What is economics? Over the last half-century, the study of economics has expanded to include a vast range of topics. What are the major definitions of these growing subjects?1 The important ones are that economics
• analyzes how a society's institutions and technology affect prices and the allocation of resources among different uses.
• explores the behavior of the financial markets, including interest rates and stock prices.
• examines the distribution of income and suggests ways that the poor can be helped without harming the performance of the economy.
• studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation.
• studies the patterns of trade among nations and analyzes the impact of trade barriers.
• looks at growth in developing countries and proposes ways to encourage the efficient use of resources.
• asks how government policies can be used to pursue important goals such as rapid economic growth, efficient use of resources, full employment, price stability, and a fair distribution of income.
This list is a good one, yet you could extend it many times over. But if we boil down all these definitions, we find one common theme:
Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
Behind this definition are two key ideas in economics: that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the desire for efficiency.
Consider a world without scarcity. If infinite quantities of every good could be produced or if hu
1 This list contains several specialized terms from economics. To master the subject, you will need to understand its vocabulary. If you are not familiar with a particular word or phrase, you should consult the Glossary at the back of this book. The Glossary contains most of the major technical economic terms used in this book. All terms printed in boldface are defined in the Glossary.
man desires were fully satisfied, what would be the consequences? People would not worry about stretching out their limited incomes because they could have everything they wanted; businesses would not need to fret over the cost of labor or health care; governments would not need to struggle over taxes or spending or pollution because nobody would care. Moreover, since all of us could have as much as we pleased, no one would be concerned about the distribution of incomes among different people or classes.
In such an Eden of affluence, all goods would be free, like sand in the desert or seawater at the beach. All prices would be zero, and markets would be unnecessary. Indeed, economics would no longer be a useful subject.
But no society has reached a utopia of limitless possibilities. Ours is a world of scarcity, full of economic goods. A situation of scarcity is one in which goods are limited relative to desires. An objective observer would have to agree that, even after two centuries of rapid economic growth, production in the United States is simply not high enough to meet everyone's desires. If you add up all the wants, you quickly find that there are simply not enough goods and services to satisfy even a small fraction of everyone's consumption desires. Our national output would have to be many times larger before the average American could live at the level of the average doctor or big-league baseball player. Moreover, outside the United States, particularly in Africa and Asia, hundreds of millions of people suffer from hunger and material deprivation.
Given unlimited wants, it is important that an economy make the best use of its limited resources. That brings us to the critical notion of efficiency. Efficiency denotes the most effective use of a society's resources in satisfying people's wants and needs. By contrast, consider an economy with unchecked monopolies or unhealthy pollution or unwarranted government interferences. Such an economy may produce less than would be possible without these factors, or it may produce a disorted bundle of goods that leaves consumers worse off than they otherwise could be—either situation is an inefficient allocation of resources.
In economics, we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off.
The essence of economics is to acknowledge the reality of scarcity and then figure out how to organize society in a way which produces the most efficient use of resources. That is where economics makes its unique contribution.
Was this article helpful?