(Arleen J. Hoag and John H. Hoag, 2.006)
Chapter 1. THE MEANING OF ECONOMICS
What is economics? The subject matter of economics is introduced in this chapter. We want to give you an overview of the subject and an idea of how economists view the world. Of course, you should not expect to understand all of economics after just one chapter. However, let us see if by theend of this chapter you can achieve a basic understanding of the meaning of economics. This chapter starts with a definition of economics. In each of the remaining sections, one concept in the definition will be discussed. We must take the definition apart before it can be put together in a meaningful way. The definition will be developed into a clear description of the science of economics. Everytime you come to a new section, look back to the definition to see where and why the new material fits into the definition.
Economics is a social science that studies how society chooses to allocate its scarce
resources, which have alternative uses, to provide goods and services for present and future consumption. The definition starts “Economics is,” and that is what is being defined. So theremaining words need to be understood to make sense of economics. Let us start with “goods and services”.
Goods and Services
What exactly are goods and services? A good is anything that satisfies a want. That is the purpose of production — to provide goods that satisfy wants. So goods are produced, and the consumption of those goods satisfies wants. Goods can be tangible or intangible.Tangible goods are physical items such as bulldozers or pizzas. Intangible goods such as medical care or education are called services. Both goods and services satisfy wants and therefore can be called goods.
The satisfaction of wants can only be accomplished by using up resources, the inputs, the so-called factors of production or means of production. These resources can be classified asland, labor, capital, and entrepreneurship. Land is land itself and anything that grows on it or can be taken from it —the “natural resources.” Imagine producing anything from a pizza to a medical doctor without the use of land somewhere along the productive process. Labor, another resource, is human effort, both physical and mental. The resource capital is also known as capital goods. Aneconomist’s use of capital is not a reference to money but to a resource. Capital is a man-made tool of production; it is a good that has been produced for use in the production of other goods. Goods are produced for one of two purposes. A good may be a consumer good used for the satisfaction of wants, which is the ultimate purpose of production. Or a good may be a capital good produced not for consumptionbut for use in producing more goods, either consumer or capital. So capital goods, such as a mechanic’s wrench or a school building, are resources that have been produced and that will combine with other resources, such as land and labor, to produce more output.
Some goods may be a consumer good in one use and a capital good in another use. For example, consider a personal computer. When thecomputer is used to play solitaire, it is a consumer good. On the other hand, when it is used as a word processor to write a textbook, it is a capital good. To tell whether a good is a consumer good or a capital good, ask yourself a question: Is the good going to be consumed directly or will it be used to produce more goods? If it is to be consumed directly and purchased by consumers, it is aconsumer good; if it is to be used to produce other goods and purchased by business, it is a capital good. Entrepreneurship is human effort again. Entrepreneurs are the risk takers. They are more than managers, although they use managerial ability. Entrepreneurs reap the profits or bear the losses of their undertakings. Entrepreneurship is the organizational force that combines the other factors of...