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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

why SA is used in estimating of national income
Unique Reply
first what SA stand for?
Alhassan
I want Keynes clear example of critics on Long run , please!!
AA Reply
what study of macro economic..?
Yogini Reply
macroeconomics can be defined as a branch of economics that studies the structure and principles governing an economy(national,regional or global) rather than individual markets
kunle
yah..
boniphace
What is say's law of marketing?
INGRID Reply
goods once sold can't be returned
Marvin
but thats not true at all goods are returned all the time
Gregory
yah ur right, as a buyer, But in the marketing world, once a good is sold, its sold.
Marvin
thanks @marvin
INGRID
what study of macro economic ..?
Yogini
what does this saying in economics means "there is no such thing as a free lunch pls
Saibu Reply
autonomous consumption
Alhassan
consumption that is not related to level of income u hve.. eg consumption of basic necessities.
Ar
autonomous consumption is the consumption when income is zero or expenditure is not vary from income
ABIYOT
what is investment function?
Zahid
what is the relationship between demand and supply?
INGRID
According to ijmb marking guide, Differentiate between capital expenditure and revenue expenditure.
elemi Reply
Sir please provide me notes on :-unemployment-the trade-off between inflation and unemployment
Swikrit Reply
what is income
NAHUM Reply
reward for rendering a sercive the real income is after a taxt y-t = (y)
Alhassan
what are the components of trade?
Michelle Reply
whats is gdp
odell Reply
what is gdp per capita
odell
GDP of state divided by its population: GDP per capita. it is one of the most relevant indicator of prosperity among its citizens.
Dinesh
thanks
odell
which one is more advantageous or accurate to the other between GDP and GNP?
Katheery
Both, GDP measures only the incomes generated within the country, irrespective of ownership. whereas,GNP measures the total income earned by nationals.
Bon
but which one is a better measure
Katheery
what are supernormal profits
Caroline Reply
what are zero economic profits
Caroline
under what circumstances may a firm continue operating even when it is making losses
Caroline
why should government influence location of a firm
Caroline
using an illustration,distinguish between breakeven and shutdown point of a firm
Caroline
supernormal profits are profits beyond the normal profits a firm expects to have after the sale of all goods n services it produced
Katheery
what are the differences between choice and scarcity
Primus Reply
what is the difference between choice and scarcity
Primus
choice means we have many options scarcity means limitation within the same option we chose among choices.
Bijaya
what the d/f production efficeincy and out put efficeincy
ABIYOT
what is money?
Primus Reply
money is the material which used to exchange to buy or sell
ABIYOT
What is the law of large numbers
Nana Reply
Can anybody provide Solow Growth Model?
Sakar 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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