LISTINGS

SUBTOPICS

So what is economics? You can immediately respond by saying that economics is the study of economies, but then that raises the question of what is an economy? We'll start by defining that. An economy is the structure in which societies satisfy their wants and needs. Economics, then, is the study of the way society's needs are met.

Pretty broad definitions, aren't they? Well, economics is an all-encompassing study. Everything in the world is inextricably tied to economic. It is a powerful force that moves the world forward and thus, economics is a most practical area of study.

To make this more clear, we'll narrow give you a more concrete picture of economics. The world only has so much resources. People want all sorts of stuff. So, then, economics studies just how resources are made into products and then distributed to various people.

To study economics, one needs to adopt a new set of rationale. All economists, no matter what policy or lack thereof they support or what cultural/political background they come from, all think alike. This economic reasoning is very straightforward, though difficult to execute. Economic reasoning is basically that, reasoning, being completely logical.

If the gain from an action is greater than the cost, then that is a good thing. If not, then it's a bad thing. Specifically, in economics, we try to maximize the benefit and minimize the cost when doing anything. With that logic, we go about choosing the best option among many. Notice that this is all logical, emotions have no place in this science.

This economic reasoning can be applied to anything and everything. You use it every time you buy any kind of product. How useful will this product be to me? What's the price tag on it? Is the usefulness of the product to me worth paying the price listed? Is it even worth spending time going to the store to check it out?

Note that last part of the above example, spending time to go buy the product. This is actually very important. When you spend time to go to the store, what are you giving up? You could be doing a multitude of other things. Working, doing homework, playing sports, watching a movie. However, because you are going to buy this product, your time can not be spent on these othere things. The same goes with your money. Money used on this product can not be used on others. You've missed out on an opportunity to do other things. This is opportunity cost.

Opportunity cost can be represented in a graph. On one axis can be plotted the benefits of one activity while on the other the benefits of another activity. The graph slopes downward as resources used towards one activity is lost to the other. The following graph illustrates this point with money that is spent toward either pencils or pens.

Fig 1.1.1-pens and pencils relative to money

Fig 1.1.2-production possibility curve

This previous graph was a straight line, but that rarely occurs in real life. Most production possibility curves are curved outwards. That means, the tradeoff between one product and another is not constant. Look at the following graph.

Fig 1.1.3-curved production possibility curve

This tradeoff changes. As more of one product is produced, you must sacrifice more and more of the other to make this product. This is because different resources are applied to making different products. Some resources have a comparative advantage over other resources at making some things. When you sacrifice production of one product, you start by sacrificing the resources you will use least and the other product will use the most. However, you do get to a point where you will start using resources that are not well-suited to making the other product. Thus, the tradeoff between two products depends on the resources used to produce them and the amount of each that is made. The general rule is: to produce more of one product, you must sacrifice more and more of another product.

So far, we've used all resources towards producing whatever. (We produce different things and there's a tradeoff there, but no matter how we combine production, we are still turning ALL of our resources into end products. That is not how things work in real life. There is always some inefficiency involved. Efficiency can also be graphed on these graphs. Complete efficiency, meaning all resources are turned into products, is plotted along the line while inefficiency is everything below the line. Anything outside the line is unattainable. There is almost always some waste, so we always try to get as close to the line as possible, trying to increase potential output as much as possible. New technologies, of course, allow us to produce more, thus shifting the production curve above outwards. When one product's production methods get better, the curve moves up its axis, representing the greater potential to make this product.

It is very important for one to note that there are many outside forces operating on an economy besides the basic shift of prices in the economy. There are political and social forces at work, controlling what you can and can not do in any economy. Often, social and political forces are one and the same. Consider prostitution, for example. It is socially unacceptable (social forces) in most places and even if it were, it would be illegal (political forces). An example of political control would be government regulation of certain industries. For example, in the U.S., the utilities companies were regulated by governments and companies were basically granted monopolies over varoius areas. Other companies can not compete in those areas that have already been parceled out. This is extremely important and will be brought up quite often.