Scarcity

Scarcity

-Short definition: the fact that there is a limited amount of resources to satisfy unlimited wants. -Long definition: is sometimes considered the basic problem of economics. Resources are scarce because we live in a world in which humans' wants are infinite but the land, labor, and capital required to satisfy those wants are limited. This conflict between society's unlimited wants and our limited resources means choices must be made when deciding how to allocate scarce resources.

Economics

-Short definition: the study of how individuals and societies choose to allocate scarce resources. -Long definition: is the study of how individuals and societies choose to allocate scarce resources, why they choose to allocate them that way, and the consequences of those decisions.

Any economic system must provide society with a means of making choices that answer three basic questions:

1. What will be produced with society's limited resources? 2. How will we produce the things we need and want? 3. How will society's output be distributed?

Assumptions economists make:

1. ceteris paribus - "all else equal" 2. economic agents are rational and have an incentive to make decisions that are always in their own self-interest

Common Misperceptions

4. 1. Economics is not the study of stock markets, money, or how to run a business. Although many new students believe they will be learning about these concepts, economics is a social science that seeks to better understand and predict human interactions; unlike business and finance, which focus on how to manage a business organization and invest money in a way to earn the highest return for investors. 2. One essential assumption made in most economic analysis is that all humans are rational and will make choices based on what is always in their best interest. In the real world, obviously, people, businesses, and even entire societies can be highly irrational. 3. Just because a decision is "irrational" in the economic sense, that doesn't mean that it is inherently wrong, bad, or lesser than what an economist would call a "rational" decision. In fact, the field of Behavioral Economics seeks to understand better the many reasons humans choose to make economically "irrational" choices in their decision making. 4. One of the four economic resources that societies must decide how to allocate is capital. When people use the word capital in everyday conversation, many people are referring to money or "financial capital." In economics, capital is defined as the already-produced goods (tools, machinery, equipment, and physical infrastructure) that are used in the production of other goods or services. A robot on a car factory floor is defined as capital in economics; money you borrow to start your own business is not.

ceteris paribus

a Latin phrase meaning "all else equal".

economic resources

also called the factors of production; these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship/technology (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services.

rational decision making

an agent is "rational" if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.

positive analysis

analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes.

models

graphical and mathematical tools created by economists to better understand complicated processes in economics.

economic aggregates

measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy.

incentives

rewards or punishments associated with a possible action; agents make decisions based on incentives.

agent

some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.

macroeconomics

the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates.

microeconomics

the study of the interactions of buyers and sellers in the markets for particular goods and services

normative analysis

unlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.