Introduction to Economic Thought – What Is Economics About?

Core Definition of Economics

Economics is the discipline that examines how society manages its scarce resources so as to satisfy unlimited wants and needs. Scarcity forces agents to make choices, and the systematic study of those choices—by individuals, businesses, and governments—constitutes the field of economics.

Principal Economic Agents

1. Individuals / Households (Consumers) – decide what and how much to buy, and supply labour.

2. Producers / Suppliers (Businesses) – decide what and how much to produce, which technologies to employ, and how many inputs to hire.

3. Government – sets rules, collects taxes, provides public goods, redistributes income, and can be both a consumer and a producer.

Each agent participates in markets where decisions over scarce resources are continuously coordinated.

The Fundamental Economic Problem: Scarcity & Choice

• Limited Resources versus Unlimited Wants – Because the supply of inputs is finite while human desires grow without bound, choices must be made.
• These choices are typically framed by three classic questions:

1. What to produce? (Allocation among possible goods and services)

2. How to produce? (Choice of production techniques and combinations of inputs)

3. For whom to produce? (Distribution of output among individuals and groups)

The tension between scarcity and choice underlies every subsequent economic analysis.

Factors of Production (Inputs)

Economic output is generated by combining several distinct categories of resources:

1. Land (Natural Resources)

• Includes all gifts of nature—forests, minerals, water, arable soil, fisheries, the electromagnetic spectrum, etc.
• Payment for land services is often called rent.
• Illustrative production‐function contribution: Q = f(L{land},L{labour},K) where L_{land} measures raw natural endowments.

2. Labour

• The physical and mental effort supplied by humans in production.
• Quantified in man‐hours or worker‐hours.
• Remunerated by a wage rate (w).
• Example cost expression: total labour cost = w \times H where H denotes hours hired.

3. Capital

Capital represents produced means of further production and is usually subdivided into:
• Physical Capital – machinery, tools, buildings, infrastructure, vehicles, computers.
• Human Capital – accumulated education, training, skills, and experience that raise labour productivity.
• Social Capital – networks, norms, and trust that facilitate coordination and cooperation across agents.
• Payment for capital services is interest or dividends.

4. Entrepreneurship

• The creative, risk‐bearing talent that combines land, labour, and capital into new products or ventures.
• Rewards take the form of profits (or losses).

Collectively these inputs feed the production process:
\text{Output} = f(\text{Land},\text{Labour},\text{Capital},\text{Entrepreneurship})

Interaction of Inputs and Agents

• Consumers supply labour and demand products.
• Firms demand inputs (land, labour, capital) and supply output.
• Government may own land, hire labour, provide capital (infrastructure), and regulate or subsidise entrepreneurship.

Scarcity, Opportunity Cost & Trade‐Offs

Whenever resources are committed to one activity, the next‐best alternative foregone is the opportunity cost. Understanding these trade‐offs is essential for optimal decision‐making by all agents.

Economics as a Social Science: The Scientific Method

Economists seek to generate testable explanations of real‐world phenomena using a structured research process:

1. Observe & Ask a Question – Identify an intriguing fact or puzzle (e.g., “Why do wages differ across regions?”).

2. State a Hypothesis – Propose a cause‐and‐effect statement (e.g., “Higher local productivity leads to higher wages.”).

3. Collect Data – Gather quantitative or qualitative evidence relevant to the hypothesis.

4. Analyse & Form a Conclusion – Apply statistical or theoretical tools to test the hypothesis, deriving conclusions about relationships or policy implications.

The cycle of hypothesis formation and empirical validation anchors economics in scientific inquiry while recognising the distinctive constraints imposed by social phenomena.

Broader Relevance & Connections

• The factors‐of‐production framework underpins both microeconomics (firm behaviour, labour markets) and macroeconomics (aggregate output, employment).
• Insights into scarcity drive public‐policy debates on sustainable resource use, environmental protection, and equitable distribution.
• Understanding the scientific method in economics strengthens critical reading of research reports, allowing one to distinguish evidence‐based findings from conjecture.