No Such Thing as a Free Lunch: Principles of Economics (Part 4)

Human well-being is not a random phenomenon. It depends on many factors - ranging from genetics and neurobiology to sociology and economics. But, clearly, there are scientific truths to be known about how we can flourish in this world. Wherever we can have an impact on the well-being of others, questions of morality apply.

Sam Harris

The Economic Problem: Scarcity and Choice

(Part A)

by

Charles Lamson

Part 1 of this analysis began with a very broad definition of economics. Every society, no matter how small or how large, no matter how simple or how complex, has a system or process that works to transform the resources that nature and previous generations provide into useful form. Economics is the study of that process and its outcomes.

Figure 1 illustrates three basic questions that must be answered to understand the functioning of the economic system:

• What gets produced?

•  How is it produced?

•  Who gets what is produced?

The next several posts explore these questions in more detail. In a sense, these next few posts are the definition of economics. They lay out the central problems addressed by the discipline and present a framework that will guide you through the rest of this analysis. The starting point is the presumption that human wants are unlimited, but resources are not. Limited or scarce resorces force individuals and societies to choose among competing uses of resources---alternative combinations of produced goods and services---and among alternative final distributions of what is produced among households.

These questions are positive or descriptive (see last post "The Scope and Method of Economics"). That is, they ask "How does the system function?" without passing judgment about whether the result is good or bad. They must be answered first before we ask more normative questions like: 

• Is the outcome good or bad?

•  Can it be improved?

The term "resources" is very broad. The sketch on the left side of Figure 1 shows several categories of resources. Some resources are the products of nature: land, wildlife, a fertile soil, minerals, timber, energy, and even the rain and the wind. In addition, the resources available to an economy include things, like buildings and equipment, that have been produced in the past but are now being used to produce other things. And, of course, perhaps the most important resource of a society is its human workforce with people's talents, skills, and knowledge.

Things that are themselves produced and that are then used in the production of other goods and services are called capital resources, or simply capital. Buildings, equipment, desks, chairs, software, roads, bridges, and highways are a part of the nation's stock of capital.

The basic resources available to a society are often referred to as factors of production, or simply factors. The three key factors of production are land, labor, and capital. The process that transforms scarce resources into useful goods and services is called production. In many societies most of the production of goods and services is done by private firms. Private airlines in the United States use land (runways), labor (pilots and mechanics), as well as capital (airplanes) to produce transportation services. but in all societies some production is done by the public sector, or government. Examples of government produced or provided goods and services include national defense, public education, police protection, fire protection, and so forth.

Resources or factors of production are the inputs into the process of production: goods and services of value two households are the outputs of the process of production.

*MAIN SOURCE: CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 23-24*

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