Economics is the social science that studies how people, in
situations, and society make better choices in conditions of scarcity. Central
to the economy is the idea of ??opportunity cost: the value of the next best
good or service that is given up to get something. The economic perspective
consists of three elements: scarcity and choice, purposeful behavior, and
marginal analysis. It is considered that individuals and institutions make
rational decisions based on comparisons of marginal costs and marginal benefits.
Economists use the scientific method, in which hypotheses of
cause-effect relationships are formed and tested to generate theories, laws and
principles. Economists usually combine theories into representations called
models. Microeconomics examines the specific decisions of the economic units of
the institutions. Macroeconomics studies the economy as a whole or its main
aggregates. Positive economic analysis refers to facts; normative economics
reflects value judgments.
Individuals face a problem of economizing. Because their
wants exceed their income, they must decide what they want to buy and what to
give up. Society also faces a problem of economizing. The society wants to
exceed the available resources necessary to fulfill them. Society, therefore,
must decide what to produce and what to give up. Graphically, a budget line
illustrates the problem of economization for individuals. The line shows the
various combinations of two products that a consumer can acquire with a
specific monetary income, taking into account the prices of the two products.
Economic resources are inputs in the production process and
can be identified as land, labor, capital or entrepreneurial ability. Economic
resources are known as factors of production or inputs. Economists illustrate
society’s problem of economization by analyzing the possibilities of
production. The production possibilities tables and curves show the various
combinations of goods and services that can be produced in a fully employed
economy with the assumption that the quantity of resources, the quality of
resources and technology are fixed.
An economy that is fully employed and is therefore operating
in its curve of production possibilities must sacrifice the output of some
types of goods and services to increase the production of others. The gain of a
type of good or service is accompanied by an opportunity cost in the form of
the loss of some of the other type of good or service.
Since resources are not equally productive in all possible
uses, a transfer of resources from one use to another creates increasing
opportunity costs. The production of additional units of a product requires the
sacrifice of an increasing amount of another product. The optimal point of the
production possibilities curve represents the most preferred mix of goods and
is found by expanding the production of each good until its marginal benefit
equals its marginal cost.
As time passes by, technological advances and increased
quantity and quality of resources allow the economy to produce more of all
goods and services for economic growth. The choice of society in terms of the
combination of consumer goods and capital goods in the current output is an
important determinant of the future location of the curve of production possibilities
and, therefore, of the magnitude of economic growth. International trade allows
a nation to obtain more goods from its limited resources than its production
possibilities curve indicates.