Food for Thought ~ Economics

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Knowledge is like money to be of value it must circulate,
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Economics 101


Economics is the social science that analyzes the production, distribution, and consumption of goods and services.  Current economic models emerged from the broader field of political economy in the late 19th century.  A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences.

Economics aims to explain how economies work and how economic agents interact.  Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science.  At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism.

Common distinctions are drawn between various dimensions of economics.  The primary textbook distinction is between microeconomics, which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy.  

Other distinctions include between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"); and between rational and behavioral economics.

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Money and Monetary Policy:

Money is a means of final payment for goods in most price system economies and the unit of account in which prices are typically stated.  It includes currency held by the nonbank public and checkable deposits.  It has been described as a social convention, like language, useful to one largely because it is useful to others.  As a medium of exchange, money facilitates trade.  Its economic function can be contrasted with barter (non-monetary exchange).

The money supply is the total amount of money available in an economy at a specific time.  There are several ways to define "money," but standard measures usually include currency (banknotes and coins) in circulation and bank money (the balance held in checking accounts and savings accounts).  Bank money usually forms by far the largest part of the money supply for any particular country. 

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.  The official goals usually include relatively stable prices and low unemployment.  An expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.  Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.  Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.

Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.

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Supply and Demand:

Supply and demand is an economic model of price determination in a market.  It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.

The four basic laws of supply and demand are:

  1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.
  2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.
  3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
  4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity.


People frequently do not trade directly on markets.  Instead, on the supply side, they may work in and produce through firms.  The most obvious kinds of firms are corporations, partnerships and trusts.  According to Ronald Coase people begin to organize their production in firms when the costs of doing business becomes lower than doing it on the market.  Firms combine labor and capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than individual market trading.

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Economic Growth:

Economic growth is defined as the increasing capacity of the economy to satisfy the wants of its members.  Economic growth is enabled by increases in productivity, which lowers the inputs (labor, capital, material, energy, etc.) for a given amount of output.  Lowered costs increase demand for goods and services.  Economic growth is also the result of new products and services.

Economic Cycle:

The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years.  These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).

Business cycles are usually measured by considering the growth rate of real gross domestic product.  Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.

During the Great Depression of the 1930s, John Maynard Keynes authored a book entitled The General Theory of Employment, Interest and Money outlining the key theories of Keynesian economics.  Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.  He therefore advocated active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle  Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels.

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Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.  When the general price level rises, each unit of currency buys fewer goods and services.  Consequently, inflation also reflects an erosion in the purchasing power of money.  A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index over time.

Inflation's effects on an economy are various and can be simultaneously positive and negative.  Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future.  Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.  Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply.  A long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most mainstream economists favor a low, steady rate of inflation.  Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn.  The task of keeping the rate of inflation low and stable is usually given to monetary authorities.  Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

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Fair Trade:

Fair Trade is an organized social movement and market-based approach that aims to help producers in developing countries make better trading conditions and promote sustainability.  The movement advocates the payment of a higher price to producers as well as higher social and environmental standards.  It focuses in particular on exports from developing countries to developed countries, most notably coffee, cocoa, sugar, tea, bananas, honey, wine, fresh fruit, and chocolate. 

Although no universally accepted definition of fair trade exists, fair trade labeling organizations most commonly refer to a definition developed by FINE, an informal association of four international fair trade networks (Fairtrade Labelling Organizations International, World Fair Trade Organization, Network of European Worldshops and European Fair Trade Association):  fair trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade.  It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers—especially in the South.

Fair trade organizations, backed by consumers, are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade.

Fair trade products are traded and marketed either by an "MEDC supply chain" whereby products are imported and/or distributed by fair trade organizations (commonly referred to as alternative trading organizations) or by "product certification" whereby products complying with fair trade specifications are certified by them indicating that they have been produced, traded, processed and packaged in accordance with the standards.

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Links to key terms and concepts mentioned in some of the videos:



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