Basics of Economics
Basics of Economics
For new students, a logical place to start would be to ask: What is economics? For the answer to that question, consider these two facts of life: Human wants are unlimited, and resources
Basics of Economics
Basics of Economics
For new students, a logical place to start would be to ask: What is economics? For the answer to that question, consider these two facts of life: Human wants are unlimited, and resources are finite. This means that not everybody can have everything. This combination of unlimited wants and limited resources is called scarcity. Scarcity, in economics lingo, is not the same thing as shortage. The term shortage is a completely different concept and will be encountered elsewhere in the study of economics. Scarcity is called "the economic problem". How individuals, groups of individuals, and entire societies deal with this economic problem is what economics is all about. So one definition of economics is this:
Economics deals with the answers to the what, how, and who questions: WHAT should be produced? HOW should it be produced? WHO should it be distributed to?
As you will figure out, if you haven't done so already, the study of economics involves a certain kind of logic, a unique kind of thinking. This is one of the things that is difficult to define, but you will recognize it when you see it. This form of thinking is called "economic thinking", or the "economic approach".
Economic thinking involves the concept that costs include unintended consequences. Economists attempt to include these costs in the decision making process. This leads to a thoroughness of the thought process not found in all social sciences. When you hear people, especially politicians, discuss economics, you often hear them talk about what should be done, or what course of action should be followed. Such statements are called normative statements. Normative statements are statements about "what ought to be". Other kinds of statements you may hear in relation to economics are called positive statements, which are statements of facts, statements of the results of studies, etc. Positive statements include no value judgements, while normative statements include value judgements. The economic approach requires the avoidance of using normative statements. Only positive statements should be used in applying the principles of economics to real-world situations.
The use of normative statements is one trap to avoid when studying economics. For the economic approach, it might be helpful to note three other common mistakes to avoid:
- Economics involves the study of human behavior. This should be done by assuming that people's behavior is governed by "rational self-interest" (more on that later on this page), instead o