Economic issues affects are daily lives ,whether reading a newspaper on a report on “local market”, watching state of economy on the television news, even discussing with friends and colleagues regarding the price of a product or whether you can afford this or that.
What is Economics all about?
For economist, “scarcity” is the central economic problem.
What is scarcity?
Although our wants are unlimited, resources available to fulfill those wants are limited.
What is the solution?
People must make choices as they try to achieve their goals. This is the basic fact of life.
What does choices reflect?
Every choice reflects trade- offs or sacrifice as we are living in a world of scarcity. For every choice we make we pay a cost and that cost in economics is called Opportunity Cost.
This economic problem is also known as “scarcity problem”, which is an universal problem.
What is economics?
A study of the ALLOCATION of SCARCE resources to meet UNLIMITED human wants.
Economic Problem→ Choice→ Opportunity Cost
Factors of Production
1. Land: is a natural (non human) resource. Land includes those resources that are gifts of nature available for use in the production process. Land includes anything natural above or below the surface, such as location, minerals, climate, water, oil, wildlife and fish etc.
Two broad categories of natural resources are
(a) Renewable resources are inputs that nature can automatically replace without the interference from human being, example clean air etc.
(b) Non renewable resources are inputs that nature will not automatically replace. There is only “so much”, once used it finishes forever, example oil and coal etc.
2. Labour: is the human resource, which includes all contributions by individuals who work. Labour is the mental and physical human capacity of workers to produce goods and services.
3. Capital: can be divided into physical capital and human capital. Physical capital refers to all manufactured resources which includes building and machines etc. Human capital refers to knowledge, training and education of workers.
4. Entrepreneurship: a special type of labour, involves human resources that perform the functions of organizing, managing, assembling the other factors of production and creating a new product.
Scarcity and Fundamental Economic Questions
Scarcity raises three questions, which every economy must answer and a clear explanation was provided by Noble Prize winner Paul Samuelson.
1. What to produce?
Using the economy’s scarce resources to produce one good requires giving up/sacrificing/trade off another good. Producing better health services, for example, may require sacrificing better education facilities. Every society must decide what it must produce with its scarce resources.
2. How to produce?
Society has to make best decision or choices in determining how goods and services should be produced. For example to produce computer, should a firm employ a few skilled or lot of unskilled workers? Should it produce in domestic country or should it use foreign plants?
3. For whom to produce?
If goods or services are produced, a decision must be made about who will get it. A decision to have one person or group receive a good or services usually means it will not be available to someone else. For example who will get the computer that has been produced?
Choices and Opportunity Cost
Choices and opportunity cost are two fundamental concepts in economics. Opportunity cost is the value of the best alternative forgone in making any choice. The opportunity cost to you of playing Play Station will be the value of the best other use to which you could have put your time. If you have chosen to spend $10 on a movie ticket, you have chosen to give up the sumptuous meal of $10. The concepts of scarcity, choices and opportunity cost are the fundamentals of economics.