Economics & markets
How prices, competition and incentives shape what gets built, bought and destroyed.
Markets are a distributed thinking machine, and these are its operating principles. Supply and demand set price; comparative advantage explains who does what; moats and network effects decide who wins; creative destruction guarantees no winner is safe. This is the model of how value flows through an economy.
Key ideas here: Supply and demand, Comparative advantage, Economies of scale, Network effects, Switching costs — and 9 more below.
Mental models
Supply and demand
Supply and demand is the model that prices and quantities are set by the interaction of how much sellers offer and how much buyers want. Scarcity…
Comparative advantage
Comparative advantage is the principle that you should specialise in what you give up the least to produce, then trade — even if someone else is…
Economies of scale
Economies of scale are the cost advantages a business gains as it grows: producing more spreads fixed costs over more units, so the cost per unit…
Network effects
A network effect is when a product or service becomes more valuable as more people use it. Each new user adds value for existing users — so growth…
Switching costs
Switching costs are the time, money, effort, and risk a customer must spend to move from one product to a competitor. High switching costs lock…
Economic moat
An economic moat is a durable competitive advantage that protects a business from rivals, the way a moat protects a castle. Warren Buffett’s term for…
Mr. Market
Mr. Market is Benjamin Graham’s parable for the stock market personified as a moody business partner who offers to buy or sell every day at wildly…
Creative destruction
Creative destruction is the process by which new innovations replace and dismantle the old — Joseph Schumpeter’s term for how capitalism continually…
Diminishing returns
Diminishing returns is the principle that as you add more of one input, the extra output it produces eventually shrinks. The first unit of effort or…
Jevons paradox
Jevons paradox is the counter-intuitive finding that making the use of a resource more efficient often increases total consumption of it — because…
Opportunity cost
Opportunity cost is the value of the best alternative you give up when you make a choice. The true cost of anything isn’t just its price — it’s…
Zero-sum vs positive-sum
A zero-sum game is one where one person’s gain is another’s exact loss — the pie is fixed. A positive-sum game is one where exchange and cooperation…
Metcalfe's law
Metcalfe's law states that the value of a network grows roughly with the square of the number of its users (n²), because each new user can connect…
Preferential attachment
Preferential attachment is the tendency for those who already have more to gain still more — "the rich get richer." In networks and society, new…
Related topics
The books behind better thinking
Listen to any of these free. Start a free Audible trial and get your first audiobook on the house.
Prefer to read? The canonical picks:
- Thinking, Fast and Slow — Daniel Kahneman
- The Art of Thinking Clearly — Rolf Dobelli
- The Great Mental Models, Volume 1 — Shane Parrish
- Poor Charlie’s Almanack — Charlie Munger
- Super Thinking — Gabriel Weinberg & Lauren McCann
- Seeking Wisdom — Peter Bevelin
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Editorial synthesis © ReadGlobe. Each idea links to a full reference page with sources.