 Hey Kevin here, welcome to Invisible Hands, a series that makes economics easy and helps you see the beauty of trade and cooperation. With me, Fiona! We're going to cover a lot of ground in these videos, but before we can get to some of the more difficult ideas in economics, it's super important to start with the fundamentals. You with me? Yep, where do we begin? Okay, what do you think economics is all about? The stock market. No. Money in business. Sort of. The study of animals that may or may not exist. That's cryptozoology. Okay, but what if you hire a bigfoot? Take a picture of him that isn't blurry, but we are getting closer. Aw, I give up. What's it about? It's about people! Yeah, uh, were you just hiding under the table this whole time? Uh, well, yes. Fiona, economics is actually the study of human behavior. Whenever people make choices, that can be about money and business, sure, but it's also about so much more. Exciting. It is. Just because it's a huge subject doesn't mean economics can't be easy to grasp. And to help you figure all this out, there are six fundamental concepts you need to understand first. Yeah? What are they? Individual action, scarcity, choice, trade-offs, subjective value, and incentives. Got it. Well, I guess we're done here. Yeah. Wait, wait, wait, wait, wait, wait, wait, wait, wait, wait, wait, wait, we have to explain all those ideas. And by we, I mean, professor? Alright. The first thing to understand about economics is only individual people act. And as individuals, the reason we act is in order to satisfy our own unique desires and values. So action is purposeful behavior. That's right. We can imagine a better future, and we believe that our actions will make this future come true. Oh, okay. Like, when I'm doing my homework and I get hungry, it means I'm not content with my situation anymore. Go on. Then I start imagining a better future, one where I'm not hungry anymore. And an astronaut. And so if I can think of some way to get food. What do you do? Order a pickle and pineapple pizza. Well, why not? Speaking of pickle and pineapple pizzas, the fact that action is purposeful doesn't mean that everybody always makes great decisions and never makes any mistakes. But before you can understand economics, you have to understand the why of human action. And puppet action. And you have to understand that the fundamental unit of analysis always comes back to the individual. Even though statistics and averages can help us understand the world around us better, groups don't make choices. Individuals do. The next thing you have to know is that one completely inescapable fact of reality is SCAR CITY, the city of scars. Wait, Sean, I think there's a typo in the teleprompter. It's supposed to be scarcity, not scarcity, but okay, yep, that's better. He means two things. One, resources are limited and have many alternative uses. And two, people have virtually unlimited wants and needs. So how often do people have to deal with scarcity? All the time. The challenge with scarcity is why individuals have to be careful with how we use the resources at our disposal. Economics is about gaining a better understanding of the various ways that deal with scarcity. Like production, consumption, exchange. Exactly. If there was no scarcity, then there wouldn't be any economic problems and nothing for us economists to study. Can you imagine? Buh. Pretty much all human action involves coping with scarcity. That brings us to choice. The unavoidable fact of scarcity forces individuals to make choices. You can't do your homework and go get a pizza at the exact same time. Unless your homework is to pick up a pizza. In which case, what class are you taking? The best class ever. Otherwise, you've got to decide which is more important to you. I never thought about it that way before. Every choice you make comes at the expense of not being able to do something else. Yeah, in economics, these are called trade-offs. Every decision we make in life is about balancing various trade-offs. Choices are scarce. So whenever you choose one course of action, you're giving up the opportunity to do something else. And this isn't just about money or material wealth. It's also about my time. So the point is, there are always going to be limits on what you can do with resources you have and competing opportunities to choose from. Economics can help you understand how to make better choices. And by the way, no two people are ever going to make the same choices about the same resources. Right. So that brings us to subjective value. Is your voice echoing? Yeah, that always happens for some reason when I say subjective value. Been happening since I was a kid. My mom says it's genetic. You know, my uncle at one point... The hem! Oh, right. Subjective value is the recognition that everybody has different desires, wants and needs. The importance we place on them changes over time. From moment to moment, in some cases, the things you value and how much you value those things depends on your goals, priorities and personal preferences. Oh, like how I might want to pickle on pineapple pizza when I'm hungry, but somebody else might want a peanut butter sandwich. Yeah, me. But it also means that just because you might value eating a pizza more than doing your homework right now, that doesn't mean you won't value doing something else once you're not hungry anymore. Maybe you'll even go back to doing your homework. The point is, everyone's preferences are constantly changing, and value is a ranking of preferences. Not just a number you can quantify. It's also not just about material stuff. People value all kinds of abstract things as well. Right. Love, friendship, social status, good grades. And economics deals with all that stuff too. Absolutely. It's also really important to understand that the value of a good is not just determined by the amount of effort, time or material it took to make it. Really? Why not? Because it doesn't matter how much work went into making a pickle and pineapple pizza, I don't want to eat it. Who would? In general, the way we quantify how much people value something is by observing how much they're willing to give up in order to get it. And remember, this isn't just about money either. We're talking about time again. Totally. Think about people who camp out in front of a store on Black Friday. Oh, they might be saving money, but they're giving up their time instead. Why do people do that? Because they value the deal they think they're going to get more than they value the time they're spending waiting in line, you see? Value is subjective. Beauty is in the eye of the beholder, I guess. Got it. That takes us all the way to our final fundamental concept, incentives. Since value is subjective, resources, including your time, are scarce, and the world is filled with trade-offs, making decisions can be tricky. But one constant fact of human nature is that we all respond to incentives. An incentive is something that motivates people to action, and that can either be positive or negative. So just like I might get two pizzas if they're half off, or how the prospect of getting a good tip motivates the delivery driver to get to me quickly, the fear of me failing my classes encourages me to do my homework. Exactly. We'll talk a lot more about how incentives affect people's behavior in some of the other videos in this series. But all you need to know for right now is that incentives matter. A lot. Man, that was a lot to cover. But let me see if I understand everything. Go for it. Okay. So resources are limited. We will never have enough time, money, or stuff to do everything we want to do at the same time. We're all doomed to be miserable. Yeah, well, scarcity is a fact of nature, and it does mean we have to make some tough choices. But the beauty of the market is that it makes us way better off than we would ever be otherwise. That's true. Okay. We're not totally doomed, but people still have to make choices. And to understand why people do what they do, we have to look at individuals. Yes. All the individual people make decisions and act on them. And they do that whenever they feel motivated to change their current situation. Of course, it can be valuable to study group behavior, but in the end, every group is just a bunch of individual people working together. Economics is about individual action. And incentives motivate our actions and behavior in pretty predictable ways. Right. Okay. So as far as economics is concerned, action is about individual people deciding to do things on purpose in order to get something they value. Yup. And those values are? Subjective. Exactly. I think I get it. Thank you. You're welcome. Now I think I'm going to order some pizza. Who wants some? Yeah, I'll have some pizza, but no pickle and pineapples on mine. What jelly and anchovies for me? Well, taste is certainly subjective. So what about you? Did this help you understand the fundamentals of economics? If you have any questions and just want to know more, leave a comment on this video and check out courses.feed.org for tons of additional information. See you next time. Hold on. Why do you either of you want pizza? You can't eat your puppets. What do you mean puppets?