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Economics. Understanding how various economies work is the basic purpose of

Understanding how various economies work is the basic purpose of

studying economics. We seek to know how an economy is organized,

how it behaves, and how successfully it achieves its basic objectives.

Economics is concerned with production, distribution, and con-

sumption of goods and services. There are two branches of economics.

Macroeconomics (macro derives from the Greek word for “large”) in-

vestigates how scarce resources are allocated within the economy as a

whole or within an entire industry. Scarcity occurs because human wants

exceed the production possible with our limited time and resources.

Scarcity implies that every decision involves opportunity costs. Opportu-

nity costs exist in all situations where available resources are not abun-

dant enough to satisfy all our desires. You can select only a few of all

available alternatives. For example, a little boy goes into a toy store with

$10. Many different toys tempt him, but he finally narrows his choice

to a Monopoly game and a magic set, each costing $10. If he decides to




buy the Monopoly game, the opportunity cost is the magic set. And if

he buys the magic set, the opportunity cost is the Monopoly game. If a

town hires an extra police officer instead of repaving several streets, the

opportunity cost of hiring the officer is not repaving the streets. Oppor-

tunity cost is the cost of giving up the next best alternative. Thus scarcity

forces us to choose. This idea is reflected in the following definition of

economics: Economics is the study of how people, individually or col-

lectively, allocate their limited resources to try to satisfy their unlimited

wants. Commonly agreed-upon goals of macro policy include:

1. High employment. People suffer when many workers cannot find

job and manufacturing plants and much machinery are idle.

2. Price stability. If average prices are volatile, people may be uncer-

tain about how much their wages will buy or whether to consume now or

invest in hopes of future returns.

3. Economic growth. People want higher incomes each year and most

hope their children will be even more prosperous than they are.

Microeconomics (micro derives from the Greek word for “small”)

studies the economic behavior of individual firms. Three major goals

dominate micro policy:

1. Efficiency. An inefficient economy wastes resources and fails to

provide the highest possible standard of living for consumers.

2. Equity. Huge gaps between the rich and the poor leave most people

impoverished while a privileged few live luxuriously.

3. Freedom. Maximum freedom requires people to have the widest

possible range of choices available.

In order to produce anything, we need resources, or factors of pro-

duction. Factors of production are the inputs – land, labour, and capital

(buildings and machinery) – we use to produce final goods and services

(output). From an economist’s standpoint, resources refer to anything

that can be used to produce products, that is, either goods or services.

Every society, from a tiny island nation in the Pacific to the most

complex industrial giants, needs these resources: land, labour, capital

and entrepreneurial ability. Land and capital are referred to as material

resources. Labour and entrepreneurship are referred to as human re-

sources. These are resources for the economy as a whole.

As a resource, land has a much more general meaning than our nor-

mal understanding of the word. Economists use the term land in a broad

sense to include not only agricultural land and land for building sites but

also other natural resources like minerals, water, and timber. The basic

payment made to the owners of land is rent.

Capital. In economic terms, capital is ”man-made” goods used to

produce other goods or services. Equipment, buildings, tools as well as

the money that buys other resources are capital goods.




Labour. The efforts of a factory worker, a lawyer, a sales representa-

tive, or anyone who works for a business are defined as labour.

Entrepreneurial ability is the least familiar of four basic resources. The

entrepreneur sets up a business, assembles the needed resources, risks

his or her own money, and reaps the profits or absorbs the losses of this


Although all economies rely on the same basic factors of produc-

tion, not all are blessed with the same quantity and quality of resources.

Besides each economic system reflects the country’s history, traditions,

aspirations, and politics. What works for one culture might not work as

well for another, and vice versa.

1. What is economics concerned with?

2. What does macroeconomics investigate?

3. Why does scarcity occur?

4. What are the main goals of macro policy?

5. What does microeconomics study?

6. What do resources refer to?

7. How many factors of production does the economic system use?

What are they?


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