| What is economics? If you've taken any sort of | | | | definition of a free market economy in which |
| economics course, you've probably heard the | | | | transactions are not forced. Obviously one of the |
| phrase mutually beneficial voluntary transactions. | | | | largest, most meaningful examples of a mutually |
| As I will continue to say, however, you don't need | | | | beneficial voluntary transaction is international |
| to be an expert economist to understand the | | | | trade in regards to imports and exports. |
| principle. Essentially they are the foundation of a | | | | The determinant factor of the number of |
| free market economy. They are what makes the | | | | transactions that take place in any particular free |
| world go 'round. As usual, I will let a concrete | | | | market economy is price. Let's assume that on |
| example do most of the explaining. Through the | | | | any given day at any given grocery store, the |
| years, I have found that generally this is the | | | | price of of a gallon of milk is $5. At this price, 20 |
| easiest way to understand the basic principles of | | | | people are still willing to buy the milk. As price |
| economics. | | | | increases, quantity supplied increases, so the |
| Ok, so let's say I go to the grocery store and | | | | grocery store, wanting to increase their profit, |
| buy a gallon of milk for $4 (I actually bought 2 | | | | produces 40 gallons of milk. Since the demand for |
| gallons yesterday). Obviously I don't know the | | | | milk at the price of $5 is only 20 people, |
| exact market price of milk, and I'm sure the | | | | however, only 20 transactions will take place. This |
| demand curve is not likely to shift drastically | | | | situation is called a surplus, because quantity |
| anytime soon, so I rounded to an even $4. When | | | | supplied is greater than quantity demanded. |
| I check out at the register, putting tax aside, I | | | | Remember that these are mutually beneficial |
| hand the cashier $4, and take my gallon of milk | | | | voluntary transactions. On the other hand, if the |
| with me. Now, let's investigate why the | | | | grocery store for some reason lowered the price |
| transaction itself took place. Simply put, I valued | | | | to $3 per gallon, more people would be willing to |
| the gallon of milk more than my $4, while the | | | | buy milk at that price (we'll say 40 people) but |
| cashier or the grocery store itself values my $4 | | | | the grocery store would lower the quantity |
| more than the gallon of milk. Each party stands to | | | | supplied to 20, so only 20 transactions would take |
| gain something from the transaction (benefit), | | | | place. This situation is known as a shortage in that |
| thus it is considered mutually beneficial. This | | | | quantity supplied is less than quantity demanded. |
| concept explains why there are always two thank | | | | Thus the maximum number of transactions |
| you's exchanged at the register. A slightly less | | | | occurs at a price of $3, called the equilibrium price. |
| obvious but equally important idea here is that all | | | | Congratulations, you now have a better |
| of these types of transactions are voluntary, | | | | understanding of mutually beneficial voluntary |
| meaning each party actively engages in it and it is | | | | transactions than most politicians and the United |
| not forced. These concepts are the fundamental | | | | States government. |