Basic Economics

A quick lesson on how an economy works.

This image popped up in my Facebook feed and I wanted to properly and clearly address it.

min wage 1

Ignoring the obvious grammatical error in the image, I will explain what inflation is in easy-to-understand terms.

Economics is a science of quantifying the daily transactions of people. It cannot be used to predict the transactions of individuals to any certain degree, but rather the ebbs and flows of people in large groups. A more in-depth knowledge can be obtained from the Economics 101 class at Hillsdale College.

To boil it down to its simplest foundation, we trade our time, effort and knowledge in exchange for money, which we then exchange for the goods and services we need to live. We negotiate with our employer (or customer) what we will do for them in exchange for a set amount of money. We then take the money we earned and negotiate with others so that we may obtain goods and services. We are always free to refuse a transaction if we feel that the other side is asking for more services we want to provide or are willing to pay for. This can even apply to a transaction as simple as purchasing a drink from a vending machine. If we feel that the vending machine asks too much for what it's offering, we can find another vending machine to purchase a product from.

Imagine if you will, a balancing scale.


Every transaction should be balanced between what we receive and what we pay. In the economy as a whole, the two things we would weigh against each other would be goods and services on one side, and the total amount of money in the economy on the other side. In real life, these numbers will change on a daily basis, so this is an ongoing balancing act. For this exercise, we will set the value of each at a constant value of 100. As long as both of these sides do not change, the transaction prices will not significantly change.

But what happens when you keep the money supply constant and increase the amount of goods and services? With more choices on where and how to consume goods and services, after a lag and some fluctuation (because this does not happen instantaneously) the price of goods and services will decrease until an equilibrium has been reached again. Likewise, when goods and services stay the same, while adding more money the costs of the goods and services will increase.

The latter is called inflation. It happens in real life because the federal government has spent more than it had raised in taxes. By spending (buying goods and services from the private sector) more than to took in, this has the effect of adding more and more money to the supply and unbalancing our scale.

Prices will always fluctuate for an individual good or service, depending on many factors. Having a vending machine in a strip mall or outside a store might sell a 20oz drink for $1.25. If you don't want to pay $1.25, you can probably walk a hundred feet to the next vending machine and get the same drink for $1.00. This should be enough incentive for the owner of the first machine to drop his price, else his machine will lose many transactions to the less expensive machine.

But what if the vending machine asks for $2.75 for that 20oz drink and it's at an interstate rest stop, with the next available vending machine 20+ miles away? Would you pay the $2.75, or go thirsty? Just in case you think that rest stop vending machine is overpriced, consider this: An in-city vending route might be 50 miles traveled during the day, replenishing 5 to 10 locations. The interstate vending route could easily run 150 miles or more, for only 3 to 5 locations. If it's a state-run rest stop, there might be fees he has to pay for the contract to have his machines there. So the interstate vending machine costs the owner more to deliver the same product as the in-city vending machine. If the interstate machine sold the same product at the same price as the in-city machine, the owner would go quickly out of business.

Now let's get to the minimum wage.


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