Economics

Economics is the science that deals with the production, allocation, and use of goods and services. It is important to study how resources can best be distributed to meet the needs of the greatest number of people. As we are more connected globally to one another, the study of economics becomes extremely important. While there are many subdivisions in the study of economics, two major ones are macroeconomics and microeconomics. Macroeconomics is the study of the entire system of economics. Microeconomics is the study of how the systems affect one business or parts of the economic system.

Scarcity and Choices.

Scarcity is the fundamental economic problem facing all societies. We cant have everything we want, so were forced to choose among alternatives. In other words, scarcity forces us to make choices. Scarcity is the condition that occurs when wants are greater than the resources to satisfy them. Economics is the study of how we make those choices. When we study economics, we presume people are dealing with scarcity; we presume they are constantly struggling to balance unlimited wants with limited resources. Some resources seem to be abundantly available to everyone, so we have trouble seeing them as limited. These are termed free goods. Air is the most common example of a free good, because we all breathe as much air as we need. However, an economist will tell you nothing is free, not even air (and certainly not oxygen, which is now sold in small, presumably invigorating quantities at oxygen bars.) If we give it enough thought, we see that everything has a cost. As the saying goes, There Is No Such Thing as a Free Lunch (TINSTAAFL). Even the air we breathe has a price tag. After all, we pay taxes to support the environmental regulations that help keep our air breathable.

Opportunity Cost and Trade-offs

Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. In order to make use of our scarce resources, we have to choose to have some things and to do without others. A trade-off is a decision to have something and to do without something else. Suppose you choose to go on a cruise, rather than take a backpacking trip to Machu Picchu. Your decision is a trade-off. By opting for the cruise, you decide to have the luxury of sleeping in late, eating extravagant meals, and breathing the salty sea air. You also decide to do without the opportunity to walk among ancient Incan ruins and to breathe the crisp mountain air of the Andes. The opportunity cost of a decision is the value of the best alternative not chosenthe value of the thing you could have had, but didnt. If backpacking to Machu Picchu is the best alternative to a cruise, then the opportunity cost of the cruise is the value to you of the backpacking trip. Its the cost of the lost opportunity. When evaluating alternative solutions to a

problem, economists want to consider all the relevant costs involved. Some costs are obvious because they require an outlay of cash. Others are less obvious. Youre probably familiar with what an economist would call an accounting cost. Its the amount that is actually paid in exchange for a good or service; its also known as explicit cost. However, an economist is most concerned with the economic cost of a decision. The economic cost of a decision is the complete cost, which is a

measure of its net economic impact. This includes the accounting cost and the opportunity cost, as well as other less-obvious costs, like the value of lost product quality or the value of a change in employee morale. All costs that are not accounting costs are also known as implicit costs. Of course, the value of a change in quality can be difficult to quantify, so the economic cost of a decision is not something we can easily express in dollars.

Wants and Needs

One of the most basic concepts of economics is want vs. need. A need is something you have to have, something you can't do without. A good example is food. If you don't eat, you won't survive for long. Many people have gone days without eating, but they eventually ate a lot of food. You might not need a whole lot of food, but you do need to eat. A want is something you would like to have. It is not absolutely necessary, but it would be a good thing to have. A good example is music. Now, some people might argue that music is a need because they think they can't do without it. But you don't need music to survive. You do need to eat. These are general categories, of course. Some categories have both needs and wants. For instance, food could be a need or a want, depending on the type of food. You need to eat protein, vitamins, and minerals. How you get them is up to you (and your family). You can eat meat, nuts, or soy products to get protein. You can get fruits and vegetables to get vitamins and minerals. You can eat yogurt or cheese to get other vitamins and

minerals. You can eat bread to get still more vitamins and minerals. These basic kinds of foods are needs. Ice cream is a want. You don't really need to eat ice cream to survive. You can eat it to get some vitamins and minerals, but other foods like cheese and yogurt give you more of those same vitamins and minerals without giving you the fat that ice cream does. Still, ice cream tastes good to many people. They like to eat it. They want it, but they don't need it. They like it, but they don't have to have it to survive. Another example is liquid. Your body has to have liquid to survive. Water is a good liquid to drink because it keeps you healthy. Milk and fruit juice are also good because they give you vitamins and minerals your body needs without giving you the fat and excess sugar found in cola. Still, cola tastes good. Drink a Pepsi or Coke or Mountain Dew or Sprite and you feel good because it tastes good. But you don't need that cola to survive.

The Basic Economic Questions

1. What to produce (and in what quantity)? In part, this is the question of whether to produce more capital goods or more consumer goods. It is also the question of whether to produce certain goods, or whether to import them instead. It could be a question of whether to grow corn or to raise cows on the same piece of land.

2. How to produce? This is a question of how to make the best use of the factors of production, and whether to improve them. It is a question of how much labor should be used, and how much automation should be used instead. It could be a question of whether to farm organically, or to use the chemicals of conventional agriculture instead.

3. Who receives the benefits of production? This is a question of how best to allocate the outputs of the production process, and on what basis. It is a question of how to decide who will consume which goods. Should a persons income affect his ability to survive? What about his age or his gender? And who should receive the better food and shelter?

Four Factors of Production

The factors of production are resources required to produce the things we would like to have. They are land, capital, labors and entrepreneurs. In economics, land refers to natural resources not created by humans. Land includes deserts, fields, forests, mineral deposits, livestock, sunshine, and the climate necessary to grow crops. Because only so many natural resources are available at any given time, economists tend to think of land as being in limited supply. Capital is the tools, equipment, machinery, and factories used in the production of goods and services. Such goods are called capital goods used to distinguish them from financial capital, which is money used to but the tools and equipment. Labor is people with all their efforts, abilities, and skills. This includes all people except entrepreneurs. Labor is a resource that may vary in size over time. Factors such as famine, immigration, war and disease have had a drastic impact on the quality and quantity of labor. Entrepreneurs are people who organize other productive resources to make goods and services. It often is said that a business will succeed or fail relative to the ability of the person or entrepreneur involved in it. This individual assumes risk for the business. They may or may not be paid for their efforts.

Goods and Services Goods are physical items that people can buy, such as books or clothes. A consumer good is intended for final use by individuals. When manufactured goods are used to produce other goods and services they are called capital goods. An example of a capital good would be an oven in a bakery or a computer in an office. Goods that last longer than three years or more when used on a regular basis are called a durable good. Durable goods include both capital goods and consumer goods. A nondurable good is an item that lasts less than three years when used on a regular basis. Examples of nondurable goods are food, writing paper and cosmetics. Services are actions done by someone else that people can buy, such as house painting, haircuts or babysitting. The difference between goods and services is that services are not solid or touchable. Goods can be physically held or touched. Now, a service can also contain a good. Someone who fixes you dinner gives you food, which was bought. In this example, the food is the good and the person's fixing it for you is the service. In the same way, your teacher gives you a service by teaching you social studies. He or she also gives you a good by giving you a textbook.

Your teacher teaching you social studies is a good example of a service that you personally don't pay for. Not all services are economic, either. A service can be as simple as reading a book to someone. This kind of activity doesn't cost anything, but it is something that one person did for another. A good doesn't have to cost anything, either. If you give your friend a book or a CD, then you have given that friend a good, since we have already defined books and CDs as goods. Your friend didn't give you any money for the good. But you didn't really do something for your friend, either; you just gave your friend something he or she could hold or touch. Remember, the one thing that sets goods and services apart is the ability to touch them. You can touch a good, but you can't touch a service. You can touch the result of a service but not the service itself. A consumer is a person who purchases goods and services for personal use.

Production Possibilities Curve

Many businesses produce more than one type of product. However, even these companies make trade-offs and have opportunity costs. This is because of the choices they make about what combination of goods to produce. Economists use a graph called a production possibilities curve to show how much goods and services can be produced from a set amount of resources in a specific period of time. This curve helps businesses decide how much of each item to produce. It reveals the trade-offs and opportunity costs involved in each decision. The classic example for explaining production possibilities in economics is the trade-off between spending on military defense and on civilian goods. In this situation, people call military goods and services guns and civilian goods and services butter. Governments know they have to give up production of one type of good or service in order to get more production of another. If a government decides to increase the production of butter one year, the opportunity cost is the value of the

guns that cannot be produced. In the United States, Congress and the president decide how many military goods and civilian goods to produce with the taxes collected. The production possibilities curve helps determine what the opportunity cost will be if the government takes particular course of action. Because of the nature of models, the predictions of a production possibilities curve do not always correspond to the real-world. For most people, economics is only one of many factors to consider when deciding how to use resources. For example, businesses might also consider the environmental consequences of their decisions.