The Fundamental economic problem
Societies do not have enough productive resources to satisfy everyone's wants and needs.
Scarcity
Scarcity
- Fundamental economic problem of meeting people's virtually unlimited wants with scarce resources.
- A need is a basic requirement for survival, including food, shelter, and clothing.
- A want is something we would like to have but is not necessary for survival.
- There is no such thing as a free lunch.
Three basic questions
Scarcity forces every society to answer the basic questions of what, how, and for whom to produce.
What to Produce
What to Produce
- The first question is what to produce. For example, should a society direct most of its resources to the production of food?
- The second question is how to produce. For example, should factory owners use automated production methods that require more machines and fewer workers?
- A third question is form whom to produce. After a society decides what and how to produce, it must decide who will receive the things produced.
The factors of production
Four factors of production - land, capital, and entrepreneurs - must be present to produce goods and services.
Land
Land
- Natural resources or other "gifts of nature" not created by human effort.
- Tools, equipment, and factories used in the production of goods and services.
- People with all their efforts, abilities and skills.
- Risk-taking individual in search of profits.
- Everything we make requires the four factors of production.
The scope of economics
Economics analyzes how societies satisfy wants through careful use of relatively scare resources.
Description
Description
- One part of economics describes economic activity. For example we often hear about Gross Domestic Product (GDP), the dollar value of all final goods, services, and structures produced within a country's borders during a one year period.
- Analysis is important because it helps us discover why things work and how things happen. This in turn, will help us deal with problems that we would like to solve.
- After economists analyze a problem and understand why and how things works, they need to communicate this knowledge to others.
- The study of economics helps us become more informed citizens and better decision makers.