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--- lb:basic.economics [2025-12-29 18:42:21] – Minor formatting changes. ninjasr
+++ lb:basic.economics [2026-04-29 06:57:16] (current) – [Value] ninjasr
@@ Line 1: / Line 1: @@
 ====== Basic Economics ======
-This article explains the basics of [[lb:economics]]. As in: the market, pricing, stuff like that.
+<div subtitle>
 {{tag>economics musing}}
+</div>
+This article explains the basics of [[lb:economics]]. As in: the market, pricing, stuff like that.
 ===== Notes =====
 I am still working on this and I wrote it up very fast. I think it gets across the basics well enough, but it could definitely be re-written to be more...pleasant to read afterwards.
@@ Line 11: / Line 13: @@
 The absolute basics of all economics starts with <dfn>Supply</dfn> & <dfn>Demand</dfn>. If you do not understand these fundamentals, you will fail to understand //any// kind of economics. Including why some economic systems are non-functional (//ahem//, socialism).
-Supply & Demand are less of a strictly economic law and more of a //law of nature// that manifests in the economy.
+Supply & Demand is not strictly just a law of //economics//, but more a //law of nature// that manifests //in// the economy.
+<div passage>
+**Supply** is a measure of how much of something there is. It's pretty simple and self-explanatory.
-**Supply** is a measure of how much of something there is. It's pretty simple and self-explanatory.\\
 **Demand** is a measure of how much that something is //wanted// in an economy. It's also pretty self-explanatory.
+</div>
+<div passage>
+What's a bit more complicated – and what needs to be grasped – is the //relationship between those two//.
+Supply & Demand want to exist in a state of equilibrium. This is the ideal state where the supply perfectly matches the demand for it. That state is also difficult to reach.
+If they are not in a state of equilibrium, then the <dfn>value</dfn> of supply will change to match the demand.
-What's a bit more complicated – and what needs to be grasped – is //relationship between those two//.\\
-Supply & Demand want to exist in a state of equilibrium. This is the ideal state where the supply perfectly matches the demand for it. That state is also difficult to reach.\\
-If they are not in a state of equilibrium, then the <dfn>value</dfn> of supply will change to match the demand.\\
 At this point, ‘value’ is represented in <dfn>price</dfn> which is expressed in a given <dfn>currency</dfn>, though neither of those are technically required for understanding how supply & demand works.
+</div>
+<div passage>
+If the demand is higher than the supply, then the price of the supply increases. By increasing the price, the demand lowers because those demanding it are gradually less willing to obtain the supply.
-If the demand is higher than the supply, then the price of the supply increases. By increasing the price, the demand lowers because those demanding it are gradually less willing to obtain the supply.\\
 If demand is lower than supply, the price of supply will decrease which causes demand to rise. This continues until a state of equilibrium is reached.
+</div>
 This doesn't happen in all situations and modern economies tend to //appear// more rigid. An alternate situation is that supply starts being increased to match demand, though the price would still usually increase. Think about scalpers and whatnot if you have trouble picturing this.
-Now, I stated that Supply & Demand is more of a law of nature...but what does that mean? It means that technically everything is in some form affected by some kind of Supply & Demand...because it's just a natural result of scarcity.\\
+<div passage>
-Think about it like this: if the number of predators in a given ecosystem increases, then the population of prey will start to decrease as well. This causes a ‘collapse’ if the population of prey is too low, which results in the population of predators crashing. Eventually, a state of equilibrium is reached in which the population of prey and predators matches to a degree where both survive long-term.\\
+Now, I stated that Supply & Demand is more of a law of nature...but what does that mean? It means that technically everything is in some form affected by some kind of Supply & Demand...because it's just a natural result of scarcity.
+Think about it like this: if the number of predators in a given ecosystem increases, then the population of prey will start to decrease as well. This causes a ‘collapse’ if the population of prey is too low, which results in the population of predators crashing. Eventually, a state of equilibrium is reached in which the population of prey and predators matches to a degree where both survive long-term.
 This is basically just a “market economy” in nature...just that most people don't think of it like this.
+</div>
+<div passage>
+As Supply & Demand is //just a thing//, it also means that not understanding how it works can result in serious misjudgements and misunderstandings about //how// the economy works and what solutions can/should be implemented.
-As Supply & Demand is //just a thing//, it also means that not understanding how it works can result in serious misjudgements and misunderstandings about //how// the economy works and what solutions can/should be implemented.\\
 An engineer who doesn't know how to count isn't going to be a good engineer, right?
+</div>
 Technically – and I know this might be controversial – you might not even necessarily need to know how to count to understand the economy. This is because all the numbers and prices and whatnot are just ways of making it easier to picture Supply & Demand in action. If you understand it intuitively, you should be pretty much fine in most cases even if you can’t count.
@@ Line 37: / Line 57: @@
 <dfn>Money</dfn> is just a representation of ‘value’. It's a bit more complicated than that though, but I'm gonna keep the explanation brief.
-We represent ‘value’ in money because, for the purposes of trade, it's convenient. That's it.\\
+<div passage>
-If we didn't have money, we'd either be forced to rely on barter or credit. And then we'd switch to money really fast anyway.\\
+We represent ‘value’ in money because, for the purposes of trade, it's convenient. That's it.
-Credit is itself a complicated topic that I'll choose to ignore for now because it isn't necessary to understand the basics.
+If we didn't have money, we'd either be forced to rely on barter or credit. And then we'd switch to money really fast anyway.
+Credit is itself a complicated topic that I'll choose to ignore for now because it isn't necessary to understand the basics.((:fn:>A brief summary would be that credit is a mental tally of debts. Basically “I did X for you, so I expect you to do Y for me at some point in the future”. This method of handling economic relationships is mostly observable in smaller communities and doesn't scale to larger societies.))((:fn:>Credit's other big disadvantage is that it doesn't work with trade between strangers or between communities. That's where barter usually comes into play.))
+</div>
 ===== Value =====
-What is ‘**value**’? Well ‘value’ is an abstract which roughly represents how useful/wanted a given thing is.\\
+<div passage>
-Gold is less useful than copper, but because gold is shiny it's desired more which means it's more ‘valuable’.
+What is ‘**<dfn>value</dfn>**’? Well ‘value’ is an abstract((:fn:>I'm using the term ‘abstract’ to refer to something that doesn't exist in the real world, but is purely ‘abstract’, meaning it exists purely conceptually or such.)) which roughly represents how useful/wanted a given thing is.
-Here it's necessary to point out something that is //very useful// to understanding things like pricing: **price** is //individually subjective// but //collectively objective//. But what does that mean?
+Gold is, in a practical sense, less useful than copper. But because gold is shinier and prettier than copper, it's desired by people more, which is what makes it more ‘valuable’.
+</div>
-Let's use an example. Let's say that I make two hotdogs. It cost me $0.50 to make each hotdog. Some guy comes along and he agrees to pay $1.50 for it. Then you come along and you pay me $2.00 for the hotdog.\\
+Here it's necessary to point out something that is //very useful// to understanding things like pricing: **price** is //subjective on an individual level//((:fn:>‘Individually subjective’.)) but //objective when taken collectively//.((:fn:>‘Collectively objective’.)) But what does that mean?
-Which of those prices represents the true value of the hotdog?\\
-The answer is that none of them do. This is because ‘value’ – and, by extension, the ‘price’ – is relative. All of them are a ‘correct’ representation of the value of the hotdog, just that what's ‘correct’ varies based on the surrounding context.
-The reason some guy paid $1.50 while you paid $2.00 is because those are the prices that we had agreed upon. He was willing to pay $1.50 for the hotdog and I agreed to sell it to him for that amount. Meanwhile you were willing to pay $2.00 for it, so I agreed to that too. If you had known the other guy had paid less, you'd probably want to pay that much too.\\
+<div passage>
-Basically every price of any good or service is individually negotiable like this. There //are// parts of this ‘equation’ that are //kinda, sorta, not really// set in stone – like me spending $0.50 to make each hotdog – but generally this applies.\\
+Let's use an example. Let's say that I make two hotdogs. It cost me $0.50 to make each hotdog. Some guy comes along and agrees to pay $1.50 for it. Then //you// come along and pay me $2.00 for the hotdog.
-Does this mean that all prices are nonsense and, in fact, nothing is worth anything? No, it doesn't. Prices may be //individually negotiable//, but if we factor in //everything else// the situation changes rapidly.\\
-So you aren't paying $2.00 because //every hotdog in existence is worth exactly $2.00// but because within your given context, that's how much the hotdog was worth //to you//.
-Basically, while the difference between what you and that guy paid might seem significant, if we consider the market as a whole...it might actually be completely normal. Let's say that the price of hotdogs within this market actually drift between $1.25-$5.00 and we can see that, actually, there's not that big of a difference at all. Now, if a hotdog were sold for less or more...**that** would be a significant difference.\\
+Which of those three prices represents the //true// value of the hotdog?
-I think it's generally here that we start talking about ‘**market conditions**’, which simply refers to the situation in a market: how the thing being sold relates to everything else being sold; what affects the demand of the thing being sold; what affects the production of the thing being sold and so on.
-While the price is individually negotiable...well, nowadays especially, the price tends to be ‘locked’. But it's still usually related to the rest of the market.
+The answer is that none of them do. This is because ‘value’ – and, by extension, the ‘price’ – is //relative//. All of them are a ‘correct’ representation of the value of the hotdog, just that what's ‘correct’ varies based on the surrounding context.
+</div>
-Why am I selling the hotdogs at that specific price? Well, because I'm probably looking at my competitors. Maybe I see that my competitor is selling hotdogs at a fixed price of $2.50. So I'm trying to undercut him by being more flexible with pricing on the one hand and for consistently selling at a lower price. My competitor may respond by lowering the prices himself.\\
+<div passage>
-This is **competition** and it can manifest in thousands of different ways, so I'll leave that for later.
+The reason //some guy// paid $1.50 while //you// paid $2.00 is because those are the prices that we had agreed upon. He was willing to pay $1.50 for the hotdog and I agreed to sell it to him for that amount. Meanwhile, you were willing to pay $2.00 for it, so I agreed to that too. If you had known the other guy had paid less, you'd probably want to pay that much too.
+Basically, every price of any good or service is individually negotiable like this.((:fn:>At least in theory.)) There //are// parts of this ‘equation’ that are //kinda, sorta, not really// set in stone – like me spending $0.50 to make each hotdog – but this generally applies.((:fn:>The reason being that the cost of the supplies used to produce the hotdog are also determined by negotiable prices. In practice though, these are usually treated as fixed costs.))
+Does this mean that all prices are actually nonsense and, in fact, nothing is worth anything? No, it doesn't. Prices may be //individually negotiable// (‘Individually subjective’), but if we factor in //everything else// the situation changes.
+</div>
+You aren't paying $2.00 because //every hotdog in existence is worth exactly $2.00// but because that's how much the hotdog was //worth to you at that moment in time//.
+<div passage>
+Now let's move on to the part that is ‘Collectively Objective’.
+It may seem like the difference between what you and that guy paid for the hotdog is quite significant...if we consider the hotdog market as a whole, that perspective may change.
+Let's say the price of hotdogs in this particular market drifts between $1.25-$5.00. Now we can see that, actually, there isn't that big of a difference between those prices at all. If a hotdog were sold for less or more than that, **that** would have been a significant difference.
+It's generally here that ‘<dfn>market conditions</dfn>’ start being brought up, which simply refers to what the given situation is in a particular market (or ‘the market’((:fn:>The terminology here is a little annoying, but ‘//a// market’ refers to a particular market (such as toys/transportation/agriculture) while ‘//the// market’ refers to all the markets collectively. Alternative terms include ‘the economy’. ‘//A// market’ is also sometimes replaced with ‘industry’, though the latter usually refers to the production side, while the ‘market’ refers to the consumer side.))((:fn:>I'll be honest that I don't think anyone specifically told me these definitions, but they make intuitive sense based on how I've observed them being used in practice.)) as a whole):
+  * How are the things being sold and how they relate to everything else in the market.
+  * What affects the demand of the things being sold. (Besides everything else.)
+  * What affects the production of the things being sold.
+And we could go on and on.
+</div>
+Nowadays, the price tends to be ‘locked’, meaning that customers usually don't directly negotiate the price of goods nowadays. But those prices are still affected by the overall conditions of the market.
+<div passage>
+So why am I selling the hotdogs at that specific price? Well, because I'm probably looking at my competitors.
+Maybe I see that my competitor is selling hotdogs at a fixed price of $2.50. So I'm trying to undercut him by being more flexible with pricing on the one hand and for consistently selling at a lower price. My competitor may choose to respond by lowering the prices himself.
+This is **competition** and it can manifest in thousands of different ways, so I'll leave that for later.
+</div>