Money talks, but it don’t sing and dance and it don’t walk…
Economics is not really about money.
We measure value and cost in units of money, but continually have
to adjust such measures for inflation.
If you drop a $50 bill and the wind blows it away, there is no social
loss or social cost – unless you run after it!
If you do, you have expended energy keep the $50 (so you
can buy something with it).
If you don’t, either someone else will find it (simple transfer of value from
you to her) or it gets lost forever.
If it is lost forever, the food, clothing, or trinkets you would have
bought still get bought by someone, perhaps at infinitesimally smaller prices because there is slightly less
money in the economy.
A corollary is that services like health care are not “free” just because you don’t pay for them.
very hard not to confuse cost
The price of a visit to the doctor’s office (what you pay) may be
zero or a $10 co-pay, but the cost (nurse, doctor, and clerical time; materials, tests, etc.) is much higher.
The prices of prescription drugs may be as high as $100 a pill, but the cost of producing that pill is surely
much lower, perhaps negligible.
Because of insurance coverage (doctor visit) or monopoly power (drug
patents), the connection between cost and price may be remote.
In an ideal system, in which prices are
determined by competitive market forces, prices reflect costs very well – but more on that later.
about the logic of scarcity and choice.
It is definitely concerned with prices and costs, but
less concerned with absolute (dollar) amounts than with relative amounts.
To isolate some basic
principles, imagine that labor is the only scarce resource and that it can be used to produce food or
A worker can produce either 5 pizzas or 10 T-shirts per day and the labor supply is 100
Notice that the scarcity of labor limits food production to 500 pizzas per day.
anyone wants clothing, pizzas have to be sacrificed.
Specifically: a shirt costs half as much (labor) as a
pizza, but more importantly, the opportunity cost of a pizza is two shirts.