SCARCITY AND THE SCIENCE OF ECONOMICS
You may wonder if the study of economics is worth your time and effort. As you
learned in the news story, though, many young people find out about economic issues
the hard way. They discover, however, that a basic understanding of economics can
help them make sense of the world they live in. The study of economics helps us in
many ways, especially in our roles as individuals, as members of our communities,
and as global citizens. The good news is that economics is not just useful. It can be
interesting as well, so don’t be surprised to find that the time you spend on this topic
will be well spent.
The Fundamental Economic Problem
Have you ever noticed that very few people are satisfied with the things they
have? For example, someone without a home may want a small one; someone else
with a small home may want a larger one; someone with a large home may want a
mansion. Whether they are rich or poor, most people seem to want more than they
already have. In fact, if each of us were to make a list of all the things we want, it would
most likely include more things than we could ever hope to obtain.
Scarcity
The fundamental economic problem facing all societies is that of scarcity.
Scarcity is the condition that results from society not having enough resources to
produce all the things people would like to have
Needs and Wants
Economists often talk about people’s needs and wants. A need is a basic
requirement for survival, such as food, clothing, and shelter. A want is simply
something we would like to have but is not necessary for survival. Food, for example,
is needed for survival. Because many foods will satisfy the need for nourishment, the
range of things represented by the term want is much broader than that represented
by the term need.
TINSTAAFL
Because resources are limited, everything we do has a cost—even when it
seems as if we are getting something “for free.” For example, do you really get a free
meal when you use a “buy one, get one free” coupon? The business that gives it away
still has to pay for the resources that went into the meal, so it usually tries to recover
these costs by charging more for its other products. In the end, you may actually be
the one who pays for the “free” lunch! Realistically, most things in life are not free,
because someone has to pay for producing them in the first place. Economists use
the term TINSTAAFL to describe this concept. In short, it means There Is No Such
Thing as A Free Lunch.
Three Basic Questions
Because we live in a world of relatively scarce resources, we have to make
careful economic choices about the way we use these resources.
What to Produce
The first question is WHAT to produce. For example, should a society direct most
of its resources to the production of military equipment or to other items such as food,
clothing, or housing? Suppose the decision is to produce housing. Should the limited
resources be used to build low-income, middle-income, or upper-income housing? A
society cannot have everything its people want, so it must decide WHAT to produce.
How to Produce
A second question is HOW to produce. Should factory owners use automated
production methods that require more machines and fewer workers, or should they
use fewer machines and more workers? If a community has many unemployed people,
using more workers might be better. On the other hand, in countries where machinery
is widely available, automation can often lower production costs. Lower costs make
manufactured items less expensive and, therefore, available to more people.
For Whom to Produce
The third question is FOR WHOM to produce. After a society decides WHAT and
HOW to produce, it must decide who will receive the things produced. If a society
decides to produce housing, for example, should it be the kind of housing that is
wanted by low-income workers, middle-income professional people, or the very rich?
If there are not enough houses for everyone, a society has to make a choice about
who will receive the existing supply. These questions concerning WHAT, HOW, and
FOR WHOM to produce are never easy for any society to answer. Nevertheless, they
must be answered as long as there are not enough resources to satisfy people’s
seemingly unlimited wants and needs.
The Factors of Production
People cannot satisfy all their wants and needs because productive resources
are scarce. The factors of production, or resources required to produce the things we
would like to have, are land, capital, labor, and entrepreneurs.
Land
In economics, land refers to the “gifts of nature,” or natural resources not created
by people. “Land” includes deserts, fertile fields, forests, mineral deposits, livestock,
sunshine, and the climate necessary to grow crops. Because a finite amount of natural
resources are available at any given time, economists tend to think of land as being
fixed, or in limited supply
Capital
Another factor of production is capital, sometimes called capital goods—the
tools, equipment, machinery, and factories used in the production of goods and
services. Capital is unique because it is the result of production. A bulldozer, for
example, is a capital good used in construction. When it was built in a factory, it was
the result of production involving other capital goods. The computers in your school
that are used to produce the service of education also are capital goods.
Labor
A third factor of production is labor— people with all their efforts, abilities, and
skills. This category includes all people except a unique group of individuals called
entrepreneurs, whom we single out because of their special role in the economy.
Historically, factors such as birthrates, immigration, famine, war, and disease have had
a dramatic impact on the quantity and quality of labor.
Entrepreneurs
Some people are singled out because they are the innovators responsible for
much of the change in our economy. Such an individual is an entrepreneur, a risktaker
in search of profits who does something new with existing resources. Entrepreneurs
are often thought of as being the driving force in an economy because they are the
people who start new businesses or bring new products to market.
Production
Everything we make requires the four factors of production. The desks and lab
equipment used in schools are capital goods. Teachers and other employees provide
the labor. Land includes the property where the school is located as well as the iron
ore and timber used to make the building. Finally, entrepreneurs are needed to
organize the other three factors and make sure that everything gets done.
The Scope of Economics
Economics is the study of human efforts to satisfy seemingly unlimited and
competing wants through the careful use of relatively scarce resources. Economics is
also a social science because it deals with the behavior of people as they deal with
this basic issue. The four key elements to this study are description, analysis,
explanation, and prediction.
Description
One part of economics describes economic activity. For example, we often hear
about gross domestic product (GDP)—the dollar value of all final goods, services, and
structures produced within a country’s borders in a 12-month period. GDP is the most
comprehensive measure of a country’s total output and a key measure of a nation’s
economic health. Economics also describes jobs, prices, trade, taxes, and government
spending. Description allows us to know what the world looks like. However,
description is only part of the picture, because it leaves many important “why” and
“how” questions unanswered.
Analysis
Economics analyzes the economic activity that it describes. Why, for example,
are the prices of some items higher than others? Why do some people earn higher
incomes than others? How do taxes affect people’s desire to work and save? Analysis
is important because it helps us discover why things work and how things happen.
This, in turn, will help us deal with problems that we would like to solve.
Explanation
Economics also involves explanation. After economists analyze a problem and
understand why and how things work, they need to communicate this knowledge to
others. If we all have a common understanding of the way our economy works, some
economic problems will be easier to address or even fix in the future. When it comes
to GDP, you will soon discover that economists spend much of their time explaining
why the measure is, or is not, performing in the manner that is expected.
Prediction
Finally, economics is concerned with prediction. For example, we may want to
know whether our incomes will rise or fall in the near future. Because economics is the
study of both what is happening and what tends to happen, it can help predict what
may happen in the future, including the most likely effects of different actions. The
study of economics helps us become more informed citizens and better decision
makers. Because of this, it is important to realize that good economic choices are the
responsibility of all citizens in a free and democratic society.
