Foundations of economics

Scarcity

Economics as a discipline would not exist without scarcity.

This is the fundamental problem that all societies face. It refers to the excess of human wants over what can actually be produced to fulfil these wants. Human wants are unlimited. On the other hand, the means of fulfilling these human wants are limited because the resources available are limited. As a result, choices have to be made.

For example, society cannot enjoy all the books and all tables it wants because the number of trees required to produce these goods is limited. It somehow has to decide how many books and how many tables it wants to produce. If more tables are produced then fewer books will be enjoyed and vice versa. We define as the opportunity cost of a choice, the value of the next best alternative sacrificed. If, for example, by giving (or more correctly, "allocating") a tree to table production, one extra table is produced but 25 books need to be sacrificed, we say that the opportunity cost of producing one more table is 25 books.

Resources (factors of production)

Resources are also referred to as factors of production. They include all inputs used in the production of a good or service. They are typically separated into the following categories.

Land and raw materials (natural resources)

These are inputs into production that are provided by nature, for example agricultural and non-agricultural land, forests, pastures, mineral deposits, oil, natural gas, lakes, and rivers. The world's land area and raw materials are limited. Some resources, such as oil and coal deposits, are non-renewable: if they are used now, they will not be available in the future. Other resources, for example forests (timber) and the stock of fish, are renewable.

Labour (human resources)

Labour includes all forms of human input, both physical and mental, into current production. The labour force is, at any point in time, limited both in number and in skills. The total number of people available for work is referred to as the labour force or working population.

Capital

Physical capital includes manufactured resources; in other words, goods used to produce other goods. The world has a limited stock of capital (limited supply of factories, machines, tools, and other equipment). Note that the meaning of capital in economics is different from that used in ordinary speech where people refer to money as capital.

Entrepreneurship

Entrepreneurship is related but not identical to management. When a new venture is being considered, risks exist. They involve the unknown future. Someone must assess these risks and make judgements about whether or not to undertake them. The people who do so are called entrepreneurs. Entrepreneurship refers to the willingness and ability of certain individuals to take risks and to mobilise the remaining factors of production.

Related concepts

In addition to the idea, of physical capital already mentioned, it is useful to include natural capital and human capital.

Natural capital

Natural capital can be thought of as natural resources which may be improved upon or may be depleted. Thinking in terms of natural capital can easily accommodate another related concept, sustainability, which refers to the idea of preserving and even increasing or improving upon the available stock of natural resources.

Human capital

Labour may also be improved upon, in that the labour force may become more productive. The term human capital refers to the education, training and skills embodied in the labour force of a country. Even if the size of the labour force of an economy is constant over time, the stock of human capital may increase.

Other useful introductory terms

Social sciences

Disciplines that systematically study human behaviour form different perspectives. Economics, psychology, anthropology, political science, sociology, and history we all considered social sciences.

The fundamental questions of economics

Name the 4 factors of production

The accounting cycle