Definition of Economics
The fundamental economic problem is
is the inability to satisfy all our wants. Because the
available resources are never enough to satisfy every-
one’s wants, choices are necessary.
, a reward
that encourages or a penalty that discourages an action,
influence people’s choices.
is the social science that studies the choices
that individuals, businesses, governments, and societies
make as they cope with scarcity and the incentives that
influence and reconcile those choices.
is the study of choices that indi-
viduals and businesses make, the way these choices
interact in markets, and the influence of govern-
is the study of the performance
of the national economy and the global economy.
Two Big Economic Questions
Economics explores two big questions:
How do choices end up determining
goods and services get produced?
How can choices made in the pursuit of self interest
also promote the social interest?
Goods and services
are the objects that people value
and produce to satisfy wants. Goods and services are
produced using productive resources called
There are four categories:
the “gifts of nature” such as land, minerals,
the work time and work effort people de-
vote to producing goods and services. The quality
of labor depends on
, which is the
knowledge and skill that people obtain from educa-
tion, on-the-job training, and work experience.
the tools, instruments, machines, build-
ings, and other constructions that businesses use to
produce goods and services.
the human resource that organ-
izes land, labor, and capital.
For whom the goods and services are produced depends
on people’s incomes. To earn an income, people sell
the services of the factors of production they own. Land
and entrepreneurship earns
People make choices that are in their
choices that they think are the best available for them.
Choices that are the best for society as a whole are in
Economists work to understand
when choices made in self interest advance the social
interest. For instance, does globalization best serve the
social interest? Did the high-tech information-age
economy result from choices made in the social inter-
est? Are the private choices made about global warming
and the use of natural resources made in the social in-
terest? Do banks’ self-interested choices to loan and
people’s self-interested choices to borrow serve the so-
cial interest or did they lead to macroeconomic instabil-
The Economic Way of Thinking