Economics
Economics involves the research and the evaluation of choices. We can apply the concepts of economics to our personal lives as well as to our society as a whole. Most experts see economics as the science of decision-making. It is the study of the ways that individuals and societies allocate their limited resources in order to better satisfy their unlimited wants.
Economics describes the nature and behavior of an economy or of an economic system and investigates economic problems with the objective of offering solutions.
The word economy is derived from the Greek words oikos (house) and nemein (to manage) and means, literally, "household management." We say that the we practice economy when we are thrifty and sparing in the use of our resources.
When we speak of an economy (like the American economy), we mean the orderly arrangement and management of production, exchange, and consumption in a household, business organization, community, or society.
Scarcity is what economics is all about. The deeper our understanding of scarcity the better we understand the essence of economics. Our desires and wants for goods and services are unlimited, while the resources to satisfy our desires and wants are limited.
Scarcity means we can never have all we want of every good and service. Think about your answers to Question 5 on activity 1.2. Now ask yourself why do you not get more of these things? The answers will revolve around the scarcity of resources. As humans, we have the insatiable appetite for more goods and services, but we lack the resources to satisfy our wants.
There is no such thing as a free lunch...everything has a cost. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. Look to your neighbor and discuss what opportunity costs you each had in the past 24 hours.
Like individuals, societies cannot satisfy all their wants. All societies have limited resources. These resources are usually categorized into four groups: land, labor, capital, and entrepreneurship. They are called the factors of production. These factors of production describes the inputs that are used in the production of goods or services in order to make an economic profit.
Land is the environmental resource. It includes all natural resources, land (anything that grows on or below the land), water, air, and wildlife. Payments for land are called rents.
Labor is the human resource. Labor refers to the mental and physical efforts applied to the production of goods and services. Payments for labor services are called wages.
Capital is the physical improvement resource. Capital refers to all relatively permanent improvements made to land. Capital includes buildings, sidewalks, utilities that are installed, and all the machinery and equipment that is used to make the improvements. Another type of capital is financial capital which includes money, stocks, bonds, deeds to land, and other financial investments. Payment for capital is called interest.
Entrepreneurship is the risk-taking resource. Entrepreneurs make things happen. They are the people who combine labor, land, and capital to start businesses. However, not every business is successful. As a matter of fact, more new businesses fail than survive. Payment for risk-taking or entrepreneurship is called profit.