In short, we are all performers on an economic stage, hence the term homo economicus, or economic man (and woman). Even though we all perform on this stage every day of our lives, few of us seem to realise it. We earn our income, then dispose of it, without thinking how we spent that income the way we did over the last year. 

Furthermore, we all make decisions every day which have economic repercussions for ourselves and others. If we buy that car, it will affect others in some way, for example nobody else can have it, unless we give it to them, or they steal it from us. When a business closes down there are implications for its employees and the local community. Tax changes affect how much we have in our pockets and so the amount of money we can spend in shops: this will affect how many people are employed in shops. Changes in interest rates, the prices of goods, and so on affect us all in various ways. As a result, we all need some understanding of economics and with this knowledge we could make better informed decisions and so make fewer mistakes, or none at all. We could use our resources more efficiently, even increase those resources available to us. We could spend less time regretting past decisions. Though regrets are useless, we all have plenty of them, don’t we? In the busy times in which we live, as time passes us by even more quickly, we all needto use our resources better.

Now that we have looked at why economics can be useful – helping us to make more informed decisions about how we use our resources – we need to define what economics is. Accordingly, this unit will consist of two sections.

In Section 1 we will be looking at what constitutes the heart of the subject matter of economics, the economic problem of scarcity: why it arises and what are its implications, especially the need to allocate scarce resources to produce goods and services people want to buy. Because there are different ways of allocating resources we have different types of economy, all of which have to find answers to seven general economic questions. Our attention will focus mainly on one type of economy – the market economy and its basic unit, the market. After this we’ll look at the two branches of economics, microeconomics and macroeconomics, and, finally, at the distinction between positive and normative statements.

In Section 2 the concept of the Production Possibility Boundary will be introduced and applied to help you better understand and consolidate some of the basic concepts and distinctions covered in Section 1. Section 2 will also introduce you to the way economists represent information using graphs.

Please note that there is no Unit Review Activity for Unit 1 but a Unit Review Activity is included at the end of Unit 2 covering the content of both Units 1and 2.

By the end of the unit you should be able to:

• explain the nature and causes of the fundamental economic problem of

• scarcity

• outline the problems arising from scarcity

• list the implications of scarcity

• classify economies into market, command, and mixed economies

• distinguish between positive and normative statements

• distinguish between microeconomics and macroeconomics

• explain the difference between resources being fully employed and efficiently employed

• outline the benefits of economic growth.

In Section 1 we will consider the economic problem of scarcity: why it arises and what are its implications. We will examine different types of economy and the seven general economic questions each has to find answers to. We will focus mainly on one type of economy – the market economy and its basic unit, the market. We will go on to discuss the two branches of economics, microeconomics and macroeconomics. Finally we will examine the distinction between positive and normative statements.

When we begin a study of something new to us we normally begin with an expectation of quickly determining what it is that we are about to start studying. So you may have approached this first unit with a question something like, ‘what is economics?’ We then expect to see the question answered concisely. Here we will have to disappoint you, as we cannot express in a concise form a definition of economics which is adequate for the purpose. Attempting to define subject matter concisely and adequately is not a problem peculiar to economics. Consider mathematics or history. How would you define them? As a result of the problems of defining something like economics, there are numerous definitions, each tending to reflect a different viewpoint.

To give you an appreciation of how difficult it is to define economics we will briefly look at five definitions, each of which has been put forward by a major economist over the last two centuries.

First, we have the definition by Adam Smith (1723–1790), generally held to be the founder of modern Economics. Smith saw economics as:

‘...an inquiry into the nature and causes of the wealth of nations.’

(From A. Smith, An Enquiry into the Nature and Causes of the Wealth of Nations, 1776.)

In the nineteenth century John Stuart Mill (1806 –73) described economics as, 

‘...the practical science of the production and distribution of wealth’. (From J. S. Mill, The Principles of Political Economy, 1848.)

Both of these definitions focus on the material aspect of the subject, or wealth.

In 1890 the late-Victorian economist, Alfred Marshall, saw economics as being quite comprehensive in its coverage:

‘Economics is the study of mankind in the everyday business of life’. (From A. Marshall, The Principles of Economics, 1890.)

Lionel Robbins (1898 – 1984) saw economics as:

‘... the science which studies human behaviour as the relationship between ends and scarce means which have alternative uses’.

(From L. Robbins, An Essay on the Nature and Significance of Economic Science, 1932.)

Rather grandly, John Maynard Keynes (1883-1946), arguably the most famous of Britain’s economists, saw economics as being involved with social improvement, practitioners of economics being:

‘... trustees of the possibility of civilisation’.

(From J. F. Harrod, The Life of John Maynard Keynes, Macmillan, 1951.)

We will come across Adam Smith and J.M. Keynes in later units.

As you look at these definitions it is possible to see differences. Consider the key words in the definitions: production and distribution, wealth, science, and human behaviour. Each definition tends to emphasise different aspects of the subject matter of economics.

If we look at the Penguin Dictionary of Economics (1972 edition) we see economics defined as,

‘The study of the production, distribution and consumption of wealth in human society’.

The dictionary then suggests that: ‘This one (definition) is as good as any’, and ‘Economists have never been wholly satisfied with any definition of this subject’. We think you may now agree with the latter statement. You may wish to have a look at the latest edition of the dictionary.

Though defining economics is problematic and there’s no agreement on a definition, it is possible to identify the subject matter. Here we could accept the invitation of the Penguin Dictionary of Economics:

‘The reader will gain a good notion of the scope of Economics by examining the coverage of this dictionary. ...This dictionary contains over 1600 entries.’ Fortunately, you will not have to familiarise yourself with all of them.

We will now move on from the problem of defining economics concisely to look in more detail at what economists consider to be the core of its subject matter: the fundamental economic problem of scarcity.

WANTS

Economics is concerned with scarcity and the problems which arise from it. To appreciate this we need to look first at the concept of wants and how they are satisfied.

The amount of resources owned by an individual varies from person to person. Consider for a moment the extent to which the wants of a person with very limited resources are satisfied, for example a homeless person, or somebody in one of the very poor parts of the Third World. Then consider the extent to which wealthy individuals with substantial resources are able to satisfy their wants. In short, you can’t always get what you want, and what you get depends on the resources at your disposal. Also, most of us would like more (there will always be some who are satisfied with very little, or who don’t want any more).

What we have said about people is also generally true of business organisations and governments. These also have wants to be satisfied – the wants of the individuals comprising them – and only limited resources to satisfy them.

So, people, businesses and governments (these three groups are called economic agents) all face a similar problem: how to satisfy their many wants from limited resources. As economic agents form the basic components of an economy, we have the fundamental economic problem faced by all countries’ economies, whatever their size, that of scarcity. Scarcity is a fact of life, something faced by all of us numerous times every day. If there were enough resources – a true world of plenty – we could have everything we wanted.

RESOURCES

Having looked at wants and seen how they are satisfied – by the using up (this is called consumption) of commodities – we now need to consider where these commodities come from. Most of them have to be produced in some way: fishedfrom the sea, manufactured, extracted, distilled, and so forth. In order to produce commodities, ingredients have to be used. These ingredients are called raw materials (or inputs) and in the production of commodities they are used up, or consumed. So when you consume something it is the final stage in a sequence of activities which began with the milking of a cow, the sale of that milk, and so on, until you purchased it. Here you may have noticed the words sale, and purchased, indicating that each stage in the sequence of activities also has a monetary aspect – for every purchase there is a sale. So we have a sequence of economic activities, involving the using up of resources and the exchange of commodities for money. (Commodities may be exchanged for other commodities as well – this is called barter.)

(End of Sample Material)