What is Economics?

Do you have everything you want? Most people can think of many things they want and do not have. Are any of the following items on your wish list?
a car
a house
a large-screen television
a laptop computer
an Apple iPhone
more jewelry
more clothes
more shoes

Even if you have some of these items, you might want newer, bigger, or better ones.

Why don’t you have all of these things?

The answer is probably because they cost too much. If a large-screen plasma television cost a nickel, then you would probably have one. If a new car cost a dime, then you would probably have one. If your dream house cost a dollar, then you would probably have it.

Why do some things cost so much? How are prices determined? Are expensive things more valuable than inexpensive things? To help answer these questions, consider air. Air is tremendously valuable to people. Without a constant supply of air, all mammals, including humans, die. So air is extremely valuable. Yet how much do people pay for air? If they are anywhere close to the surface of the earth, the answer is probably nothing. Air is so abundant on the surface of the earth that people just inhale to consume as much of it as they want. When people leave the earth’s surface, however, air becomes more expensive. Scuba divers, for example, pay dive shops to fill scuba tanks with compressed air for use while swimming under water for extended periods of time. So prices have very little to do with value. If they did, air would be extremely expensive because people cannot live without air.

Prices are determined by the relative scarcity or abundance of an item in relation to its desirability. An item is abundant if it is widely available. An item is scarce if it is not widely available. However, relative scarcity or abundance alone is not sufficient to explain why things are expensive. Lithiophilite is a scarce phosphate mineral. Yet, it does not have many practical uses. So people are not paying millions of dollars to fill their yards with lithiophilite.

In real estate markets, waterfront property is generally more expensive than similar property away from the beach, river, or lake. Part of the explanation for these differences is relative scarcity and abundance. There is not as much waterfront property as there is property without access to water. The other part of the explanation is that waterfront property is generally more desirable than other properties.

How does society decide who lives in houses on the beach and who lives elsewhere? What determines who drives new luxury sports cars and who drives jalopies? Who wears the latest clothing fashions and who wears hand-me-down clothes?

Economics is the study of how scarce resources are allocated to satisfy seemingly unlimited needs and wants.

No matter how many material possessions people have, it seems they always want more. People’s needs and wants are seemingly unlimited. The things that can be used to satisfy human needs and wants are limited, however. The earth and all its resources are finite. Thus, the economizing problem is that people’s needs and wants are seemingly unlimited, yet the resources they can use to satisfy those needs and wants are limited.

Consequently, society must make choices about what things will be produced, how they will be made, who will produce them, and who will consume them.