Economics: Here Are Basic Things You Need To Know

The study of Economics makes individuals aware or cognizant of their environment and better decision makers.

By the end of this section, you will be able to:

• Discuss the importance of studying economics,
• Explain how the study of economics provides knowledge to understand the system and policies that guide life.
• Explain the relationship between production and division of labor, and
• Evaluate the significance of scarcity

Key Points in this study

1. Economics also allows individual agents to balance expectations.
2. Economics provides distilled frameworks to analyze complex societal interactions, as in the case of consumer and firm behavior.
3. Being knowledgable about economics foundations allows an individual to be an active and aware participant rather than a passive economic agent.

Key Terms

Circular flow: A model of market economy that shows the flow of dollars between households and firms.

Externality: An impact, positive or negative, on any party not involved in a given economic transaction or act.

Definition/Meaning

The generally accepted definition of Economics is the one put forward by a renowned economist, Robbins.

He famously defined Economics as a social science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. 

It means that Economics is the study of how humans make decisions in the face of scarcity. 

These can be individual decisions, family decisions, business decisions or societal decisions. 

If you look around carefully, you will see that scarcity is a fact of life. 

Scarcity means that human wants(demand) for goods, services and resources exceed what is available(supply). 

Resources, such as labor, tools, time, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. 

Of course, the ultimate scarce resource is time- everyone(rich or poor) has just 24 hours in the day to try to get the thing(s) needed or wanted. 

At any point in time, there is only a finite amount of resources available.

When you combine this fact with the fact that human wants seem to be almost endless or infinite, you can see why there is scarcity which is an economic problem.

Economics has two important attributes. It studies human activities and constructions in environments with scarce resources, and uses the scientific method and empirical evidence to build its base of knowledge.

The evaluation of human interactions as it relates to preferences, decision making, and constraints is a significant foundation of economic theory. 

The complexity of the dynamics of human motivation and systems has led to the establishment of assumptions that form the basis of the theory of consumer and firm behavior, both of which are used to model circular flow interactions within the economy .

                     Circular Flow of the Economy

Economics provides an accessible foundation for understanding the complexity of the interactions in the world. 

For example, the circular flow diagram displays the economic framework related to the dynamic interconnectedness of economic agents. 

In the graph above, the display is limited to households and firms but other depictions of circular flow incorporate the government and international trading partners.

Economics provides distilled frameworks to analyze complex societal interactions, as in the case of consumer and firm behavior. 

An understanding of how wages and consumption flow between consumers and producers provides agents with an ability to understand the symbiosis of the relationship rather than fixating on the contentious components that surface from time to time.

Economics also allows individual agents to balance expectations. 

An understanding of the ebb and flow of the economy through the boom and bust of the business cycles, creates the potential for emotional balance by reminding agents to limit desperation in downturns and exuberance in expansions.

By developing an understanding of the foundations of economics, individuals can become better decision makers with respect to their own lives and maintain a balance with respect to an externality that has the potential to supplement or deter their plans. 

Since economic theories are a basis of decision making and regulatory policy, being knowledgable about economics foundations allows an individual to be an active and aware participant rather than a passive economic agent.

Source: Boundless Economics

Scarcity Of Resources

Scarcity is a fundamental problem of economics where there are limited resources to fulfill society's unlimited wants

If you still don't understand that scarcity is a problem, consider the following: 

Does everyone need food to eat? 
Does everyone need a decent place to live? 
Does everyone have access to healthcare? 

In every country in the world, there are people who are hungry, homeless(for instance those who call park benches their beds, etc) and in need of healthcare, just to focus on a few critical goods and services. 

Why is this the case? 

It is because the means to satisfy the  numerous wants are scarce. 

Let’s delve into the concept of scarcity in full, since it is very important in understanding economics.

According to Wikipedia, Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. Scarcity also includes an individual's lack of resources to buy commodities. 

The opposite of scarcity is abundance.

Concept Of Scarcity

"Scarcity refers to a gap between limited resources and theoretically limitless wants"(Wikipedia).

The notion of scarcity is that there is never enough (of something) to satisfy all conceivable human wants, even at advanced states of human technology. 

Scarcity involves making a sacrifice—giving something up, or making a trade-off in order to obtain more of the scarce resource that is wanted.

According to Wikipedia, the condition of scarcity in the real world necessitates competition for scarce resources, and competition occurs "when people strive to meet the criteria that are being used to determine who gets what"

The price system, or market prices, are one way to allocate scarce resources. 

"If a society coordinates economic plans on the basis of willingness to pay money, members of that society will strive to compete to make money". 

If other criteria are used, we would expect to see competition in terms of those other criteria.

For example, although air is more important to us than gold, it is less scarce simply because the production cost of air is zero, hence its opportunity cost is equally zero.

Gold on the other hand has a high production cost. It has to be found and processed, both of which require a great deal of resources. 

Additionally, scarcity implies that not all of society's goals can be pursued at the same time; trade-offs are made of one goal against others. 

In an influential 1932 essay, Lionel Robbins defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". 

In cases of monopoly or monopsony an artificial scarcity can be created. 

Scarcity can also occur through stockpiling, either as an attempt to corner the market or for other reasons. 

Temporary scarcity can be caused by (and cause) panic buying.

Scarce goods

A scarce good is a good that has more quantity demanded than quantity supplied at a price of 0. 

The term scarcity refers to the possible existence of conflict over the possession of a finite good. One can say that, for any scarce good, someones’ ownership and control excludes someone else's control. 

Scarcity falls into three distinctive categories: demand-induced, supply-induced, and structural scarcities. 

Demand-induced scarcity happens when the demand of the resource increases and the supply stays the same.

Supply-induced scarcity happens when a supply is very low in comparison to the demand. This happens mostly due to environmental degradation like deforestation and drought. 

Lastly, structural scarcity occurs when part of a population doesn't have equal access to resources due to political conflicts or location. The happens in Africa where desert countries don't have access to water. To get water they have to travel and make agreements with countries who have water resources. 

In some countries political groups hold necessary resources hostage for concessions or money. 

Supply-induced and structural scarcity demands for resources cause the most conflict for a  country.

Non-scarce goods 

On the opposite side of the coin there are the non-scarce goods. 

These goods don't need to be valueless and some can even be indispensable for one's existence(e g, air).

As Frank Fetter explains in his Economic Principles: "Some things, even such as are indispensable to existence, may yet, because of their abundance, fail to be objects of desire and of choice". 

Such things are called free goods. They have no value in the sense in which the economist uses that term(that is, "no value" in monetary terms)

Free goods are things which exist in superfluity; that is, in quantities sufficient not only to gratify but also to satisfy all the desires which may depend on them." 

As compared with the scarce goods, non-scarce goods are the ones where there can be no contest over its ownership. The fact that someone is using something doesn't prevent anyone else from using it. 

For a good to be considered non-scarce it can either have an infinite existence, no sense of possession, or it can be infinitely replicated.

The Problem Of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, entertainment, etc. 

How do you acquire those items? You do not produce them yourself rather you buy them. 

How do you afford the things you buy? You work for pay. Or if you do not, someone else does on your behalf. 

Yet most of us never have enough to buy all the things we want. This is because of scarcity. 

So how do we solve it?

According to QuizOver.com, when you visit this website you will see how United States is dealing with scarcity in resources.

Every society, at all levels, must make choices about how to use its resources. 

Families must decide whether to spend their money on a new car or a fancy vacation. 

Towns must choose whether to put more of the budget into police and fire protection or into the school system. 

Nations must decide whether to devote more funds to national defense or to protecting the environment. 

In most cases, there just isn’t enough money in the budget to do everything. So why do we not each just produce all of the things we consume? 

The simple answer is most of us do not know how, but that is not the main reason. 

When you study economics, you will discover that the obvious choice is not always the right answer or at least the complete answer. Studying economics teaches you to think in a different of ways.

Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. 

Most of us do not know how to do all or any of those things. It is not because we could not learn, rather, we do not have to. 

According to QuizOver.com, the reason is because of something called Division and Specialization of labor , a production innovation first put forth by Adam Smith , in his Book; "The Wealth of Nations".