Economics

What's the Economy? 

You may hear it discussed on the news or overhear your parents discussing it.  You may hear that the economy is in good shape or bad shape, but you wonder what exactly does that mean.

The economy is all about how money is made and spent in a set area—whether we're talking about a town, state, country, or the global economy.  The economy includes the amount of money moving around, where (or with whom) the money is accumulating, and the trends that influence how money moves around an economy. 

The economy is made up of buyers and sellers and each of us are both a buyer and a seller, it just depends on the circumstance at the time. For example, we use money to buy presents around the holidays, and food when we get hungry. We sell things when we need more money. That can mean selling a car or a home. It can also mean selling our time or knowledge, like when cut someone's grass or we baby sit our neighbor's kid. 

There are times when a lot of people have more money than they need to survive. When this happens, the economy is doing well. Just because the economy is doing well, that doesn't mean that everyone is doing well. But when a majority of the people in an economy aren't stressed about money, then the economy is considered healthy. On the other hand, there are times when many people don't have enough money to buy what they need. The economy is doing badly when this happens. 

The following terms will help us learn about economics and better understand the economies of other countries.  Understanding economics will also help us learn to start a business, run our households, understand our bosses' business, and better our communities.

Economics is the study of how societies,  governments, businesses, households, and individuals allocate scarce resources to satisfy their wants and needs. 

Land is the physical space and the natural resources in it (examples: water, timber, oil).

Labor is the human effort to transform resources into goods or services available for purchase.  

Capital  is a company's physical equipment and the money it uses to buy resources (supplies, machinery, etc) to make something.

Entrepreneurship is the ideas and processes involved in starting, organizing, and managing a business. An entrepreneur is a person who, operating within the context of a market economy, seeks to earn profits by finding new ways to organize factors of production.

These four factors of production are needed for any business and are the inputs used in the production of goods or services in order to make an economic profit.   Because these productive resources are limited, the goods and services that can be made from them are also limited.  In contrast, the goods and services wanted by individuals and societies are virtually unlimited. 

The tension between unlimited wants and needs and the limited productive resources available for satisfying these wants and needs is what economists refer to as scarcity.  The more scarce a good or service, the costlier the good or service.  The price of an item indicates how scarce a good is relative to other goods. 

Can you identify the four factors of production?

Industry

All types of businesses that are related to the same good or service.  List of industries by the U.S. Burea of Labor Statistics.  For example, the auto industry is depicted below.

The existence of scarcity creates the basic economic problem faced by every society, rich or poor:  how to make the best use of limited productive resources to satisfy human wants.  To solve this problem, every society must answer these three basic questions:

1. What goods and service will be produced?

2. How will these goods and services be produced? 

3. Who will consume the goods and services? 

Several economic systems exist to answer these three questions.  We will examine these in very near future. 

Because of scarcity, any time a choice is made, there are alternatives that are not chosen.  More precisely, there is always one next best alternative that is not chosen.  In economics, the value of the next best alternative is called opportunity cost. 

Both producers (those who provide goods and services) and consumers (those who use goods and services) incur opportunity costs when making decisions.  For example, the business person who uses a building to operate an insurance business cannot use the same building to produce pizza.  The consumer who uses scarce income ($) to purchase a new carpet will have to forgo saving the money or purchasing something else.  Because there are always alternative uses for limited resources, every economic decision has an opportunity cost.  

The concept of opportunity cost also applies to the use of time.  Our time is scarce.  The time spent doing one activity cannot be spent doing another activity. Therefore, the time you spend watching television is not only the time itself, but the other activities that you could be doing during that time.  Every economic choice has an opportunity cost; therefore, there is no such thing as a free lunch (in other words, everything has a cost)! 

Summary

At its essence, economics is the study of choices under scarcity.  Every society, regardless of its political structure, must develop an economic system to determine how to use its limited resources (factors of production) in answering the three basic economic questions of what, how, and for whom to produce. 

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