introduction to economics

1. Definition of Economics

Economics is the social science that studies how individuals, governments, firms, and nations make choices on allocating scarce resources to satisfy their unlimited wants. At its core, economics deals with the study of human behavior in response to the availability of resources.

2. The Fundamental Economic Problem: Scarcity

Scarcity is the basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently.

  • Resources (Factors of Production):

    1. Land: Natural resources such as water, minerals, and land itself.

    2. Labor: The physical and mental effort provided by people.

    3. Capital: Man-made goods used in the production of other goods (e.g., machinery, factories).

    4. Entrepreneurship: The skill and risk-taking required to combine the other three factors to produce goods and services.

3. Microeconomics vs. Macroeconomics

Economics is generally divided into two main branches:

  • Microeconomics: Focuses on the behavior of individual consumers and firms. It examines how these entities make decisions and how they interact in specific markets. Typical topics include supply and demand, price determination, and individual labor markets.

  • Macroeconomics: Looks at the economy as a whole. It focuses on aggregate variables such as total output (GDP), the unemployment rate, inflation, and national fiscal and monetary policy.

4. Opportunity Cost

Opportunity cost is the value of the next best alternative that is foregone when a choice is made. Since resources are scarce, every choice involves a trade-off.

  • Formulaic Representation:
    If choosing option $A$ over option $B$, the opportunity cost is the benefit of option $B$.

5. Economic Systems

Societies use different systems to answer the three basic economic questions: What to produce? How to produce? and For whom to produce?

  1. Traditional Economy: Based on customs, beliefs, and traditions.

  2. Command Economy: The government or a central authority determines what goods are produced and how they are distributed.

  3. Market Economy: Decisions are made by individuals and firms through the interaction of supply and demand.

  4. Mixed Economy: A combination of market and command systems, where both the private sector and the government play significant roles in resource allocation.