Applied Economics

Topics: Economics, Economic system, Planned economy Pages: 16 (4596 words) Published: June 2, 2013
Chapter 1: What Is Economics?


As you read this chapter, look for answers to the following questions:

• What is "scarcity" and why must all societies deal with it? • Why is economics sometimes called "the study of scarcity and choice"? • What are trade-offs and opportunity costs?
• Why should everyone understand basic economics?
• What are the factors of production?
• How do different economic systems solve the problem of scarcity?


One discovery you have made is that you can't have everything! In fact, you probably are reminded of this every time you go shopping. You may see 20 or 30 items you would like, but you know you cannot afford to buy them all. Everyone—not just teenagers—has to make choices. Governments have the power to tax and receive huge sums of money, but politicians still must debate how to spend taxpayers' money. All business owners or managers—and even coaches of professional basketball teams—must pick and choose from among the employees or equipment they would like to have. They cannot have everything.

There will always be a difference between what people want and the resources available to satisfy those wants. Human wants are unlimited, but the resources (land, labor, capital, and time) required to satisfy them are limited. 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 the nation will be able to increase the production of one thing will be by reducing the production of something else. This happened during World War II in the United States. In their efforts to increase the production of tanks and other military vehicles, our nation's factories stopped producing automobiles. So if somebody tries to sell you a 1944 Ford or Chevrolet, beware: none were produced that year!

Thus, if human wants are unlimited, but resources to satisfy those wants are limited, then people in every society face the same 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 governments - needs to make choices. Individuals and families must decide how to use limited income, savings, and other resources. Similarly, business firms make choices based on their limited profits, savings, and borrowing power. Governments, too, are limited by their ability to tax, borrow, and print money.

With this in mind, economics can be defined as the social science that describes and analyzes how people in a society choose to use its scarce resources to satisfy their needs and wants.

Macroeconomics vs. Microeconomics. For convenience, economists usually study issues facing individuals, families, and businesses separately from problems facing nations. They even have specific names for each area of study - macroeconomics and microeconomics. Macroeconomics is the study of the economy as a whole; microeconomics is the study of individual consumers and business firms.

Macroeconomics examines questions such as: How fast is the level of production in the nation changing? How fast are prices rising? How many people are unemployed? How has the total income Americans earned changed since 1990? Macroeconomics also seeks solutions to current problems facing the economy, such as unemployment, poverty, and long-term economic growth.

Microeconomics examines the choices that individuals, families, and businesses make. Microeconomics examines the interaction of producers, buyers, and sellers in markets. Much of this textbook is devoted to helping you understand how markets—which consist of the people interested in buying or selling any particular good or service—operate in a free enterprise system.

Why Study Economics?

You may be asking yourself, "Why should I study economics?" Scarcity probably isn't a problem you will be able to solve, and...
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