Defining Economics
It's Friday night. You have nothing you have to do, but the possibilities of things you could do seem endless! Except, of course—they aren't. What you can do is limited by several factors, but chief among them is the fact that you only have twenty dollars in your pocket.
Now, twenty dollars is more than enough cash to fund an entertaining evening, but it's not enough to satisfy all of your desires. You'd like to grab some dinner, then go to the latest Marvel movie and enjoy a big tub of popcorn. But—that twenty dollars isn't going to be enough for that. You could probably grab some McDonald's and then catch the movie, but you wouldn't have enough money left to get that eight-dollar bucket of popcorn too. So you might decide to skip McDonald's and spend all of your money at the theater, split between the ticket and the snacks. Or perhaps, if you really want to splurge on dinner, you might decide to go get some steak at Texas Roadhouse, but then you're definitely not going to be able to afford the movie.
Your decision on Friday night is an economic decision. You have a scarce resource (the small number of dollars in your pocket) and no way to make that resource fulfill all of your desires. You'll eventually make this decision based on which desires you most want to fulfill—or, in other words, what you think will provide the greatest benefit to your happiness.
What Is Economics?
Just as you didn't have enough money to fulfill all of your Friday-night desires, the world doesn't have enough resources to fulfill all the wants of all the people on Earth. The fact that humans have more desires than there are resources to fulfill those desires is called scarcity. Because resources are scarce, humans must choose how they want to use those resources. How humans make these decisions is the primary concern of economics. Thus, economics is the study of how people make choices in the face of scarcity.
Microeconomics vs. Macroeconomics
Economics is usually divided into two main fields of study: microeconomics and macroeconomics. Microeconomics looks at the choices made by individual consumers and businesses, while macroeconomics looks at how economic choices impact the overall economy.
Microeconomics focuses on questions such as:
In a major recession, how many people will stop going to the movies?
If the cost of steel doubles, how will that affect the price of automobiles?
If the price of automobiles increases, will people keep their old cars for a longer time before buying new ones?
If a blight destroys half of the world's broccoli crop, what will happen to the price of broccoli?
Macroeconomics, on the other hand, asks questions like:
What is the nation's unemployment rate?
Is the nation producing more or fewer goods and services than last year?
Is the inflation rate going up or down?
These two fields are very interdependent. A particular topic can be considered from both a microeconomic and a macroeconomic point of view. For example, you can study how inflation impacts whether or not businesses and individuals borrow money. This would be microeconomics. But you can also study how the federal government can enact policies to increase or decrease inflation as well as the effects those policies would have on the national economy. This would be macroeconomics.
In this course, we won't be focusing on just one of these fields and will examine most economic issues from both perspectives.
Positive and Normative Statements
There are two types of statements that economists make. One is a positive statement—a statement of fact or a hypothesis. We either know these to be statements of fact, or we can test them to find out if they're statements of fact. The following are some examples of positive statements:
The unemployment rate is currently 5%.
Netflix recently raised its price to $12.99 per month.
Economics graduates average a salary of $52,000 per year.
The other type of economic statement is a normative statement—an assertion that makes a value judgment. These are statements that cannot be proven. In other words, normative statements are opinions, not facts, and there is no way to prove that they are facts. Examples of normative statements include:
We need to make sure everyone has a job.
We should spend more money on helping the poor.
CEOs at big corporations make too much money.
Positive statements can be tested and agreed upon by all economists. Normative statements, however, are a source of major disagreement. And because there's no way to prove them, they will likely continue to be a source of disagreement until or unless one side changes its values. When studying economics, it's important to be aware of whether a statement is positive (a fact or testable hypothesis) or normative (an untestable, value-based opinion).
Why do some people go hungry, while others have access to more food than they could ever need?
Why Study Economics?
Hundreds of millions of people across the world lack basic necessities and suffer from starvation, preventable disease, and lack of knowledge. Much of this is an economic problem. It's true that resources are scarce, but there are plenty of them to go around if they're managed correctly. By studying economics, we can learn how to make the best choices to help the most people. Thus, learning and applying economic principles is a fundamental aspect of showing Christian compassion to the world.
As Christians, there are two primary considerations we must be mindful of in our study of economics:
First, we are called to be stewards of the Earth. We must take care of the blessings—the resources—that God has given us, and we must use them as efficiently as possible so that no one has to live without basic necessities.
Second, we must take into account the Fall of Man when setting up economic systems. Free markets are good, but because humanity has a sin nature, we will ultimately forsake our responsibilities and corrupt the marketplace. This is why even in the United States (a capitalist, free-market nation), the government plays an important role as a regulator and protector. Humans are sinful and selfish, and we must remember this during our study of economics.
The Dangers of Bad Economics
Bad economic thinking can plague governments, businesses, and individuals.
Governments
The policies instituted by governments impact entire nations—and with the increase of globalization, even the entire world. When these policies are created using bad economic ideas, the consequences can be devastating. Communist economic policies caused tens of millions of people to starve under Soviet and Chinese leadership. In capitalist economies like the United States, government decision-making can worsen and lengthen recessions. In poor economic times, people may struggle to obtain basic necessities, and the financial stress can cause health problems like heart attacks, depression, and alcohol abuse. Governments must follow sound economic thinking in order to protect the health and wealth of their citizens.
Businesses
A business can make many bad economic choices, such as opening a store in a bad location or choosing the wrong products to sell. If the choice is costly enough, it could lead to the company going out of business completely, bankrupting the owners and leaving all of the employees without jobs.
Individuals
Individuals can also make poor economic decisions. David was a twenty-two-year-old college graduate who had just landed his first job, and he wanted to reward himself. Sounds reasonable, right? Perhaps. But David decided that his reward should be a brand-new car—one for which he needed to take out a huge, high-interest loan. So, he ended up spending a lot of money making payments—and then, when he was finally done paying off the car, he owned a car that was worth a lot less than the amount he'd paid for it. This left David with less wealth to take care of his own needs, and it meant that he had fewer resources with which to help others.
Even if we don't work for the government or a big business, we must all make sound economic decisions in our own lives. It's not about becoming wealthy; it's about being good stewards of the resources God has given to us. When we use those resources wisely, we can not only take care of ourselves but also help others in need. A foundational knowledge of economics is essential to help us utilize our scarce resources in the best way possible.
Review of Key Terms
scarcity: the fact that humans have more desires than there are resources to fulfill those desires
economics: the study of how people make choices in the face of scarcity
macroeconomics: studies how economic choices impact the overall economy
microeconomics: studies the economic choices made by individual consumers and businesses
positive statement: a statement of fact or a hypothesis
normative statement: an assertion that makes a value judgment
Many bad economic decisions are made because we value short-term results over long-term success. For instance, the individual who bought the new car despite the high interest rate did so because he really, really wanted a new car right now. He didn't care that it would cost him a lot of money in the long run. In the next section, we'll explore this idea further as we introduce Henry Hazlitt's book Economics in One Lesson.