Chapter 1 Value of Studying Economics Elements of Economics

Definition of Economics
Economics as an allocation of wealth
Economics is a social science that deals with the allocation of scarce resources to
satisfy unlimited human needs and wants. Allocation is a mechanism of distribution
used by society to address the needs and wants of citizens in an environment
characterized by scarcity of resources (3 types: price system, command system,
traditional system)
Economics as creation and consumption of wealth process of distribution and
production
Economics as a science of choice optimization
Problems of Material Survival and Progress
Relating economics to goals of society social survival and social progress
Besides economics, these are answered by culture and politics
In economics, the society is concerned with wealth as a means of ensuring its
material survival and growth.
Economic development is not only expansion of wealth but the equitable
distribution of the fruits of this wealth
Basic Economic Questions
1. What goods to produce?
Refers to a productive activity of any society. The relative importance of human
needs and wants will have to be matched with the available resources for
production
The social mechanism for ranking the relative importance of human needs and
wants is:
Market system: the price people attach to these goods and services
Planning system: the priorities made by the central planning agency
Traditional society: the social norms
2. How many will be produced?
Concerned with the amount of goods and services that will be produced by the
society based on human wants, extent of wealth and technology used in production.
The system of allocation or mechanism for ranking human wants is:
Market system: the price of the commodity

Planning system: The goals of society as formulated by the state

Tradition
3. Who will produce it?
Refers to the amount of productive inputs to be used based on the availability of
resources as well as on their relative productivities.
Market system: the price of the productive input is compared with its productivity
to determine whether it will be employed or not
Planning system: the planning board decides to use more labor regardless of their
productivity Traditional society: groups of people are assigned specific social tasks
4. How will it be produced?
Focuses on the technology to be used. Technology does not only describe the
process of combining resources but also refers to the intensity of use of a resource
relative with another resource.
Market system: the market mechanism will evaluate the relative cost of productive
inputs and their productivities
Planning system: the planning board decides to use capital intensive techniques
even if it is labor abundant
Traditional society: traditional techniques > modern
5. For whom will it be produced?
Consumption
Market system: the portion allocated to various citizens will depend on their
relative contributions in the production process
Planning system: redistribution as part of social equity
Traditional society: based on the value they give to the community
Conclusion
We have discussed the important role played by the science of economics in
answering the basic questions for materials survival. Although the study of
economics may be defined in various ways, consistently it is about how societies
deal with its wealth. Different societies across the globe and over the centuries have
various ways of answering the questions related to production and distribution
activities of a society.