What Is Economics?

Economics is in many ways the study of everyday life. People put economics into practice almost daily—as they work to earn money and use their earnings to buy things.

Specifically, economics deals with how people make choices to satisfy their needs and wants with their limited resources. The basic things people must have to survive—food, shelter, clothing, and the like—are needs. Things that are not necessary for survival but make life more comfortable—such as computers and DVD players—are wants. Resources are all the things that people can use to make the products that they need or want.

In the language of economics, resources are called factors of production. Factors of production are usually divided into three categories: land, labor, and capital. Land in economics is a general term that includes not only the soil but also other natural resources, such as oil, coal, and forests. Labor means the human work, both physical and mental, used to produce goods or services. Capital in economics means human-made items, such as machinery, tools, and buildings, that are used in production. In everyday language, capital may be used to mean money.

One important issue in economics is the problem of scarcity. Scarcity means simply that people’s wants are unlimited while the resources to satisfy those wants are limited. A person is dealing with the problem of scarcity, for example, if she wants a dishwasher and a new stove but has enough money to pay for only one of them.

Because of the scarcity problem, both individuals and nations must make choices that enable them to satisfy some of their unlimited wants with limited resources. People differ widely in the economic choices they make. Nations differ too, but each has an overall economic system that guides the choices made in that country. Every economic system must provide ways to make three basic economic decisions:
  1. What will be produced?
  2. How will it be produced?
  3. For whom shall it be produced?
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Modern Economic Systems

The graph to the right lists the names of the three basic economic systems: capitalism, socialism, and communism. It also shows that each system has a special plan for dividing basic economic decisions between the government and the private sector. The private sector includes all those businesses that individuals own and run by themselves.

Economic SystemsThe private sector makes most of the economic decisions under the system of capitalism. Under communism, the opposite is true: the government makes nearly all the economic decisions. Socialism is an in-between case: the private sector makes fewer decisions than the government does, but it still plays an important role in the nation’s economy.

In actual practice, it is impossible to find examples of nations that follow either pure capitalism or pure communism. The United States is the world’s leading capitalist nation, yet the government carries on a number of very important economic activities. The People’s Republic of China is a leading communist nation. Yet in recent years, the government of China has encouraged a greater role for the private sector. That is why economists say most modern nations have “mixed economies” rather than pure forms of capitalism or communism.

The main forces that make capitalism work are self-interest and competition. Private citizens own most of the land and capital. They operate businesses to make profits for themselves. Profit is the money left after all the expenses of running a business have been paid. Business owners must compete, or try to stay ahead of other businesses that are also working for profits.

In a communist system, self-interest and competition are less important. Communists believe that the goals of society are more important than individual wants. The government controls the land, capital, and labor. The government plans the nation’s economic goals and directs all the economic activities.

In a socialist system, the government controls the major resources and capital, such as the mines, steel mills, and air and rail networks. Individuals in the private sector may own smaller businesses.

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