Economics is the study of the way society uses scarce physical resources to produce useful commodities and then redistributes these resources amongst various individuals. Behind this common definition are two major ideas in economics: the maxim that goods are rare and that a society should use its natural resources efficiently. These ideas are fundamental to understanding economics as a whole, but it is important to remember that economics is a field that also deals with concepts like technology, human society and culture. Other ideas that come into play in economics include consumer and capital demand, the theory of money and the concept of risk. Let’s take a brief look at some of the more important topics in this interesting area of study.
One of the most important concepts in economics is labor. The definition of labor refers to the skills of the people who perform work. Labor is a very important concept in economics because without workers, there is no economy. Economic theory assumes that a society will allocate economic resources, primarily capital, to those with skills and knowledge that will be used to create new jobs. Since the supply of skilled workers is low, wages for such workers will be relatively high, leading to economic prosperity.
The difficulty in answering the question, “What is labor?” stems from two concepts. The first of these is what economists call a “surplus” problem. Surplus (the other term for “surplus”) refers to the overall value of labor in a market – what economists call its “opportunity cost”.
Market failure, which is the other side of the “surplus problem”, occurs when there is a deficit in the production of goods or services relative to the demand for them. When this occurs, the economy attempts to increase aggregate demand through changes in monetary policy or interest rates, both of which have significant effects on aggregate demand. However, the effects of these changes do not offset one another and do not lead to increases in real income. This concept is central to understanding economics and the nature of economic growth. It is also an essential concept to understanding the debate concerning economic stimulus packages and the appropriate timescales associated with them.
A key assumption of economics is that humans act primarily to satisfy their needs. Individuals will try to acquire what they need as long as their wants are not denied. They will then attempt to expand their needs when they are granted. The scope and size of these needs are determined by the extent of the distribution of natural resources and the elasticity of prices provided by the market. Individuals will never act in a manner that would cause them to lose the opportunity cost associated with their decisions; hence, economics describes the process by which people secure more of their human wants.
Economics demonstrates that some people, relative to other individuals, are better equipped to perform certain tasks than others. In fact, the distribution of human resources and the elasticity of the market provide elastic grounds for certain tasks to be performed by some people relative to others. Individuals who possess certain skills and are better positioned to perform such tasks can gain access to different markets and thus obtain goods and services at lower costs relative to other individuals. Conversely, there are situations where individuals who possess less desirable skills and are less positioned to obtain the goods and services at lower costs relative to others will be forced to perform tasks at a higher cost in order to obtain these goods and services.
The concepts of economics are extremely important in determining governmental policies. For example, if the supply of basic commodities is high but the demand for such commodities is low, the government will opt to increase the supply of goods but will reduce demand through various measures such as raising taxes and increasing interest rates. Another example is the operation of the market. If the relative prices of goods and services are rising, there is likely to be increased inflation and consequently increased demand, leading to increased production and employment levels. The process by which economics enters the political arena is often referred to as the “trickle-down effect.”
An essential part of understanding economics is the concept of opportunity cost. Opportunity cost is the value of doing something else if the activity is likely to have a negative effect on the overall results of the activity. economists therefore argue that it is impossible to maximize the benefits of a planned action by avoiding the potential costs or by waiting to find out what the direct results will be until the end of the activity. A clear example of this principle is when an individual decides to purchase a used vehicle rather than purchasing a new vehicle. The individual’s opportunity cost is the amount of money that he or she would lose should they decide not to purchase a vehicle and instead drive off into the sunset. However, individuals must choose between gaining a benefit and losing a benefit and because of this, they must choose to perform an activity that has a net benefit to them at the expense of performing an activity that does not have a net benefit.