. © 1999-2003
Douglas A.Ruby

Relative Prices

Equilibrium Analysis

Introduction to Economics

Macroeconomic Principles

Microeconomic Principles

Macroeconomic Theory

Microeconomic Theory
Economics as a Social Science

Economics is the study of social behavior guiding in the allocation of scarce resources to meet the unlimited needs and desires of the individual members of a given society.

Economics seeks to understand how those individuals interact within the social structure to address key questions about the production and exchange of goods and services. First, how are individual needs and desires communicated such that the correct mix of goods and services become available? Second, how does a society provide the incentives for these individuals to participate in the production these goods? Third, how is production organized such that maximum-possible quantities are made available given existing resources and production technology? Finally, given that these individuals are at one time involved in the production process and at other times seeking to acquire the goods that have been produced, how are trading rules and exchange agreements established?

The above questions stress the importance of understanding the process of production. The goal here is to understand the basic features of production without getting mired in great technical detail. This is accomplished by developing a simple model that maintains the important features of what are, otherwise complex, engineering relationships. Production is about the conversion of scarce resources into desired goods and services. These resources are often referred to as the factors of production -- a short list that includes:

  • Land (acreage and raw materials)
  • Labor (unskilled, semiskilled, professional)
  • Capital (machines, factories, transportation equipment, and infrastructure) and
  • Entrepreneurship (organizing the other factors of production and risk-taking)

This list is brief and yet complete intended to provide sufficient detail to model the input choices available to the producer. Accordingly, the combination of Land, Labor, Capital, and Entrepreneurship will lead to the production of Apples, Wheat, Automobiles, Houses, a Freight Train, Education, or any other good or service.

However, we do live in a world of scarce resources. Scarcity refers to a physical condition where the quantity desired of a particular resource exceeds the quantity available in the absence of a rationing system. Potential candidates for rationing systems include:

  • Tradition and Culture, where the problem of allocation is addressed via social norms, customs and past history.
  • Planning and Central Government Command, making use of complex mathematical tables to determine output goals and input requirements.
  • Voting and Political Procedures, communication about resource allocation among individuals thorough the development of a consensus or perhaps majority rule.
  • Markets -- using a system of prices to act as a means of communication about the availability of resources and the desire for those resources.

Goods and services refer to:

  • Final Goods and services -- those products that are directly consumed by individuals to satisfy their needs and wants.
  • Intermediate or Capital Goods -- are those goods used to produce other goods.

In the case of final goods, Needs represent those goods and services  required for human survival. Needs are determined by nature, climate and region, and are often finite. Human Wants or Desires refer to everything else. Human wants are determined by society and the culture in which an individual lives. These wants are indeed unlimited and represent the source of the problem facing all economic systems.

We need to be careful in noting that Economics is not just about the production of goods and services. Equally important is developing an understanding about how wants and needs are communicated to the economic system, how to involve individuals in the production process and provide incentives for these individuals to specialize in areas of production where their talents are best used and then exchange goods with others.

Concepts for Review:
  • Economics
  • Exchange (of goods and services)
  • Factors of Production
  • Final Goods
  • Intermediate (Capital) Goods
  • Production
  • Rationing Systems
  • Scarcity
  • Specialization
  • Wants and Needs