Have you ever noticed that very few people are satisfied with the things they have? For example, someone without a home may want a small one; someone else with a small home may want a larger one; someone with a large home may want a mansion. Whether they are rich or poor, most people seem to want more than they already have. In fact, if each of us were to make a list of all the things we want, it would most likely include more things than we could ever hope to obtain.

Scarcity

The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. scarcity fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources As the image on the right shows, scarcity affects almost every decision we make. This is where economics comes in. Economics is the study of how people try to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources.

economics
social science dealing with how people satisfy seemingly unlimited and competing wants with the careful use of scarce resources

Needs and Wants

Economists often talk about people’s needs and wants. A need is a basic requirement for survival, such as food, clothing, and shelter. A want is simply something we would like to have but is not necessary for survival. Food, for example, is needed for survival. Because many foods will satisfy the need for nourishment, the range of things represented by the term want is much broader than that represented by the term need.

need
basic requirement for survival, including food, clothing, and shelter

want
something we would like to have but is not necessary
 

TINSTAAFL
Because resources are limited, everything we do has a cost—even when it seems as if we are getting something “for free.” For example, do you really get a free meal when you use a “buy one, get one free” coupon? The business that gives it away still has to pay for the resources that went into the meal, so it usually tries to recover these costs by charging more for its other products. In the end, you may actually be the one who pays for the “free” lunch!

Realistically, most things in life are not free, because someone has to pay for producing them in the first place. Economists use the term TINSTAAFL to describe this concept. In short, it means There Is No Such Thing As A Free Lunch.

What is the difference between a need and a want?
 

REVIEW & DO NOW Answer the following questions:
What is the fundamental economic problem? What is scarcity? What is economics?	What is the difference between a need and a want? Give an example of a need. Give an example of a want. What is TINSTAAFL?

Three Basic Questions
Scarcity forces every society to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.

Because we live in a world of relatively scarce resources, we have to make careful economic choices about the way we use these resources.

WHAT to Produce

The first question is WHAT to produce. For example, should a society direct most of its resources to the production of military equipment or to other items such as food, clothing, or housing? Suppose the decision is to produce housing. Should the limited resources be used to build low-income, middle-income, or upper-income housing? A society cannot have everything its people want, so it must decide WHAT to produce.

HOW to Produce

A second question is HOW to produce. Should factory owners use automated production methods that require more machines and fewer workers, or should they use fewer machines and more workers? If a community has many unemployed people, using more workers might be better. On the other hand, in countries where machinery is widely available, automation can often lower production costs. Lower costs make manufactured items less expensive and, therefore, available to more people.

FOR WHOM to Produce

The third question is FOR WHOM to produce. After a society decides WHAT and HOW to produce, it must decide who will receive the things produced. If a society decides to produce housing, for example, should it be the kind of housing that is wanted by low-income workers, middle-income professional people, or the very rich? If there are not enough houses for everyone, a society has to make a choice about who will receive the existing supply.

These questions concerning WHAT, HOW, and FOR WHOM to produce are never easy for any society to answer. Nevertheless, they must be answered as long as there are not enough resources to satisfy people’s seemingly unlimited wants and needs.

Why are societies faced with the three basic questions of WHAT, HOW, and FOR WHOM??
 

REVIEW & DO NOW Answer the following questions:
Can a society produce everything its people want?  Explain why. Why is it necessary to determine how goods are produced?	What does it mean to determine for whom goods should be produced? Why is our society faced with these questions?

The Factors of Production
Four factors of production—land, capital, labor, and entrepreneurs—must be present to produce goods and services.

People cannot satisfy all their wants and needs because productive resources are scarce. The factors of production, or resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs. As shown below, all four are required to produce goods and services.

factors of production
productive resources that make up the four categories of land, capital, labor, and entrepreneurs

Land

In economics, land refers to the “gifts of nature,” or natural resources not created by people. “Land” includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, and the climate necessary to grow crops. Because a finite amount of natural resources are available at any given time, economists tend to think of land as being fixed, or in limited supply.

land
natural resources or other “gifts of nature” not created by human effort

Capital

Another factor of production is capital, sometimes called capital goods—the tools, equipment, machinery, and factories used in the production of goods and services. Capital is unique because it is the result of production. A bulldozer, for example, is a capital good used in construction. When it was built in a factory, it was the result of production involving other capital goods. The computers in your school that are used to produce the service of education also are capital goods.

capital or capital goods
tools, equipment, and factories used in the production of goods and services

Labor

A third factor of production is labor—people with all their efforts, abilities, and skills. This category includes all people except a unique group of individuals called entrepreneurs, whom we single out because of their special role in the economy. Historically, factors such as birthrates, immigration, famine, war, and disease have had a dramatic impact on the quantity and quality of labor.

labor
people with all their efforts, abilities and skills

Entrepreneurs

Some people are singled out because they are the innovators responsible for much of the change in our economy. Such an individual is an entrepreneur, a risktaker in search of profits who does something new with existing resources. Entrepreneurs are often thought of as being the driving force in an economy because they are the people who start new businesses or bring new products to market.

entrepreneur
risk-taking individual in search of profits

Production

Everything we make requires the four factors of production. The desks and lab equipment used in schools are capital goods. Teachers and other employees provide the labor. Land includes the property where the school is located as well as the iron ore and timber used to make the building. Finally, entrepreneurs are needed to organize the other three factors and make sure that everything gets done.

What would happen if one of the factors of production was missing?
 

REVIEW & DO NOW Answer the following questions:
List and define the four factors of production. How would livestock such as cattle or pigs be categorized?	How would money be categorized? What would happen if one of the four factors of production was missing?

The Scope of Economics
Economics analyzes how societies satisfy wants through careful use of relatively scarce resources.

Economics is the study of human efforts to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources. Economics is also a social science because it deals with the behavior of people as they deal with this basic issue. The four key elements to this study are description, analysis, explanation, and prediction.

Description

One part of economics describes economic activity. For example, we often hear about gross domestic product (GDP)—the dollar value of all final goods, services, and structures produced within a country’s borders in a 12-month period. GDP is the most comprehensive measure of a country’s total output and a key measure of a nation’s economic health. Economics also describes jobs, prices, trade, taxes, and government spending.

gross domestic product (GDP)
dollar value of all final goods, services, and structures produced within a country’s borders during a one-year period

Description allows us to know what the world looks like. However, description is only part of the picture, because it leaves many important “why” and “how” questions unanswered.

Analysis

Economics analyzes the economic activity that it describes. Why, for example, are the prices of some items higher than others? Why do some people earn higher incomes than others? How do taxes affect people’s desire to work and save? Analysis is important because it helps us discover why things work and how things happen. This, in turn, will help us deal with problems that we would like to solve.

Explanation

Economics also involves explanation. After economists analyze a problem and understand why and how things work, they need to communicate this knowledge to others. If we all have a common understanding of the way our economy works, some economic problems will be easier to address or even fix in the future. When it comes to GDP, you will soon discover that economists spend much of their time explaining why the measure is, or is not, performing in the manner that is expected.

Prediction

Finally, economics is concerned with prediction. For example, we may want to know whether our incomes will rise or fall in the near future. Because economics is the study of both what is happening and what tends to happen, it can help predict what may happen in the future, including the most likely effects of different actions.

The study of economics helps us become more informed citizens and better decision makers. Because of this, it is important to realize that good economic choices are the responsibility of all citizens in a free and democratic society.

Why is economics considered to be a social science?
 

REVIEW & DO NOW Answer the following questions:
Why is economics considered a social science? What are the four key elements of economics?	What is gross domestic product? How is prediction a part of economics?