Economics Principles & Practices

Chapter 1: What Is Economics?

Chapter Overviews

Economics is a social science, that deals with the fundamental economic problem of scarcity—a condition caused by the combination of seemingly unlimited wants and limited resources. Because of this, choices and decision making are the central focus of Chapter 1.

Section 1 introduces the concepts of needs such as food, clothing, and shelter—and wants, which are ways of expressing needs. The notion of TINSTAAFL, which stands for There Is No Such Thing As A Free Lunch, is often used to remind us that resources are scarce and that we must make careful economic decisions regarding WHAT, HOW, and FOR WHOM to produce. Other concepts relevant to economics, such as the four factors of production-land, capital, labor, and entrepreneurs—along with the meaning and scope of economics, are also examined.

Section 2 introduces a number of key economic concepts, including utility, value, and wealth. The concepts of goods, services, consumers, markets, factor markets, product markets, productivity, economic growth, and economic interdependence are explained and are linked in the circular flow diagram. Productivity is necessary for economic growth, and growth takes place when specialization and the division of labor are present. Human capital, the sum of our skills, abilities, health, and motivations, is another important component of growth.

Section 3 deals with the way economists think about choices. Choices are explained in terms of trade-offs, or alternatives that are available whenever a decision is made. The cost of every decision is measured in terms of its opportunity cost, which is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Trade-offs can be analyzed with a decision-making matrix, or illustrated with a production possibilities frontier. The production possibilities frontier, the decision-making matrix, and the circular flow diagram are some of the more useful "tools" used by economists.