For starters, there are two basic facts of existence you need to understand.
RESOURCES ARE FINITE
There's only so much stuff in the world people can use. There's only so much food, water, oil, land, time, and so on. However...
DESIRES ARE INFINITE
Everyone always wants more. This isn't a bad thing, and can mean anything. People can want more stuff, a better life, a better life for their kids, to help the poor, to go to the moon, whatever. Once in a while I'll meet someone who says, "I'm not like that. I'm perfectly happy with my life. I'm happily married, I have good friends, enough food, and no worries, so this second principle doesn't apply to me." Well... that's just not true! If your wife got sick, would you be interested in curing her? Are you interested in being as healthy in twenty years as you are today? Are you interested in traveling to distant places cheaper and more quickly? Everyone always wants more, and while these desires are subjective, this is a universal fact. It can range from "I want a new kitty" to "I want to continue breathing." However lofty or impossible the desire, everyone always wants more, and these desires are unlimited.
From the principle of finite resources and the principle of infinite desires, we get a third principle:
PEOPLE WILL TAKE ACTION TO SATISFY THEIR DESIRES
Since people want stuff they don't have, they will dedicate their resources to acquiring their desires. They will make use of all available resources, including people, to achieve their desires, and for this reason...
THE MARKET TENDS TOWARDS FULL EMPLOYMENT
The physical resources associated with acquiring economic desires are what we call CAPITAL. In order to convert raw resources into consumable resources, the LABOR of people is required. In order to achieve maximum satisfaction of everyone's desires, the market will tend towards maximum use of people's labor and capital.
In choosing how to allocate our resources, however, there is a very important question -
AT WHAT PRICE?
Since resources are finite, and desires are infinite, how much of one's resources is one willing to contribute in order to achieve one's infinite desires? In other words, at what point does one better achieve one's desires through keeping one's resources than expending them? This constant decision-making between keeping one's resources and using one's resources eventually arrives at a central point. This point is the maximum PRICE at which one is willing to part with one's resources to acquire what one desires.
VOLUNTARY TRANSACTIONS
A transaction is a voluntary agreement between two people in which resources are exchanged. They both give something, and they both get something. All voluntary transactions are mutually beneficial, win-win, or they would not take place. If this is not the case, then force or fraud must be involved.
Example:
You go to a convenience store and buy a coke. The coke costs $1. You go to the counter and give the shop owner $1, and he gives you the coke.
Why did this happen?
It happened because you valued the coke more than you valued your dollar, and conversely, the shop owner valued your dollar more than he valued his coke.
If this was not the case on both sides, this transaction would not have taken place.
Since in all voluntary transactions both sides increase their amount of perceived wealth...
IN A FREE MARKET, WEALTH ALWAYS INCREASES
Wealth is a nebulous concept. Wealth is simply "things you value." Since in every exchange people acquire more of what they desire, and since desires are infinite, the tendency of the free market is the creation of more wealth. In other words, by whatever criteria people wish to use, they always end up better off than they were before. If this is ever not the case, it is usually due to some government intervention, natural disaster, theft, or other external action outside of market forces.
Finally, we get to how we describe market forces. There are two sides to the market - those who produce goods and services, and those who desire goods and services.
SUPPLY AND DEMAND
In other words, if something is at a lower price, people wish to buy more of it. If it's at a higher price, they don't want to buy it as much. If there's a lot of something available, people won't be willing to pay much to get it. If it's scarce, they will pay more.
Where these two curves meet is the equilibrium point. This point represents an equilibrium price and an equilibrium quantity. All other things being equal, the economy will always be seeking the equilibrium point, so there are no shortages or surpluses and there is no overcharging or undercharging.
IN SUMMARY:
1. Resources are finite
2. Desires are infinite
3. People will act to acquire more resources
4. There is an amount people are willing to exchange for what they desire. This is the price
5. All transactions are voluntary and mutually beneficial
6. Because all transactions are mutually beneficial, overall wealth always increases
7. Supply and Demand interact to find an equilibrium price and an equilibrium quantity.
Thanks for reading, and have a nice day!
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