Invisible Hands: The Fundamentals of Economics


Hey, Kevin here. Welcome to Invisible
Hands, the 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? OK, what do you think
economics is all about? The stock market. No. Money and business. Sort of. The study of animals that
may or may not exist. That’s cryptozoology. OK, but what if
you hire 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. 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. Ugh. 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. We have to explain
all those ideas. And by we, I mean, Professor? All right. The first thing to
understand about economics is only individual people act. Hm. 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, OK. 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. [LAUGHING] 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. Supposed to be
scarcity, not scar city. Uh, OK, yep. That’s better. Scarcity 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 to 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? Ugh. 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. Resources 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– Ahem. Oh, right. Subjective value
is the recognition that everybody has different
desires, wants, and needs. The importance we place on them
changes over time, even 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 a
pickle and 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. Eh. 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. You’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 the eye of
the beholder, I guess. Got it. And 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. OK, 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. OK, maybe 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. Only 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, OK. 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. Yep. And those values are? Subjective. Exactly. Whew. 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 the no pickle and
pineapples on mine, just 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.fee.org for tons
of additional information. See you next time. Hold on. Why do either of you want pizza? You can’t eat. You’re puppets. What do you mean, puppets? [PEACEFUL MUSIC]

55 thoughts on “Invisible Hands: The Fundamentals of Economics”

  1. Mmmm. Looks a little bit like queer kids stuff. Start talking about how socialism is good, you’re going to hemorrhage subscribers. Especially those who lived under it.

  2. Getting burned by capitalism and swearing off capitalism as a good idea is like getting your hand burned on the stove and swearing off having any heat in your body ever again.

  3. Why do these puppets always look like they took a joint before moving up from behind the desk. Why does she look so disappointed in herself?

  4. Good show idea, but loose the puppets. It makes you look like your talking down to your audience like children, and is reminiscent of Queer Kids stuff and other creepy SJW programs.

  5. SUBJECTIVE VALUE:
    This video is really good, it was worth the 10 minutes and 32 seconds it took to watch it. 😛
    Really didn't except to see Vsauce2 Kevin, pretty cool!

  6. No people will ever make the same choices about the same resources? Your example shows how silly that idea is. Most people will eat food, in pretty much the same way, and the same food at that.
    The point on subjective value is misleading. No matter how dumb your choice is, if you commission a work, you should have to pay for the labour and resources it requires–thus its value IS the work and resources that go into it, even if subjectively it is of lower value to others.

  7. You guys need to upload these to Facebook so I can share them. When they're shared as a YouTube link people tend not to click on them.

  8. This is far too complicated and contradicts my indoctrin- uh, I mean "educayshun." Can't we just tax the rich and raise the minimum wage instead? Problem solved! No need to waste time on this nonsense. 😀

    "SUBJECTIVE VALUE"

  9. As someone who had crap economics teachers in the past (high school just had us watch =3 videos all day and college is a socialist brainwashing center), I stronlgy appreciate this series so far. Looking forward to seeing more.

  10. Good content, but why is the "unknowledgeable" puppet a female and the "all-knowing" puppet an older white male? Surely there are younger non-majority professors of economics now.

  11. I love a lot of stuff FEE does but this video was really good. Reminds me of the first day of micro class

  12. I'm guessing the Professor represents the people who are educated and the lady represents the person who isn't very interested but open to learning, thus both puppets. The relate-able middle guy must represent the viewer who would be watching this video that is interested in learning about this.

  13. As an economics major I really appreciate this Channel and these videos. You guys help me put things in too easy to understand statements. When discussing economics and politics with friends they really helps having the knowledge that you guys share. Thank you.

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