Many people think that economics is about money. Well, to some extent this true. Economics has a lot to do with money: with how much money people are paid; how much they spend: what it costs to buy various items; how much money firms earn; how much money there is in total in the economy. But despite the large number of areas in which our lives are concerned with money, economics is more than just the study of money.
It is concerned with:
The production of goods and services: how much the economy produces; what particular combination of goods and services; how much each firm produces; what techniques of production they use; how many people they employ.
The consumption of goods and services: how much the population as a whole spends (and how much it saves); what the pattern of consumption is in the economy; how much people buy of particular items; what particular individuals choose to buy; how people’s consumption is affected by prices, advertising, fashion and other factors.
In 1932 Professor Lionel Robbins defined economics as “ the science, which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” Economics is simply the study of how society decides what, how and for whom to produce. In answering the questions what, how and for whom to produce, economics explains how scarce resources are allocated between competing claims on their use. The central economic problem is the problem of scarcity.
Countries can only produce a limited amount of goods and services due to a limited amount of resources. There are three types of resources:
Human resources: labour
The labour force is limited both in number and in skills.
Natural resources: land and raw materials
The world’s land area is limited, as are its raw materials.
Manufactures resources: capital
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
One must bear in mind that our wants are virtually unlimited, while the resources available to satisfy these wants are limited. In other words when society demands more of a product than can actually be produced to fulfil those wants we have a problem of scarcity. An example of this would be the OPEC oil price shocks between 1973 and 1980. Yes, it is true that the price of oil rose and some individuals used substitutes but the economies of oil importing countries like Germany and Japan fell because OPEC now had more buying power since they had the control over a scarce resource. We can therefore think of oil as having become scarcer in economic terms when its price rose.
Earlier I stated that economics is concerned with consumption and production. We can look at it in the terms of demand and supply. It is simply the quantity of a good buyers wish to purchase at each conceivable price. Three factors determine demand:
Willingness to pay
Ability to pay
Whilst supply is the quantity of good sellers wish to sell at each conceivable price. Supply is related to resources. The amount that firms can supply depends on the resources and technology available.
The Laws of Demand and Supply states:
As the price of goods and services increases, producers may offer more goods and services.
As the price of goods and services decreases, producers may offer less goods and services.
As the price of goods and services increases, buyers may demand less goods and services.
As the price of goods and services decreases, buyers may demand more goods and services.
Economics is not just about money as you can see but it also uses resource, scarcity, and mankind’s basic desires the demand for a certain product or service and the supply by a manufacturer or person of this desired good or service. Economics also studies how demand adjusts to available supplies and how supply adjust to consumer demands.