Economics as a Science
Economics is the study of how individuals and nations make choices about how to use scarce resources to fill their needs and wants. A resource is anything that people can use to make or obtain what they need or want. You may be asking yourself at this point how economics will help you, a student. Also, you may be wondering how scarce resources are a problem for any nation that has abundant resources in its economy.
It may surprise you to know that many of the decisions you will face as a citizen deal with how the nations should use their resources. Learning economic principles can help you make decisions about candidates for political office, political and social issues, and the goals a country should set for itself, such as how to spend government revenues. Many people are familiar with the benefits of government programs such as job training and Medicare, but how many people are aware of the costs of these programs? Economics can help you to understand both costs and benefits and, therefore, help you to make better decisions.
Because economics examines facts in order to make choices, it can teach you some basic skills for making decisions. Being able to make reasoned, well-informed decisions will be important to you as an employee, employer, entrepreneur, saver, and investor, as well as citizen. The economic principles that underlie your different roles in life are the same. How many times have you said that you “need” something? How often do you think about what you “want”? The distinction, or difference, between wants and needs is not a clear one. Everyone needs certain basic needs – enough food, clothing, and shelter to survive. People think there are certain basic needs for a nation, too, such as a strong military defense. Americans also consider a certain number of years of public education and adequate health care as needs. Everything other than these basic needs are called “wants” by economists. People want better and more clothing, bigger places to live, new cars, personal computers, and the like. Although more and more people have these items, this does not mean that anyone actually needs them. For example, people entertained themselves and informed themselves of news long before the invention of the radio. But as the wonders of radio were advertised and more people bought radios, more people began to believe they needed one. What began as a luxury, or want, became to many people a necessity. This cycle of wants and perceived needs is repeated over and over. In economics, however, there are only a few true needs, such as food and shelter. You may believe you need a DVD player. But is it really a need or just a want?
Besides the question of whether you need or want a DVD there is the issue of whether there will be enough DVDs to allow every person to own one. Also, not everyone would have enough money to buy one. As you have just read, only a certain amount of resources exist, regardless of wants and needs. Traditionally, economists have classified resources into three types, depending on their economic use: 1. land, 2. labor, 3. capital. The term land refers to natural resources, not just to surface land. Natural resources are all the things found in the nature on or in water and the earth – such as fish, animals, forests, and minerals as well as land and water. Among the most important natural resources in economic terms are lands and mineral deposits such as iron one. In economics, the location of land is also important. In the United States today, location is probably more important than natural resources in establishing the value of land. Labor refers to the work that people do. It includes all kinds of jobs – bus driver, doctor, teacher, business executive, plumber, assembly-line worker, and so on. Anyone who works is a part of the labor resource.
Capital is all the property – machines, buildings, and tools –that people use to make other goods and services. For example, the machines used to make automobiles are capital. The cars themselves are not considered capital unless they are used, for example, as taxicabs, to produce services. Combining capital with land and labor resources increases the value of all three resources by increasing their productivity. Productivity is the ability to produce greater quantities of goods and services in better and faster ways. A person using a tractor, for example, can plow many more acres a day than a person using a wooden plow and a team of horses.
A related resource is entrepreneurship, which refers to individuals’ ability to start new businesses, to introduce new products and techniques, and to improve management techniques in existing business. All changes in business organization are part of entrepreneurship. It involves initiative, and individual willingness to take risks and to experiment with new ideas that could lead to profits. Entrepreneurs, or those who use these entrepreneurial skills, succeed when they produce new products, improve an existing product or produce it more efficiently, or reorganize a business to run more smoothly. Together these resources are called the factors of production. They are the things used to produce goods and services. Goods are the things that people buy. Services are the activities done for others for a fee. For example, butchers and bakers sell goods, while doctors, teachers, and auto-mechanics sell services. Sometimes, the term “goods” is used to mean both goods and services because individuals may provide a good and a service.
Today some economists add another item to the list of resources: technology. The first use of fire by early people is an example of technology. Any use of land, labor, and capital that produces goods and services more efficiently is technology. For example, the tractor is a technological advance over the horse-drawn plow. Today, however, technology usually describes the use of science to develop new products and new methods for producing and distributing goods and services. In modern economics, land, labor, capital, and advanced technology are interrelated. Advanced machinery and new production and distribution methods increase the productivity of the other resources. For example, without modern drilling machinery, the amount of oil pumped from the ground would be far less than it is. It would also be impossible to tap the oil resources of the ocean without modern equipment. Modern technology has many benefits. It creates leisure time, highly skilled workers, efficient use of resources, lower prices, and a high quality of goods and services.