Economics: The Study Of Scarcity And Choice

WHAT IS ECONOMICS

Scarcity

One of the things that young people discover as they grow older is that you can't have everything. You are reminded of it every time you shop. Although you may see twenty or thirty items that you would really like to buy, you know that you will have to limit your selection to one or two. Everyone goes through life having to make choices.

Every business, even sports teams, must pick and choose from among the things they would like to have because, like you and me, they cannot have everything.

Governments, too, cannot have everything. Every year the most important political debates concern questions about spending taxpayers' money.

Neither individuals nor societies can have all the things they would like to have. There simply is not enough of everything to go around. Economists note that there is no limit to the amount or kinds of things that people want. There is, howeVer, a limit to the resources, things used to produce goods and services, available to satisfy those wants. Once that limit is reached, nothing else can be produced.

In other words, when a nation's resources (all its workers, factories, farms, etc.) are fully employed the only way it will be able to increase the production of one thing will be by reducing the production of something else. This happened during World War 2. In its efforts to increase the production of tanks and other military vehicles, our nation's factories stopped producing automobiles. Therefore, if somebody tries to sell you a 1944 Ford or Chevrolet, run, do not walk, to the nearest exit - none were produced that year.

To summarize: human wants are unlimited, but the resources necessary to satisfy those wants arc limited. Thus, every society is faced with the identical problem, the problem of scarcity.

Economics: The Study Of Scarcity And Choice

Since there is not enough of everything to go around, everyone -individuals, business firms, and government-needs to make choices from among the things they want. In the process they will by to economize, to get the most from what they have. With this in mind, we can define economics as the social science that describes and analyzes how society chooses from among scarce resources to satisfy its wants.

The need to choose is imposed on us all by our income, wealth and ability to borrow. Individuals and families are limited by the size of their personal income, savings and ability to borrow. Similarly, business firms are limited by their profits, savings and borrowing power, and governments by their ability to tax and borrow. Income, savings, profits and taxes enable people, institutions and government to purchase goods, products you can see or touch, and services, work performed for pay that benefits others. The problem that each must face, however, is that once the decision has been made to choose one set of alternatives, one loses the opportunity to choose the other.

Trade-Offs And Opportunity Costs

Let's suppose that you recently managed to save enough to buy the CD player you always wanted. While you were building up your savings, you discovered the fun of basketball and would now love a pair of pump sneakers. You can afford to buy either a CD player or sneakers, bdt not both. It's a tradeoff.

Economists describe these kinds of trade-offs as opportunity costs. The opportunity cost of something its cost measured in terms of what you have to give to get it. Thus, the opportunity cost of the CD player the example above would be new sneakers.

Business is also faced with the problem of choices and opportunity costs. In planning an advertising program, for example, a local store might have to choose between a newspaper ad or a direct-mail campaign. If it puts efforts into newspaper advertising, the opportunity cost is the benefits of a direct-mail campaign.

Like individuals and business firms, government also pays opportunity costs. If, for example, the federal government chooses to increase its spending for roads by reducing the number of warships to be built, the opportunity cost of the improved road network would be more powerful navy.