Friday, August 3, 2007

The Most Important Concepts

It started with a post by Greg Mankiw. Then Arnold Kling weighed in. This was followed by another post from Dr. Mankiw. (By the way, the comments following each post are also quite interesting.)

Now, given the main object of this blog, I feel a need to weigh in. I believe the most important concepts (or groups of concepts, if that’s more appropriate) are as follows:

1. Choice and opportunity cost: economics is about decision-making. What do we choose and what do we sacrifice. This can be helpful not only for other aspects of economics (margin, etc.) and financial literacy (budgets, etc.).
2. Supply/demand and market price: Explaining how markets provide goods and services and mechanism for consumer choice. Also understanding that, in a market system, price is a rationing system.
3. Money and the equation of exchange: Understanding that money is tool to facilitate exchange, and that “money matters.”
4. Comparative advantage, specialization and gains from trade: Important to demonstrate interdependence and the impact on real income that comes from “do what you do best and trade for the rest.”
5. Economic systems: The impact and results of how decisions are made. Whether tradition, command or market, this is important to understand. Also a good place to discuss the role of institutions in our decision-making process.

What are your thoughts, and why?

Posted by TSchilling at August 3, 2007 11:18 AM

The equation of exchange and its value was brought to light for me when you recommended The Wall Street Journal opinion. I wonder why we spend so much time on the aggregate expenditures model when more time should be devoted to this concept.

Posted by: mike fladlien at August 3, 2007 12:06 PM

Tim this is a great question as many of us are taking a good look at our economics courses and revising for the coming school year. The blog comments are interesting and several provacative.We could have a great discussion.
Here is my list
1) Scarcity and opportunity cost; thinking at the margin
2) Incentives matter
3) Market Prices as signals; supply and demand
4) Comparative advantage/trade
5) Fed and Monetary Policy

Posted by: Julie Chismar at August 5, 2007 9:20 AM

Price is a rationing system in a market mechanism. I find that this statement is a profound one! What are the benefits and costs of such a system? In one hand it provides an efficient way of allocating resources but it also can have some inadequacies: i am thinking about a situation of lackage of water. Increasing the price of water (in such a way that its demand equals the available supply) would prevent low income households to have access to it. Do you know any paper discussing this matter? Thanks for your attention.

Posted by: Fábio List at August 6, 2007 10:03 AM

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