Economic Scarcity and the Function of Choice
- 0:06 Foundation of Economics
- 1:05 Scarcity and Choice
- 2:44 What is Economics?
- 3:18 Incentives
- 4:24 What is the Economy?
- 5:02 Lesson Summary
Discover the foundation of the social science of economics as we explore the basic economic problem of scarce resources and unlimited wants using key definitions that create a framework for understanding everyday behavior in a nation.
Foundation of Economics
Let's talk about the basic foundation of economics - what economics is, what's involved with it, and what the basic economic problem is. The word economy comes from two Greek words, one meaning house and the other meaning distribute. It was first used to describe the management of a household, but by the mid-1700s, it came to describe the management of the resources of a country.
The basic economic problem that we're concerned about is this: Needs and wants are unlimited, but resources are scarce. What are resources? Resources are otherwise known as the factors of production and they include land, labor, capital and entrepreneurship - everything it takes to produce the stuff that you and I buy on a regular basis in our economy.
Scarcity and Choice
So, let's get back to this word, scarcity. What does it really mean when a resource is scarce? Scarcity, in general terms, means that the demand for something is much greater than the supply, or there is not enough money to buy it. The exact definition in economics is that there are insufficient resources to satisfy everyone's needs and wants. Whether you're talking about oil, from which we get the gasoline that powers most of our cars, or corn, even seats in a movie theater, there isn't enough for everyone to get what they want at a zero price. You know something is scarce if you try to offer it for free, and you don't have enough of it for everyone who stands in line to get it.
So, how does a society decide who gets what? Producers charge a price for it. That way, whoever values it the most will pay the most for it. This is how scarce resources are allocated, or divided up and distributed, efficiently in our economy. When you go to the store, you can't buy everything you want, so you must make choices to buy one thing instead of another. If you walk into the store with $50 and the store offers you 500 different items, you're only going to walk out of that store with a cart full of stuff that totals $50. Scarcity always leads to choice, and people can actually make better decisions because they have a better understanding of how much each choice costs.
What is Economics?
So now that we understand what scarcity is all about, let's talk about what economics is. Economics is the social science that studies how people use scarce resources to satisfy unlimited needs and wants. You'll notice it's a social science because it's about how people interact and why they behave in certain ways. In some respects, it's a lot like psychology because we talk about and make decisions based on our understanding of why people do what they do.
Incentives are at the heart of economics. Incentives are rewards that motivate people to behave in certain ways that we want them to. For example, if the government offers a tax break, or a lower tax, to families with children going to college, this tax break will motivate some additional families to make this decision. These families have an incentive, or a reward, to do something different. While not everyone will respond to this incentive, some families who weren't planning on sending their kids to college will now change their behavior because of the incentive.
In this example, the government wanted a certain result, which is more people going to college, so it created an incentive, or a reward. Many of the decisions that are made by leaders in government and the central bank are made based on incentives; that is, they have the perspective of trying to help the economy grow faster or slower by changing certain incentives.
What is an Economy?
An economy is, therefore, a system in which suppliers produce the goods and services that consumers demand. It's where consumers make choices about what to consume, and producers decide what to produce, how to produce and distribute it. Using it as an adjective, we can say that I'm being economical when I'm managing resources in a careful, efficient and prudent way. Economists study the economy by using certain mathematical models, and these models will explain why people behave the way they do.
To summarize what we've talked about in this lesson, economy refers to the management of the resources of a country. The basic economic problem is that needs and wants are unlimited, but resources are scarce. Resources, also known as factors of production, include land, labor, capital and entrepreneurship. Scarcity means that resources are limited, and because resources are scarce, people must make choices. Economics is the social science that studies how people use scarce resources to satisfy unlimited needs and wants. Finally, economists study incentives, which are rewards that motivate people to behave in certain ways.
Chapters in Economics 102: Macroeconomics
- 1. Scarcity, Choice, and The Production Possibilities Curve (5 lessons)
- 2. Comparative Advantage, Specialization and Exchange (3 lessons)
- 3. Demand, Supply and Market Equilibrium (6 lessons)
- 4. Measuring the Economy (5 lessons)
- 5. Inflation Measurement and Adjustment (11 lessons)
- 6. Understanding Unemployment (5 lessons)
- 7. Aggregate Demand and Supply (10 lessons)
- 8. Macroeconomic Equilibrium (3 lessons)
- 9. Inflation and Unemployment (4 lessons)
- 10. Economic Growth and Productivity (7 lessons)
- 11. Money, Banking and Financial Markets (10 lessons)
- 12. Central Bank and the Money Supply (11 lessons)
- 13. Fiscal and Monetary Policies (15 lessons)
- 14. Inflows, Outflows, and Restrictions (2 lessons)
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