Anne Rooney - Think Like an Economist

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Published in 2022 by The Rosen Publishing Group, Inc.

29 East 21st Street, New York, NY 10010

Copyright Arcturus Holdings Limited, 2022

All rights reserved. No part of this book may be reproduced in any form without permission in writing from the publisher, except by a reviewer.

Cataloging-in-Publication Data

Names: Rooney, Anne.

Title: Think like an economist / Anne Rooney.

Description: New York: Rosen YA, 2022. | Series: Think like a

Identifiers: ISBN 9781499470949 (pbk.) | ISBN 9781499470956 (library bound) | ISBN 9781499470963 (ebook)

Subjects: LCSH: Economics--Juvenile literature. | Finance, Personal--Juvenile literature.

Classification: LCC HB183.R66 2022 | DDC 330--dc23

Manufactured in the United States of America

CPSIA Compliance Information: Batch #CSRYA22.

For Further Information contact Rosen Publishing, New York, New York at 1-800-237-9932.

CONTENTS

INTRODUCTION

What is economics about?

Economics arises from the need to choose how to spend what we have, to apportion our resourcesto economize, in fact.

Would you rather go on vacation or buy a new sofa? Would you prefer your government to spend more on education or reduce taxes? Should health care be free?

Questions like this lie at the heart of economics. They require us to choose how to use the financial resources available to us or our government, knowing that choosing one thing often means giving up another. They arise when we have to deal with scarcitywith choosing how to allocate limited resources.

These questions come about because for most peopleand all governmentsmoney is a limited resource. You might not have enough money to afford both a sofa and a vacation. A government might not have enough money to improve education and reduce taxes. It is not only about money; land and time are also limited resources.

If there were plenty of everythingunlimited food, land, housing, healthcare, education, transport, booksthere would be no need for money, no need to choose or prioritize one thing over another, and consequently, no need for economics.

Never enough

All the things we usethe food, housing and booksare called resources by economists. Most of them are in limited supply; they are, in economics-speak, scarce resources. Economists use "scarce" in a slightly different way from everyone else. They dont mean the resource is rare or in short supply in the way that snow leopards are scarce. They mean simply that the supply of the resource is limited: either it is not renewable or it is not renewable at the rate at which it is used. So oil is a scarce resource, even though in some countries there is plenty of it, because eventually it will run out and cannot be replenished. Economics is, essentially, the process of making choices about how to use scarce resources.

A very few things are essentially unlimited in their supply. Examples are air, seawater, sunlight and wind power. Economists generally call these free goods, though in reality there is a limit to air and seawater.

How to choose

Scarcity forces us to make choices. We might choose whether to use our time maintaining a vegetable garden or playing a sport; we have limited time and have to choose how best to use it. A business might choose to use its limited number of staff to make wheelbarrows or ladders, according to which it thinks will be more profitable. A government might choose whether to spend more on welfare payments or on road building.

In each case, we have to weigh the costs and benefits. There is often a trade-off: this generally means that having one thing requires us to relinquish another. If you spend your money on a vacation, you may not have enough to spend on new furniture. If you work part time in order to spend more time with your family, you will earn less money than if you work full time. You can choose to have (or give up) either money or free time.

Lost and costly opportunities

Economists apply mathematics to these commonplace ideas, making it possible to create useful models to explain what happens in an economy and help individuals, businesses, and governments make plans for the future.

Imagine a farmer who can grow both strawberries and raspberries on her land. She only has a limited amount of land, so she must decide the most profitable way of using it.

If the farmer chooses to grow more strawberries, she must grow fewer raspberries, and vice versa. If we draw a graph, we can calculate the opportunity cost of growing each type of fruit. The farmer has three greenhouses, so she must choose how many to allocate to strawberries and how many to allocate to raspberries.

NO LIMITS

Free goods can be produced with no cost in terms of resources. Ironically, this leads to a definition of free goods that can include or exclude identical items. Intangible goods such as a computer program, web page or ebook, which can be downloaded any number of times without using more resources, are free goods. The original composition, though, has taken resources to create (in the form of time, skill, and effort). If a publisher makes a charge for the program or ebook, identical copies of the item are no longer a free good because the consumer has to use resources (money) to acquire them. Intellectual property rights convert a free good to a scarce good in recognition of the resources used in its original creation.

If the farmer decides to use two greenhouses for strawberries, she then has only one greenhouse in which to grow raspberries. For each greenhouse of strawberries she grows, the opportunity cost is one greenhouse of raspberries, and for each greenhouse of raspberries, the opportunity cost is one greenhouse of strawberries (see graph on facing page).

A POST-SCARCITY ECONOMY

Some futurists have suggested that nanotechnology (creating things at a molecular level) might one day be used to convert any type of matter into any other matter of the same mass. All goods would then become free goods as they would be limitlessly interchangeablethere would be no restriction on any particular type of good.

The curve gets curvy

In this case, the opportunity-cost graph is a straight line: each greenhouse of strawberries costs one greenhouse of raspberries and vice versa. But it is rarely this straightforward.

Heres another example: suppose we have an island that has rich, fertile land on one side and rocky scrubland on the other. The principal farming products of the island are goats and wheat. The islanders have to decide how to allocate the land. This time, the opportunity cost is not a straight line because the resource (the land) is uneven. It will be very difficult to grow wheat on the rocky scrublandlittle will take root there. But goats can tolerate scrubland. It is also easy to keep goats on the fertile land, but that would be a waste because it is good for growing wheat.