Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economicscomes from the Ancient Greek οἰκονομία
(oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος
ECONOMICS AS A SCIENCE
1. Do you know the difference between the terms ‘economics’ and ‘economy’? How can we call a prudent housewife – ‘economic’ or ‘economical’?
2. Are wants similar to needs? How do they differ?
3. Why can’t people have everything they want? Why do they have to make choices? Do you think it will be possible to satisfy all the desires people have some day?
4. Can you give an example of economic goods and services? Do you have an idea what factors of production are required to produce them?
Read the text and do the tasks that follow.
Economics as a Science
Our world is a finite place where people, both individually and collectively, face the problem of scarcity. Scarcity is the condition in which human wants are forever greater than available resources. For an individual, limited resources include time, money and skill. For a country, limited resources include natural resources, capital, labour force and technology. Because of scarcity, it is not possible to satisfy every desire, there are always limits on the economy’s ability to satisfy unlimited wants.
The condition of scarcity is the main problem economics studies. Economics is a social science that studies how individuals, governments, firms and nations make choices on allocating resources to satisfy their unlimited wants. One should distinguish the terms “economics” and “economy”. Economy is a system by which industry, trade and money are organized.
Society makes two kinds of choices: economy-wide, or macro choices and individual, or micro choices. The prefixes macro and micro come from the Greek words meaning “large” and “small,” respectively. Reflecting the macro and micro perspectives, economics consists of two main branches: macroeconomics and microeconomics.
The old saying “Looking at the forest rather than the trees” fits macroeconomics. Macroeconomics is the branch of economics that studies decision making for the economy as a whole. Macroeconomics examines economy-wide variables, such as inflation, unemployment, growth of the economy, money supply, and national incomes.
Examining individual trees, leaves, and pieces of bark, rather than surveying the forest, illustrates microeconomics. Microeconomics is the branch of economics that studies decision making by a single individual, household, firm, industry, or level of government. Microeconomics applies a microscope to specific parts of an economy, as one would examine cells in the body. The focus is on small economic issues, such as economic decisions of particular groups of consumers and businesses.
Because of the problem of scarcity nations, businesses, and individuals all must make choices in an effort to satisfy unlimited wants with limited resources.
It is important to point out that there is a difference between wants and needs. Needs are basic necessities such as food, clothing and shelter. Other so-called “needs” are really “wants”. For example, you may want new clothes, but whether or not you need them is a value judgement. Most people’s needs are limited. In contrast, people’s wants are unlimited. Very few people ever reach the stage where they have everything they want. In fact, one want often leads to another.
Economists use the term opportunity cost to refer to the value of what is foregone in order to have something else or, saying otherwise, it is the next best alternative which is given up when a decision is made to use limited resources in a particular way. This value is unique for each individual. You may, for instance, forego ice cream in order to have an extra helping of mashed potatoes. For you, the mashed potatoes have a greater value than dessert. The opportunity cost of an individual’s decisions, therefore, is determined by his or her needs, wants, time and resources (income). Nations, too, are constantly faced with the realities of opportunity costs. For example, the government must decide how much it will spend for national defence and how much will be spent on non-defence programs, such as education, transportation, and other public services.
Opportunity cost is different for each individual and nation. Thus, what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources.