By: Hong-An Phan
The very first thing you will learn in any economics class.
What is economics, really? According to the American Economic Association, economics is “the study of scarcity, the study of how people use resources and respond to incentives, or the study of decision-making. It often involves topics like wealth and finance, but it’s not all about money.”
Firstly, it is important to define the term ‘scarcity.’ A simple explanation of scarcity is having a limited amount of a certain resource available. The broadest understanding of economics is that it relates to money, which is why it is related to scarcity. Money is a scarce and valuable resource that is necessary for survival. Without it, people cannot purchase essential items, therefore being unable to provide food and shelter for themselves.
Second, the definition of economics refers to “decision-making”. For every choice that an individual, institution, or government makes, an effect echoes throughout the entire economy. This is because every interaction will create a lasting impression on scarce resources. For example, a basic concept in economics is ‘opportunity cost.’ If it takes five feet of fabric to make a dress, but two feet of fabric to make a coat, there is a trade-off in terms of fabric cost for the creation of either product.
For example, somebody could dedicate all their fabric supply to making coats instead of dresses, and would therefore be costing themselves the opportunity of having made dresses instead.
On the other hand, there is also the interaction between competitors. One person could make dresses for five feet of fabric and coats for two feet of fabric while another person can make dresses for three feet of fabric and coats for six feet of fabric. This means that person A, who makes coats for two feet of fabric, has a comparative advantage over person B, who makes coats for six feet of fabric, in terms of coat production.
However, person B has a comparative advantage over person A in terms of making dresses because their opportunity cost of fabric is lower when producing dresses.
Economics demonstrates the importance of understanding the scarcity of resources and the importance of how they are used, as well as the effects of every choice made in a system. From the choice of which product to create, to who should make them, many different outcomes might be put into play.
Photo by: Eduardo Soares, Unsplash.
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