Foundational Concepts in Economics: An Introduction

That a free economy works at all is one of the most remarkable things in the human experience. How can billions of people acting in their individual self-interest—and knowing little about the particular purposes or wishes of others—nevertheless manage to cooperate and produce for one another an ever-​increasing abundance of goods and services with nobody in charge?

Some basic economic concepts help us understand and appreciate that marvel.

This course has two main goals. The first is to help the reader learn “the economic way of thinking,” the foundational concepts economists use to make sense of the economy. Those concepts, on which the rest of economics is based, are presented in Lectures 1–7: subjective value, scarcity, opportunity cost, thinking “at the margin,” comparative advantage, division of labor, and the famous supply and demand.

The second goal is to help readers understand why people need free markets to flourish. The underlying institutions of a free market—private ownership and freedom of exchange— are necessary to human well-​being for three main reasons, addressed in Lectures 8–12.

First, we need the information that free-​market prices give us. Market prices are a kind of telecommunications system; they communicate to everyone what everybody else individually knows about the availability of and need for various goods and services, and thereby they make it possible for us to coordinate our various actions.

Second, we need free-​market profit and loss to guide business enterprise. Profit made in a free market signifies the creation of value for others; loss signifies the destruction of value. In a world where no one can be sure what to do today to make the world a better place tomorrow, this profit-​and-​loss guidance is indispensable.

Third, we need the incentives that free markets give us to serve others. In free markets, we all must consider the wishes of others in order to get from them what we want, because those others don’t have to deal with us. That is not the case where government force may be used to get what we want from others against their wishes. In brief, free markets provide everyone the knowledge, the guidance, and the incentives we need to produce for one another in an extended order of human cooperation.

Economics has great explanatory power. It helps us understand much of what happens in the social world, and how free people benefit others as they seek to benefit themselves. I hope you enjoy this presentation of why that is so.