The Meaning of Economics

Economics is a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for present and future consumption.

What exactly are goods and services? A good is anything that satisfies a want. That is the purpose of production — to provide goods that satisfy wants.

So goods are produced, and the consumption of those goods satisfies wants. Goods can be tangible or intangible. Tangible goods are physical items such as bulldozers or pizzas. Intangible goods such as medical care or education are called services. Both goods and services satisfy wants and therefore can be called goods.

The satisfaction of wants can only be accomplished by using up resources, the inputs, the so-called factors of production or means of production. These resources can be classified as land, labor, capital, and entrepreneurship.

Resources are scarce. Scarcity is a relationship between how much there is of something and how much of it is wanted. Resources are scarce compared to all of the uses we have for them.

We must choose how to use our scarce resources. Scarcity forces choice. It is imposed by limited factors of production yielding limited output of goods relative to unlimited wants.

The society is faced with the problem of not having enough resources to provide for all wants. Society must decide which goods will be produced, how to allocate resources to produce goods, and how to allocate the goods among the population. The method used to decide how these allocations will be made depends on the kind of economic system the society has chosen.

Because there are always alternative uses of the resources and because scarcity exists, society cannot produce all that it wants. It must therefore choose among the alternatives. Hence cost is imposed on society; economists call this cost opportunity cost.

Opportunity cost is not what you choose when you make a choice — it is what you did not choose in making a choice. Opportunity cost is the value of the forgone alternative — what you gave up when you got something.

You buy the blue shirt rather than the green or 1,700 pieces of bubble gum, or leave the dollars in your checking account. Opportunity cost. Your state uses its limited budget to build more roads rather than schools. Opportunity cost.