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Toasters and Pencils

Jan 17, 2011 • Demand, Supply, and Markets, International Trade and Finance, Labor, Macroeconomic Measurement • 181 Views    No Comments

In this TED talk, a designer explains how he tried to build his own toaster. Deciding to focus on five basic ingredients instead of the 100 he would really need, he describes what happened. For the steel, first he needed iron ore. For the plastic, he went to BP to get “a jug” of oil but was unsuccessful so he settled, instead, on using potatoes. (Yes, you can make plastic out of potato starch.) Also, he needed mica and copper and nickel. As you can see, step-by-step, the simplicity of an everyday inexpensive toaster got more and more complex.

The point?

By showing how many people and materials were involved, designer Thomas Thwaites sought to display our interconnectedness.

The Economic Lesson

Now as economists, we should take his story a step further. Why are people willing to interconnect? The answer is price. During every step of the production process, someone, combining land, labor, and capital, decided that he or she would be willing to exchange a good or a service for a certain price.

So, in a way, we could say that a toaster exists because of prices and incentives. Economists call the interaction of prices and incentives the price system.

Written in 1958, a classic essay,”I, Pencil: My Family Tree as told to Leonard Read” illustrated a similar phenomenon. Close to the beginning of the essay, the pencil says, “I, Pencil, simple though I appear to be, merit your wonder and awe…Simple? Yet not a single person on the face of this earth knows how to make me…” 

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