Basic Economic Problem
Definition of Economics
In very broad terms, economics is the way in which resources are allocated among alternative uses to satisfy human wants. Many economists have different view of what actually constitutes economics, with some focusing on the allocation of scarce resources, other emphasizing human behaviour and decision-making, and yet others exploring the systems of production, distribution and consumption in the society.
According to Adam Smith, the father of economics, it is the science of wealth. It deals with production, distribution and consumption. This fact was highlighted in 1716 but in most days, the view of aiming at the maximisation of wealth was strongly critised because it was against moral and religious beliefs.
According to Lord Robbins, it is defined as the social science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
According to Alfred Marshall, It is defined as a study of man and woman in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side the study of wealth and on the other side and more important side, part of study of man and woman.
Note: The social science actually refers to the study of how people interact with each other. Since we are not robots so our individual behaviour is not always predictable, but large group behaviour is actually quite predictable and therefore studyable. Thus, this is what economists use to study our behaviour.
- Earth has limited resources
- resources are used to produce goods and services
- People have unlimited needs and wants
- There is a conflict between finite resources and infinite needs and wants
- People cannot have everything they want so resources will rationed in some way.
- This is where economics comes in.
What is Scarcity?
Simply, scarcity means the tension between infinite wants and finite resources.
Scarcity means that there is not enough of something to satisfy evryone who wants it and therefore, you must pay a price for it. Hence, scarcity involves a cost. Any item that cost something is scarce.
Once you pay for it, that item becomes an economic good, which is defined as any good or service that has a price and thus being rationed. If it were not scarce, it would be a free good and you could have as much as you wanted without paying for it.
Hence, a choice will become inevitable. Since, we have Scarcity + Unlimited needs and wants + Limited Resources= Trade-offs, we have to make decisions in lives.
What is a choice?
A choice refers to decisions on how to allocate their financial resources on choosing between alternatives as people do not have infinite incomes, they make choices whenever they pratice goods and services.
A choice is a selection among alternatives. This means that among the different wants, the one which is chosen to be statisfied becomes the choice.
A choice is normally made upon a scale of preference of priority list. This means among the different choices reaching the want of an inidividual, the most important want will be satisfied first and those want which are have a low scale of neccessity be satisfied later.
A choice is made when the benefits outways the costs involved.
Note: Unsatisfied wants= Alternatives foregone
What is Opportunity Cost?
The cost of having something in terms of the other thing obtained instead.
Opportunity cost is the next best alternative foregone whenever a choice is undertaken.
The next best alternative use of your energy, time, money or resources when one choice is made rather than another.
Basics economic problem at the national level
- What should be produced and in what quantities?
- How should things be produced?
- for whom should things be produced?