A Bit of Economics — Part 5

{Read part 4 here.}

In the previous bit, we briefly discussed prices. Prices are important because without prices we will be incapable of economic calculations. Prices guide us to choose the best among alternative courses of action. Imagine going to a store in which there are no prices — just stuff that we pick up and at the checkout they charge some random amount for it. We have to know prices before we buy.

Firms face the same problem.

We will use the word “firms” to mean small (mom and pop stores, little hole in the wall joints), medium (a car dealership, a garbage collection service) and large businesses (corporations like Toyota, Apple and Google.)

What do firms do? They buy or hire inputs — materials, labor, technology, capital — and produce various goods and services. That involves costs and they have to use prices to guide what to produce and how. Should they make it in-house or would it be cheaper to buy from some other supplier? Continue reading “A Bit of Economics — Part 5”