Definition of 'Economics' A social science that studies how individuals, governments, firms and nations make choices on allocating

scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers. Economics is often referred to as "the dismal science." Read more: http://www.investopedia.com/terms/e/economics.asp#ixzz1x3fn7DMP Investopedia explains 'Economics' Two of the major approaches in economics are named the classical and Keynesian approaches. Classical economists believe that markets function very well, will quickly react to any changes in equilibrium and that a "laissez faire" government policy works best. On the other hand, Keynesian economists believe that markets react very slowly to changes in equilibrium (especial to changes in prices) and that active government intervention is sometimes the best method to get the economy back into equilibrium. Read more: http://www.investopedia.com/terms/e/economics.asp#ixzz1x3fvjVOO http://www.investopedia.com/terms/e/economics.asp#axzz1x3fY75RG Scarcity and Choice Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced. Scarcity requires choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied. When we, either as individuals or as a society, choose more of something, scarcity forces us to take less of something else. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices. When there is scarcity and choice, there are costs. The cost of any choice is the option or options that a person gives up. For example, if you gave up the option of playing a computer game to read this text, the cost of reading this text is the enjoyment you would have received playing the game. Most of economics is based on the simple idea that people make choices by comparing the benefits of option A with the benefits of option B (and all other options that are available) and choosing the one with the highest benefit. Alternatively, one can view the cost of choosing option A as the sacrifice involved in rejecting option B, and then say that one chooses option A when the benefits of A outweigh the costs of choosing A (which are the benefits one loses when one rejects option B). The widespread use of definitions emphasizing choice and scarcity shows that economists believe that these definitions focus on a central and basic part of the subject. This emphasis on choice represents a relatively recent insight into what economics is all about; the notion of choice is not stressed in older definitions of economics. Sometimes, this insight yields rather clever definitions, as in James Buchanan's observation that an economist is one who disagrees with the statement that whatever is worth doing is worth doing well. What Buchanan is noting is that time is scarce because it is limited and there are many things one can do with one's time. If one wants to do all things well, one must devote considerable time to each, and thus must sacrifice other things one could do. Sometimes, it is wise to choose to do some things poorly so that one has more time for other things. One way to see the importance of scarcity is to examine how various people have constructed utopias. http://ingrimayne.com/econ/Introduction/ScarcityNChoice.html AS Markets & Market Systems Scarcity and Choice in Resource Allocation In this chapter we consider the nature of economics and the choices that all economic agents, be they consumers, businesses and different levels of government must make every day. What is Economics? The Economist's Dictionary of Economics defines economics as "The study of the production, distribution and consumption of wealth in human society" Another definition of the subject comes from the economist Lionel Robbins, who said in 1935 that "Economics is a social science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions." The purpose of economic activity

Road space throughout the world is becoming increasingly scarce as the demand for motor transport increases each year what do you think are some of the best solutions to reducing the problem of congestion on our roads? It is often said that the central purpose of economic activity is the production of goods and services to satisfy consumers needs and wants i.e. to meet peoples need for consumption both as a means of survival but also to meet their ever-growing demand for an improved lifestyle or standard of living. The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire. All societies face the problem of having to decide: What goods and services to produce: Does the economy uses its resources to operate more hospitals or hotels? Do we make iPod Nanos or produce more coffee? Does the National Health Service provide free IVF treatment for thousands of childless couples? Or, do we choose instead to allocate millions of pounds each year to providing beta-interferon to sufferers of multiple sclerosis? How best to produce goods and services: What is the best use of our scarce resources of land labour and capital? Should school playing fields be sold off to provide more land for affordable housing? Or are we contributing to the problem of obesity by selling off these playing fields? Who is to receive goods and services: What is the best method of distributing products to ensure the highest level of wants and needs are met? Who will get expensive hospital treatment - and who not? Should there be a minimum wage? If so, at what level should it be set? Scarcity Water, water everywhere We use an average of 158 litres of water a day in Britain, for which we pay a price of 28p per litre but much of it is just cash down the drain, according to water companies. Most are campaigning to cut the amount we use. And the front-line weapon in their campaign is the water meter. They want us all to have one and one company is seeking powers to make them compulsory. When a meter is installed, in most homes, consumption drops by 20 per cent and, in some, it goes down by a third. According to Ofwat, the water industry regulator, the average water and sewerage bill for homes with a meter is 248 compared with 289 for those with flat-rate bills. At present only 25 per cent of households have meters and most of those are in East Anglia. They are installed free by water companies but households then have about 43 added to each bill to cover the cost of installing and reading the meter. Unsurprisingly, we use more water in summer. Peak demand on hot days can be 50 to 70 per cent above average. Most of this is for lawns, flowers, paddling pools and extra showers and baths. Source: Adapted from an article by Valerie Elliott, the Times, 9 July 2005 If something is scarce - it will have a market value. If the supply of a good or service is low, the market price will rise, providing there is sufficient demand from consumers. Goods and services that are in plentiful supply will have a lower market value because supply can easily meet the demand from consumers. Whenever there is excess supply in a market, we expect to see prices falling. For example, the prices of new cars in the UK have been falling for several years and there have been huge falls in the prices of clothing as supply from countries such as China and Vietnam has surged. Insatiable human wants and needs Human beings want better food; housing; transport, education and health services. They demand the latest digital technology, more meals out at restaurants, more frequent overseas travel, more leisure time, better cars, cheaper food and a wider range of cosmetic health care treatments. Opinion polls consistently show that the majority of the electorate expect government policies to deliver improvements in the standard of education, the National Health Service and our transport system. (Whether voters are really prepared to pay for these services through higher taxes is of course another question!) Economic resources are limited, but human needs and wants are infinite. Indeed the development of society can be described as the uncovering of new wants and needs - which producers attempt to supply by using the available factors of production. For a perspective on the achievements of countries in meeting peoples basic needs, the Human Development Index produced annually by the United Nations is worth reading. Data for each country can be accessed and cross-country comparisons can be made. Making choices Because of scarcity, choices have to be made on a daily basis by all consumers, firms and governments. For a moment, just have a think about the hundreds of millions of decisions that are made by people in your own country every single day. Take for example the choices that people make in the city of London about how to get to work. Over six million people travel into London each day, they have to make choices about when to travel, whether to use the bus, the tube, to walk or cycle or indeed whether to work from home. Millions of decisions are being taken, many of them are habitual (we choose the same path each time) but somehow on most days, people get to work on time and they get home too! This is a remarkable achievement, and for it to happen, our economy must provide the resources and the options for it to happen. Trade-offs when making choices

Making a choice made normally involves a trade-off - in simple terms, choosing more of one thing means giving up something else in exchange. Because wants are unlimited but resources are finite, choice is an unavoidable issue in economics. For example: 1. Housing: Choices about whether to rent or buy a home a huge decision to make and one full of uncertainty given the recent volatility in the British housing market! There are costs and benefits to renting a property or choosing to buy a home with a mortgage. Both decisions involve a degree of risk. 2. Working: Choosing between full-time or part-time work, or to take a course in higher education lasting three years how have these choices and commitments been affected by the introduction of university tuition fees? 3. Transport and travel: The choice between using Euro-Tunnel, a speedy low-cost ferry or an airline when travelling to Western Europe. Your choices about which modes of transport to use to get to and from work or school each day. Consumer welfare and rationality What makes people happy? Why despite several decades of rising living standards do surveys of happiness suggest that people are not noticeably happier than previous generations? When we study the decisions of consumers in different markets, we can start to consider and explore what their aims are. Our working assumption for the moment is that consumers make choices about what to consume based on the aim of maximising their own welfare. They have a limited income (i.e. a limited budget) and they seek to allocate their funds in a way that improves their standard of living. Of course in reality consumers rarely behave in a perfectly informed and rational way. We will see later that often decisions by people are based on imperfect or incomplete information which can lead to a loss of satisfaction and welfare not only for people themselves but which affect other and our society as a whole. As consumers we have all made poor choices about which products to buy. Do we always learn from our mistakes? To what extent are our individual choices influenced and distorted by the effects of persuasive advertising? Multinational companies have advertising and marketing budgets that often run into hundreds of millions of pounds. We are all influenced by them to a lesser or greater degree and there is always the risk that advertising can be misleading. Economic Systems An economic system is best described as a network of organisations used by a society to resolve the basic problem of what, how and for whom to produce. There are four categories of economic system. Traditional economy: Where decisions about what, how and for whom to produce are based on custom and tradition. Land is typically held in common ie private property is not well defined. Free market economy: Where households own resources and free markets allocate resources through the workings of the price mechanism. An increase in demand raises price and encourages firms to switch additional resources into the production of that good or service. The amount of products consumed by households depends on their income and household income depends on the market value of an individuals work. In a free market economy there is a limited role for the government. Indeed in a highly free market system, the government limits itself to protecting the property rights of people and businesses using the legal system, and it also seeks to protect the value of money or the value of a currency. Planned or command economy: In a planned or command system typically associated with a socialist or communist economic system, scarce resources are owned by the state (i.e. the government). The state allocates resources, and sets production targets and growth rates according to its own view of people's wants. The final income and wealth distribution is decided by the state. In such a system, market prices play little or no part in informing resource allocation decisions and queuing rations scarce goods. Mixed economy: In a mixed economy, some resources are owned by the public sector (government) and some resources are owned by the private sector. The public sector typically supplies public, quasi-public and merit goods and intervenes in markets to correct perceived market failure. We will come back to all of these concepts later on in our study of microeconomics. Opportunity Cost There is a well known saying in economics that there is no such thing as a free lunch! Even if we are not asked to pay a price for consuming a good or a service, scarce resources are used up in the production of it and there must be an opportunity cost involved. Opportunity cost measures the cost of any choice in terms of the next best alternative foregone. Many examples exist for individuals, firms and the government. Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages foregone. If you are being paid 6 per hour to work at the local supermarket, if you choose to take a day off from work you might lose 48 from having sacrificed eight hours of paid work. Government spending priorities: The opportunity cost of the government spending nearly 10 billion on investment in National Health Service might be that 10 billion less is available for spending on education or the transport network. Investing today for consumption tomorrow: The opportunity cost of an economy investing resources in new capital goods is the current production of consumer goods given up. We may have to accept lower living standards now, to accumulate increased capital equipment so that long run living standards can improve.

Making use of scarce farming land: The opportunity cost of using arable farmland to produce wheat is that the land cannot be used in that production period to harvest potatoes. Sectors of production in the economy Primary sector: This involves extraction of natural resources e.g. agriculture, forestry, fishing, quarrying, and mining

Secondary sector: This involves the production of goods in the economy, i.e. transforming materials produced by the primary sector e.g. manufacturing and the construction industry Tertiary sector: the tertiary sector provided services such as banking, finance, insurance, retail, education and travel and tourism Quaternary sector: The quaternary sector is involved with information processing e.g. education, research and development

http://tutor2u.net/economics/revision-notes/as-markets-scarcity-and-choice.html Essential economic activities Published: November 6, 2006, 6:54 pm Updated: November 6, 2006, 6:54 pm Lead Author: Global Development and Environment Inst Contributing Authors: Neva R. Goodwin, Julie A. Nelson, Frank Ackerman, Thomas Weisskopf Topics: Environmental Economics

Rate: 12345 This article has been reviewed by the following Topic Editor: Cutler Cleveland Table of Contents 1 Resource Maintenance 2 Production 3 Distribution 4 Consumption 5 Further Reading Resource Maintenance Resource maintenance means tending to, preserving, or improving the stocks of resources that form the basis for the preservation and quality of life. A capital stock is a quantity of any resource that is valued for its potential economic contributions. Capital stocks are also often referred to as capital assets. We can identify four types of capital that contribute to an economys productivity. Natural capital refers to physical assets provided by nature, such as land that is suitable for agriculture or other human uses, fresh water sources, and stocks of minerals and crude oil that are still in the ground. Manufactured capital means physical assets that are generated by applying human productive activities to natural capital. These include such things as buildings, machinery, stocks of refined oil, transportation infrastructure, and inventories of produced goods that are waiting to be sold or to be used in further production. Human capital refers to individual peoples capacity for labor, particularly the knowledge and skills each can personally bring to his or her work. Social capital means the stock of trust, mutual understanding, shared values, and socially held knowledge that facilitates the social coordination of economic activity. Lastly, there is a fifth sort of resource, financial capital, which is a fund of purchasing power available to an economic actor. While financial capital doesnt directly help to produce anything, it indirectly contributes to production by making it possible for people to produce goods and services in advance of getting paid for them. It also facilitates the activities of distribution and consumption. Key examples of financial capital would be a bank checking account, filled with funds that have been either saved up by the economic agent who owns it or loaned to the agent by a bank. Notice that economists description of capital is different from what you might hear in everyday use. In common usage, sometimes people take capital to mean only financial capital. We hear this in everyday references to capital markets, undercapitalized businesses, venture capital, etc. Economists take a broader view.

Capital stocks may increase or decrease as a consequence of natural forces, as in the case of a natural forest; or they may be deliberately managed by humans, in order to provide needed inputs for the production of desired goods and services. When the quantity or quality of a non-financial resource is increased now in order to make benefits possible in the future, this is what economists mean by investment. The activity of resource maintenance is about making sure that investments are sufficient to provide an economy with good asset base for future years and future generations. You, right now, are investing in your human capital by studying economics. Production The second of the four basic economic activities is production. Production is the conversion of resources into usable products, which may be either goods or services. Goods are tangible objects, like bread or books, whereas services are intangibles, like TV broadcasting, teaching, or haircuts. Manufactured assets, such as machines and buildings, are also the result of human productive activitythat is, some items are produced for investment purposes. Popular bands producing music, recording companies producing CDs, local governments building roads, and individuals producing cooked meals are all engaged in the economic activity of production. The economic activity of production converts some resources, which we call inputs, into new goods and services, which we refer to as outputs, as a flow over some period of time. The way in which this production occurs depends on available technologies. Production processes can also lead to undesirable outputs, such as waste products. We consider only useful outputs to be economic goods and services. Inputs include materials that become part of the produced good, supplies that are used up in the production process, and labor time. For example, were we to ask a chef how to prepare one of his specialties, say ginger chicken, we would be given an answer in terms of ingredients (chicken, ginger, oil, etc.) and a method for combining them. The food ingredients become part of the produced good. Other inputs that will be used up in the process probably include the natural gas or electricity that provides heat and other supplies such as paper towels. The chefs labor time is necessary for the dish to be prepared, and is used up by the process. But the recipe, the chefs skills, and the stove and cooking implements that will be used neither become part of the produced good nor are used up, although they are crucial for the production process. We can best think of these as flows of services arising out of capital stocks. The production process draws on services from social capital, in the form of the social knowledge embodied in a recipe; services of the chefs human capital in the form of the chefs acquired knowledge; and services of manufactured capital in the form of the stove and implements. But unlike materials and supplies, these capital stocks are not themselves transformed or used up in production. In the case of commercial production, the services of another form of capitalfinancial capitalare also vitally important. This is because the production process takes time. Imagine that the chef and her husband, for example, are also entrepreneurs. They need to be able to buy the ingredients, buy or rent kitchen space, and get to work well before they can prepare the meal and sell it. They therefore need to have financial capital available at the start of the processeither financial assets of their own, or loans they can use to pay the bills until their revenues start coming in. If at the end of the process, they can sell the meal, cover all their expenses, and make a profit, they will end up with more financial capital than before. Figure 1: The Role of Financial Capital in Commercial Production. This diagram illustrates how a commercial production process must begin with a stock of financial capital. If profitable, the production and sale of goods yields results in a larger stock of financial capital. (Source: [1]) This is illustrated in Figure 1. The reliance of commercial production on manufactured and financial capital is very important for macroeconomics. Production by noncommercial organizations such as households, nonprofit organizations, and governments, also begins with resourcesincluding financial resources, if any of the inputs are going to be bought on markets. Generally, however, such production is intended for purposes other than making a financial profit. Distribution Distribution is the sharing of products and resources among people. In contemporary economies, distribution activities take two main forms: exchange and transfer. When you hand over money in return for goods and services produced by other people, or when you receive a wage for the work you have provided to an employer, you are engaging in exchange. Markets are social institutions that facilitate exchange relations. People are generally much better off if they specialize in the production of some limited range of goods and services, and meet at least some of their other needs through exchange, than if they to produce everything they need themselves. Distribution also takes place through transfer. Transfers are payments given with nothing specific expected in return. For example, wealth is transferred from one generation to the next by inheritance. Social Security payments from the federal government to the elderly, to give another example, are transfers. Distribution also takes place through transfers of goods, services, or assets as well as transfers of money. Local public school boards, for example, distribute education services to child and teenage students in their districts, tuition-free. Parents in households transfer food and care to children. These sorts of nonmonetary transfers are called in-kind transfers. Consumption Consumption refers to the process by which goods and services are, at last, put to final use by people. In some cases, such as eating a meal or burning gasoline in a car, goods are literally consumed in the sense that they are used up and are no longer available for other uses. In other cases, such as enjoying art in a museum, the experience may be "consumed" without excluding others or using up material resources.

The activity of consumption is frequently contrasted, in macroeconomics, to the resource maintenance activity of investment. The two activities are linked by the activity of saving, or refraining from consumption today in order to gain benefits in the future. For example, suppose a subsistence farmer grows a crop of corn. To the extent the farmer eats some of the corn, the farmer consumesthe corn is used up in the process of eating, and is not available for future use. To the extent that the farmer sets some of this years corn crop aside for planting next season, the farmer saves. The farmer also investsthat is, creates a resource that will aid production in the future. Having an inventory of seeds is what makes growing a crop in the next season possible. In a modern, financially sophisticated economy, the situation is more complex, but the basic idea is the same. Modern households can save by spending less money on consumption than their income would allow. Governments can save by spending less on government consumption goods than their budgets would allow. Businesses save by retaining some of their earnings, instead of paying out to their shareholders (as dividends) all of what they make beyond their (non-investment) expenses. These flows of savings add to the stock of available financial assets. Financial intermediaries such as banks and bond markets allow savers to loan out the use of their financial capital to others who want to borrow. Some of the borrowers will use the funds to pay for the creation of new investment goods, such as buildings, factories, or a college education. The Author The Global Development And Environment Institute (GDAE pronounced "gee-day") was founded in 1993 to combine the research and curricular development activities of two Tufts programs: the Program for Sustainable Change and Development in the School of Arts and Sciences (directed by economist, Neva Goodwin), and the Center for Environmental and Resource Policy at The Fletcher School of Law and Diplomacy (Directed by William Moomaw, a chemist and environmental policy specialist). The ... (Full Bio) http://www.eoearth.org/article/Essential_economic_activities 4 Factors of Production Economics The economic theory of factors of production encompasses all of the resources and inputs that go into the manufacturing of products. Apart from direct inputs such as materials and labor, factors of production include the skills, human resources, and equipment that are required to create a product. For small businesses, understanding these inputs is critical to the bottom line of the company as small incremental changes in cost structures can be the difference between profit and loss. Production Capital Besides the supplies and materials that go into the manufacturing process, other "hard" assets are needed, such as equipment, buildings and trucks. These assets are known as production capital. Production capital varies depending on the type of business. In a manufacturing setting, it includes the machinery used to build the products, the forklifts needed to warehouse and move them, and the building that houses the operation. In a service business, it could include computers, desks and telephone equipment.

Human Capital No business is completely automated; humans are involved in producing any business' product or service. Labor is often one of the largest expenses of a business and managing human capital appropriately and efficiently is one of the hallmarks of a successful business. Human capital can also impact a business in a less direct, but just as important, way. Customers and clients see the employees in a business as a reflection of that company. The way that the human resources of a company interact with the customer base has a large impact on customer longevity and loyalty. Resource Capital The building and equipment required to run a business need to be located somewhere. Resource capital encompasses the physical space a company occupies, as well as other non-man-made resources such as water and air. Manufacturing operations often use more resource capital than service businesses because the manufacturing process requires more space for production, warehousing and showcasing. Intellectual Capital A business is far more than the sum of its physical parts. It takes entrepreneurial spirit, experience, creativity and know-how to make a business successful. These components are collectively called intellectual capital. Also included are rights, patents and trademarks; everything that you can't touch or see but is often the reason a business grows and succeeds. Sometimes, these "assets" of a business are not captured on a traditional financial statement as their value is indeterminable. It is almost impossible for competitors to duplicate intellectual capital, making it one of the most coveted and useful assets a business can own. http://smallbusiness.chron.com/4-factors-production-economics-3945.html Economic choice - is deciding between different uses of scarce resources Opportunity cost - is the benefit that is lost in making a choice between two competing uses of scarce resources. It is the next best alternative. http://tutor2u.net/economics/gcse/revision_notes/basics_choice_opportunity_cost.htm