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

  • Discuss the importance of studying economics
  • Explain the relationship between production and division of labor
  • Evaluate the significance of scarcity

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 for goods, services and resources exceed what is available. Resources, such as labor, tools, 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 acquire the goods they want. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158.6 million workers, according to the U.S. Bureau of Labor Statistics. Similarly, the total area of the United States is 3,794,101 square miles. These are large numbers for such crucial resources, however, they are limited. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Scarcity of resources

The image is a photograph of two people who are homeless and sleeping on public city benches.
Homeless people are a stark reminder that scarcity of resources is real. (Credit: “daveynin”/Flickr Creative Commons)

If you still do not believe 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 example, those who call park benches their beds, as shown in [link] ), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The problem of scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. 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?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, 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 way.) 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. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith , [link] , in his book, The Wealth of Nations .

Questions & Answers

Is this Aap for class 11 and 12 only not for graduation?
ankit Reply
what is inflation
Bright Reply
hike in price
situation of rise in price with the fall in purchasing power of money
cycle of corruption
rise in price of a Nation economy in terms of trade
what is distruptive international trade?
meaning of inflation
Jayakumar Reply
increase in general prices level in an economy.
increase in general price level
The fall in standard of living because goods and services become expensive.
what is value added and how is it used in calculating GDP
Benedicta Reply
value added is final price of output minus cost of production. For example, let's say you make a shirt with raw materials that cost $20, and then sell the shirt for $35 added value would be 35-20=15. In calculating GDP, it is used to avoid double counting goods. Exp. eggs individually and in bread.
as the price of tickets rises from $200 to $250, what is the price elasticity of demand for business travelers, vacationers using midpoint method
Buumba Reply
Explain how income taxes and transfer payments are used to stabilize the economy
Nakagwa Reply
reduce demand on scarce resources by reducing money supply.
sketch the graph of supply curve
Isamole Reply
why is not possible accept or reject any microeconomics theory explain
Amna Reply
what is law of demand
four major factors of macro economics
what is liquidity trap ?
Vibhu Reply
what is inflation?
what type of tests can be applied to a country's budget? to test for robustness of data used.
hi jerry i not sure of tests. i think more consideration implement n result.
thanks. when we analyse a country's budget what are the issues that we are looking for that determine whether it's a sound budget or a weak or not so sound budget?
adequate is the answer. ministries n statistics dept provides the numbers n budget tries to push the system. providingly $budget is used wisely n properly according to design.sociology is also a consideration
liquidity Trap is a situation where by contractionary Monetary policy is no longer able to stimulate aggregate demand.
what criteria is applied to determine if a country's monetary policy is weak? what are the tell tale signs?
jerry should start a new thread discussion
monetary policy to stabilize exchange rate
rapheela Reply
two ways in which the central bank can use monetary policy to help stabilize the exchange rate
that's interesting. So in my context where the PGK is struggling against the USD how do we ease the pressure? we also have a healthy current account position with so much domestic liquidity.
One example Is Europe. with the "quantitative easing", they've made monetary base, without create inflation. and they cut the price of euro by setting it at the same price of dollars.
this Aap for class 11 and 12 only not for graduation
if a person is working for a company for k500 and a person spends the k500 to purchase meal meal 5kg at k100/kg and now due to convid 19 the price for meal meal rise to k120 /kg. the company decides to give him salary for k400 in order for him to purchase meal meal for k80/kg or the company increase his salary to k600?
Bridget Reply
it depends in which sector the person actually works. I mean, if this person works in a sector that is in totally or partially in lockdown his salary gonna be cutted. By the way not every sector are in lockdown and not every workers have seen his salary reduced.
thank you
but can you just imagine it is like that which one can you advise if maybe that person comes to ask for advice whether to accept k400 or k600 from the company as an economist
thank you
suppose that perfectly competitive firm is maximizing is profit in the short run. at the profit maximizing quantity AR<ATC compared to the short run in the long run they will be
okay thanks
The stock of high power money in an economy is₹22550.Currency deposit ratio is0. 6&the reserve ratio is 0.12.If the Central Bank purchases the Government securities worth ₹12500, what is the increase in money supply in the economy?
Amb Reply
What is liquidity
what is liquidity preference?
the difference between GDP and GNP
Sarpong Reply
how is productivity found
through production
ĢDP includes every thing produce in the country even the foreign goods that produce in the country but GNP is only the national not the foreign.
why do we need to divide by 2($0.50/$2)when we already multiple by two(2).
Olaoluwapo Reply

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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