear is highest in the Balkans, with Bulgaria the most concerned nation. Latvians and Estonians are also fearful.
Tied Number 7 - Spread Of Infectious Disease
Four percent are terrified that a global epidemic will wipe out mankind. The Czech Republic and neighbouring Slovakia are the countries most concerned.
Number 6 - The Increasing Global Population
Five percent of the EU believe there is not enough room in this world for everyone. Scandinavia is particularly concerned about population growth with Sweden being the most afraid nation.
Number 5 - Availability Of Energy
Seven percent of Europe fears a global blackout. The concern about the availability of energy was expressed most vigorously in Germany and Italy. It is no coincidence that they are two nations that make some of the world's finest automobiles.
Number 4 - International Terrorism
Eleven percent are most fearful of an international terrorist threat. Bulgarians seem the most concerned about an attack, while Denmark, Czech Republic and Slovakia are also very afraid.
Number 3 - The Economic Situation
It is surprising that this is not at the top of the list. Only 16 percent of Europe believes that the globe's economy is its single biggest problem today. Less surprising is that Greece is the most concerned European nation when it comes to economic matters.
Number 2 - Climate Change
Twenty percent of Europe think that climate change is the world's biggest problem. Sweden and Luxembourg were the most concerned nations, but the Portuguese have other problems; only seven percent of Portugal thought climate change was a global issue.
And Number 1 - Poverty, Hunger And Lack Of Drinking Water
Twenty-eight percent of the EU said that poverty, hunger and lack of drinking water represented the biggest problem for the world.
- Explain the difference between free market and state market.
- What type of economy is the Spanish one? Give details.
- State three things you can do to act as a responsible citizen.
- Write a composition about the problems in the world that worry you the most (100 words).
CHECK YOUR NEW VOCABULARY
Form full sentences using the words below:
Economics, supply, demand, savings, debts, mortgage, barter, commodities, free-market, mixed economy, state-dominated system, sustainable growth, welfare states, income, unemployment, social responsibility, recycling, fuel efficient, profitable, consumers, investors, nuclear weapons, climate change, global issues.