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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

what is the difference between micro and macro economics?
ezana Reply
the difference between micro and macro economics is that macro involves economics as a whole and also deals with inflation, unemployment, economic growth while micro deals with the individual house hold
Bernice
money multiplier formula
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Use the following information (in rupees): Income (Y) = 1,00,000 Nominal Money Supply (M) = 80,000 Price Level (P) = 20 Calculate the money growth rate required to finance the budget deficit of Rs.10,000 in an economy.
yogesh Reply
How is economics an art
Michael Reply
Why is enomices a science
Michael
when price is falling continuesly this phenomenon is called?
Sunshine Reply
Deflation
siga
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Tanvir
what is aggregate demand?
Tanvir
deflation
Ayushi
opposite of inflation when the level of price of all goods and services decreased, and be careful about the level of price not the only price of one good or service
Modek
Inflation is an increase in the general prices of goods and services in an economy. Deflation, conversely, is the general decline in prices for goods and services, indicated by an inflation rate that falls below zero percent.
Mityko
aggregate demand: C + G + I + NX=GDP
siga
what is the simple difference between real GDP and nominal GDP?
Kamaldeen
I wish to proceed for Master in Economics. what books or stuff can assist me
ibn Reply
Hal R.Varian For Microeconomics best book
Bilal
If a country's economy GDP increased from 96-to125 between 2003-2004-2005 and the general price level rose by 10%in the same period what was the increase in real GDP?
Maryln Reply
what is Solow growth model?
Soovankar Reply
The solow growth model shows how saving, population growth and technological progress affect the level of an economy's output and its growth over time.
Peter
in the present scanerio of covid-19 whether eq GDP of pakistan is below or above full employment level?
Sadia Reply
what newclassical economcs
Solomon Reply
new keynesianism theory
Solomon
How do commercial banks create credits ?
Hussein Reply
Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits.
Neeraj
for an economy the following function have been given. C=100+0.8y, S=100+0.2, i=120-5r, Ms=120, Md=0.2y-5r find out IS equation. LM equation. Equilibrium level of income and interest rate.
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Ayodeji
aggregate expenditure model til monetery policy
Sadia Reply
Using the Solow growth model discuss the implications of the covid19 pandemic on the prospects of long run economic growth for South Africa
Simthembile Reply
ln last word discuss (if. ,at all)changes in the stock prices relate to macroeconomic stability
rachel Reply
what do you know about the nigration in labor economic ?
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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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