This problem of limited resources and unlimited wants also applies to society as a whole. Can you think of any societies in which all wants are satisfied? Most societies would prefer to have better health care, higher quality education, less poverty, a cleaner environment, etc. Unfortunately, there are not enough resources available to satisfy all of these goals.
Thus, economists argue that the fundamental economic problem is scarcity. Since there are not enough resources available to satisfy everyones wants, individuals and societies have to choose among available alternatives. An alternative, and equivalent, definition of economics is that economics is the study of how such choices are made.
A good is said to be a free good if the quantity of the good supplied exceeds the quantity demanded at a zero price. In other words, a good is a free good if there is more than enough available for everyone even when the good is free. Economists argue that there are relatively few, if any, free goods.
An item is said to be an economic bad if people are willing to pay to avoid the item. Examples of economic bads include things like garbage, pollution, and illness.
Goods that are used to produce other goods or services are called economic resources (and are also known as inputs or factors of production). These resources are often categorized into the following groups:
The category of "land" includes all natural resources. These natural resources include the land itself, as well as any minerals, oil deposits, timber, or water that exists on or below the ground. This category is sometimes described as including only the "free gifts of nature," those resources that exist independent of human action.
The labor input consists of the physical and intellectual services provided by human beings. The resource called "capital" consists of the machinery and equipment used to produce output. Note that the use of the term "capital" differs from the everyday use of this term. Stocks, bonds, and other financial assets are not capital under this definition of the term.
Entrepreneurial ability refers to the ability to organize production and bear risks. Your text does not list this as a separate resource, but instead considers it as a type of labor input. Most other introductory texts, though, list this as a separate resource. (No, your text is not wrong, it just uses a different way of classifying resources. I think it's better, though, to stick with the somewhat more standard classification in this course.)
The resource payment associated with each resource is listed in the table below:
| Economic Resource | Resource Payment |
|---|---|
| land | rent |
| labor | wages |
| capital | interest |
| entrepreneurial ability | profit |
Note that the term "self-interest" means something quite different than "selfish." Self-interested people may donate their time to charitable organizations, give gifts to loved ones, contribute to charities and engage in other similarly altruistic activities. Economists assume, though, that altruistic people select these actions because they find these activities more enjoyable than available alternative activities.
As a social science, economics attempts to rely on the scientific method. The scientific method consists of the following steps:
Note that tests of a model can never prove that a model is true. A single test, however, may be used to establish that a model is incorrect.
Economists rely on the ceteris paribus assumption in constructing models. This assumption, translated roughly as "other things constant," allows economists to simplify reality so that it may be more readily understood.
Similarly, one would commit the fallacy of composition if one were to claim that, since anyone could increase his or her wealth by stealing from his or her neighbors (assuming no detection), that everyone can become wealthier if everyone steals from their neighbors.
The association as causation fallacy, also known less technically as the post hoc, ergo propter hoc fallacy, occurs if one incorrectly assumes that one event is the cause of another simply because it precedes the other event. The Super Bowl example discussed in your text is a good example of this logical fallacy.
A direct relationship is said to exist between two variables X and Y if an increase in X is always associated with an increase in Y and a decrease in X is associated with a decrease in Y. A graph of such a relationship will be upward sloping, as in the diagram below.
A direct relationship may be linear (as in the diagram above), or it may be nonlinear (as in the diagrams below).
An inverse relationship is said to exist between the variables X and Y if an increase in X is always associated with a decrease in Y and a decrease in X is associated with an increase in Y. A graph of an inverse relationship will be downward sloping.
An inverse relationship may also be either linear or nonlinear (as illustrated below).
A linear relationship possesses a constant slope, defined as:
If an equation can be written in the form: Y = mX + b, then:
m = slope, and
b = y-intercept.