Economics starts from a plain fact: people want more than the world can make. Hours in the day, farmland, workers, machines and oil are all limited, while new wants appear as soon as old ones are met. That gap between wants and resources is called scarcity. It is the reason every person, family, business and country has to choose.
Key idea
Scarcity means wants are greater than the resources available to satisfy them. Economists sort resources into four factors of production: land (every natural resource), labor (human effort and skill), capital (tools, machines and buildings made to produce other things) and entrepreneurship (organizing the other three and taking the risk of a new venture).
Why it works
Scarcity is a gap, not poverty. A billionaire still has 24 hours in a day and must choose how to spend them; a rich country still has to decide whether a hillside becomes a park or a housing development. Because each resource has other possible uses, putting it to one use means it is not available for another. That is why scarcity forces choices, and why the next idea in this course, the cost of a choice, follows from it.
Worked example: The resources behind a slice of pizza
A pizza shop uses flour from wheat, a pizza oven, two cooks, the owner who started the shop and plans the menu, and the land the shop stands on. Sort these into the four factors of production.
- Natural resources are land: the plot the shop stands on, and the wheat field the flour came from.
- Human work is labor: the two cooks.
- Things made to produce other things are capital: the oven (and the shop's building, counters and mixers).
- The person who brings it all together and takes the risk is the entrepreneur: the owner.
Answer: Land: the plot and the wheat field. Labor: the cooks. Capital: the oven. Entrepreneurship: the owner.
Common mistake
Calling money "capital." In everyday talk, a business's money in the bank is its capital. In economics, capital means the physical tools, machines and buildings used to make goods and services. Money buys resources, but money itself doesn't bake a pizza. A second mix-up: scarcity is not the same as a shortage or as poverty. A shortage happens in one market at one price; scarcity is always present, even for the richest society. Quick check: ask "could this thing be used to produce something?" A van, yes; a bank balance, no.
You'll also meet the term human capital: the knowledge and skills workers gain from schooling, training and experience. It makes labor more productive. In the four-factor list it belongs with labor, because it lives in the worker.