Economics is a subject that gives a scientific
explanation of how individuals, households, organizations and nations attempt to
satisfy their unlimited wants in a world of limited resources. The versatility
of the subject is seen in its application to virtually all spheres of human
Endeavour. All activities of mankind can be explained in terms of the
satisfaction of some by the use of some resources. The student that seeks to
obtain a degree in a chosen profession; the household that seeks to judiciously
utilize its income food, housing, savings and durables; the firm that is
deciding on the production of one good or the other or what level of output to
produce given its resources; the nation that seeks to maximize the income and
welfare of its citizens or grapple with the problem of fuel scarcity; the world
power that moves in the defense of an rich nation or the international system
attempting to solve the problem of global poverty, or worse still be the
acquisition of nuclear and chemical weapons,. All these actors are all directly
or indirectly practicing economics.
explanation of how individuals, households, organizations and nations attempt to
satisfy their unlimited wants in a world of limited resources. The versatility
of the subject is seen in its application to virtually all spheres of human
Endeavour. All activities of mankind can be explained in terms of the
satisfaction of some by the use of some resources. The student that seeks to
obtain a degree in a chosen profession; the household that seeks to judiciously
utilize its income food, housing, savings and durables; the firm that is
deciding on the production of one good or the other or what level of output to
produce given its resources; the nation that seeks to maximize the income and
welfare of its citizens or grapple with the problem of fuel scarcity; the world
power that moves in the defense of an rich nation or the international system
attempting to solve the problem of global poverty, or worse still be the
acquisition of nuclear and chemical weapons,. All these actors are all directly
or indirectly practicing economics.
The knowledge of economics help us to know how these
agents attempt to satisfy their needs with available resources, how decisions
are made in a world of scarcity by consideration of the benefit and cost of a
particular action. In short, economics is a finite science that teaches us how
man goes about making a living in a world of finite opportunities. It is a
science that teaches us how to do the best with what we have. A simple and
widely accepted definition of economics is that given by Lionel Robins. He
defined economics as “the science, which studies human behavior as a
relationship between ends and scare means which have alternative uses.” This
definition brings out some key concepts that must be understood in the study of
economics. We shall discuss them in turn.
agents attempt to satisfy their needs with available resources, how decisions
are made in a world of scarcity by consideration of the benefit and cost of a
particular action. In short, economics is a finite science that teaches us how
man goes about making a living in a world of finite opportunities. It is a
science that teaches us how to do the best with what we have. A simple and
widely accepted definition of economics is that given by Lionel Robins. He
defined economics as “the science, which studies human behavior as a
relationship between ends and scare means which have alternative uses.” This
definition brings out some key concepts that must be understood in the study of
economics. We shall discuss them in turn.
Human
behavior
behavior
Economics studies behavior. It seeks to explain
scientifically the behavior of man in his attempt to satisfy his needs, the
motive that guides him in the utilization of his resources and how he can get
the best out of such resource utilization. Hence economics is a social and not
a physical science.
scientifically the behavior of man in his attempt to satisfy his needs, the
motive that guides him in the utilization of his resources and how he can get
the best out of such resource utilization. Hence economics is a social and not
a physical science.
Unlimited
ends (wants)
ends (wants)
Human wants are unlimited. An individual would
basically seek to meet his need of food, shelter, health and education. These
are normally called the basic human needs (BHN). In other words, they are
“necessities.” However, beyond these are man’s numerous wants, his desires for
luxuries. The natural man is inherently insatiable. If possible, he would
acquire all things, even the highest possible leisure. Neither his desire for
material things nor his want of intangible goods such as leisure can be
satisfied. In fact, man is plagued with wants and material wants (fuelled by
innovations, technological advancement, introduction of new products and mind-
boggling advertisements) have a high reproduction rate.
basically seek to meet his need of food, shelter, health and education. These
are normally called the basic human needs (BHN). In other words, they are
“necessities.” However, beyond these are man’s numerous wants, his desires for
luxuries. The natural man is inherently insatiable. If possible, he would
acquire all things, even the highest possible leisure. Neither his desire for
material things nor his want of intangible goods such as leisure can be
satisfied. In fact, man is plagued with wants and material wants (fuelled by
innovations, technological advancement, introduction of new products and mind-
boggling advertisements) have a high reproduction rate.
The same applies to nations. No nation is ever
satisfied with its level of wealth to the extent of not wanting to have more.
Indeed, all nations consider their survival tied to a continuous and growing
acquisition of wealth together with economic, political and military might. The
rich seeks to get richer and the poor nations desire to break loose from the
shackles of lack. Man’s wants are rightly said to be unlimited and as we shall
see, unlimited wants in the face of limited resources is the fundamental
problem in the study of economics.
satisfied with its level of wealth to the extent of not wanting to have more.
Indeed, all nations consider their survival tied to a continuous and growing
acquisition of wealth together with economic, political and military might. The
rich seeks to get richer and the poor nations desire to break loose from the
shackles of lack. Man’s wants are rightly said to be unlimited and as we shall
see, unlimited wants in the face of limited resources is the fundamental
problem in the study of economics.
Resources
(means)
(means)
Resources are the means by which wants are met.
It is by the combination of resources that goods and services are produced to
satisfy human needs (or wants). From the standpoint of a society, resources are
normally classified into three: natural resources, human resources and capital
resources. Natural resources are those resources endowed the society by nature.
They include land, mineral resources, water resources and forestry etc.
It is by the combination of resources that goods and services are produced to
satisfy human needs (or wants). From the standpoint of a society, resources are
normally classified into three: natural resources, human resources and capital
resources. Natural resources are those resources endowed the society by nature.
They include land, mineral resources, water resources and forestry etc.
In a strict sense, the natural resources of a
society are those of these endowments that have been identified for productive
use. In other words, something does not become a natural resource until it has
been identified not only as existing but also as capable of satisfying a given
want. Until the discovery of crude petroleum in Nigeria and the use to which it
could be put, for example, that natural endowment, through existing was not a
resource to the nation.
society are those of these endowments that have been identified for productive
use. In other words, something does not become a natural resource until it has
been identified not only as existing but also as capable of satisfying a given
want. Until the discovery of crude petroleum in Nigeria and the use to which it
could be put, for example, that natural endowment, through existing was not a
resource to the nation.
Human resources are usually called labor. This
is the physical and mental ability that humans contribute to the production
process. Often in economics we talk of human capital. This is the ability of
labor to be productive, and is determined by the level of education and state
of health of society’s population. Hence, human capital can be viewed in terms
of the accumulation of past investment in education, training and health that
raise the productive capacity of the people.
is the physical and mental ability that humans contribute to the production
process. Often in economics we talk of human capital. This is the ability of
labor to be productive, and is determined by the level of education and state
of health of society’s population. Hence, human capital can be viewed in terms
of the accumulation of past investment in education, training and health that
raise the productive capacity of the people.
Capital resources are the stock of man made
goods possessed by a society that can be used to produce other goods and
services. Examples are machinery equipment and buildings. The quantity of all
the above resources possessed by an individual or society determine what level
of output that can be produced and to what extent the individual or society can
satisfy his wants. Hence, the stock of resources represents the wealth of an
individual or a society.
goods possessed by a society that can be used to produce other goods and
services. Examples are machinery equipment and buildings. The quantity of all
the above resources possessed by an individual or society determine what level
of output that can be produced and to what extent the individual or society can
satisfy his wants. Hence, the stock of resources represents the wealth of an
individual or a society.
Scarcity
In economics, resources (the means of satisfying
man’s wants) is said to be scarce, hence, the phrase the law of scarcity. The scarcity
of resources is a crucial factor in economics and needs to be understood
clearly. The scarcity of a good (resource) is not defined in relation to the
quantity available merely but rather in relation to the demand for it. A
society may have only five units of a good for example, but if the society is
the only user of the commodity and needs (uses) only one unit, then the good
cannot be said to be scarce even though only five units are available. Again,
it will be impossible for the good to command a high price because what is
available is far beyond what is needed (i.e. even if the good were to be free,
only one unit can be used by the society). If it would command a price at all,
the price would be low. At the extreme, the price may tend to towards zero.
man’s wants) is said to be scarce, hence, the phrase the law of scarcity. The scarcity
of resources is a crucial factor in economics and needs to be understood
clearly. The scarcity of a good (resource) is not defined in relation to the
quantity available merely but rather in relation to the demand for it. A
society may have only five units of a good for example, but if the society is
the only user of the commodity and needs (uses) only one unit, then the good
cannot be said to be scarce even though only five units are available. Again,
it will be impossible for the good to command a high price because what is
available is far beyond what is needed (i.e. even if the good were to be free,
only one unit can be used by the society). If it would command a price at all,
the price would be low. At the extreme, the price may tend to towards zero.
Now assume the quantity desired by the society
is hundred units and there are fifty units available. Even though the quantity
available in this latter case is greater than the former, yet unlike in the
former case, the commodity is scarce. Hence it would command a price and high
one for that matter (because what is available is less than what the society
wants). The above illustrative examples bring us to an important observation in
economics: resources (goods) have prices because they are scarce. A free good
(one which the quantity available is greater than what is required) would
command no price.
is hundred units and there are fifty units available. Even though the quantity
available in this latter case is greater than the former, yet unlike in the
former case, the commodity is scarce. Hence it would command a price and high
one for that matter (because what is available is less than what the society
wants). The above illustrative examples bring us to an important observation in
economics: resources (goods) have prices because they are scarce. A free good
(one which the quantity available is greater than what is required) would
command no price.
An example of a free good is air. Air is
naturally provided and infinite in supply. However, only a fixed quantity is
required by the individual for survival. Apart from air however, there is
hardly any free good in our world. Free goods are not economic goods. Only
goods that are scarce and have prices are economic goods. Even air in its pure
form is fast becoming a scarce resource. In general, because man’s wants are
unlimited and resources are limited in supply, all goods are scarce and hence
have prices. The price of a good is a reflection of its scarcity value. A good
that is scarcer than the other will command a higher price. Scarcity is a
fundamental fact of life even in the affluent society.’ If resources were
unlimited and man’s limited, then there would have been not need to study
economics, since there would be no economizing problem. Scarcity of resources
in the face of unlimited wants is therefore at the foundation of economics.
naturally provided and infinite in supply. However, only a fixed quantity is
required by the individual for survival. Apart from air however, there is
hardly any free good in our world. Free goods are not economic goods. Only
goods that are scarce and have prices are economic goods. Even air in its pure
form is fast becoming a scarce resource. In general, because man’s wants are
unlimited and resources are limited in supply, all goods are scarce and hence
have prices. The price of a good is a reflection of its scarcity value. A good
that is scarcer than the other will command a higher price. Scarcity is a
fundamental fact of life even in the affluent society.’ If resources were
unlimited and man’s limited, then there would have been not need to study
economics, since there would be no economizing problem. Scarcity of resources
in the face of unlimited wants is therefore at the foundation of economics.
Alternative
uses
uses
Resources are not only scarce, but also capable
of different uses. A piece of land can be used to rise up a residential
building or an office factory or for crop or fish farming. Labor and capital
can be used to produce consumer goods like food, consumer durables such as
pleasure cars, stereo, TV’s or to increase the capital stock through the
production of capital goods. Again, in producing a commodity, a society may
decide to use more of a resource (e.g. labor) and less of another (e.g.
capital), or vice versa.
of different uses. A piece of land can be used to rise up a residential
building or an office factory or for crop or fish farming. Labor and capital
can be used to produce consumer goods like food, consumer durables such as
pleasure cars, stereo, TV’s or to increase the capital stock through the
production of capital goods. Again, in producing a commodity, a society may
decide to use more of a resource (e.g. labor) and less of another (e.g.
capital), or vice versa.
At the household level, the typical household
can spend its limited income in a variety of ways: on consumption or savings,
on education or social ceremonies. The presence of alternative uses for scarce
resources compounds the economic problem as the individual (household, firm or
nation) would now have to decide how best to utilize his resource among
competing ends.
can spend its limited income in a variety of ways: on consumption or savings,
on education or social ceremonies. The presence of alternative uses for scarce
resources compounds the economic problem as the individual (household, firm or
nation) would now have to decide how best to utilize his resource among
competing ends.
Economic
choice
choice
Since human wants are unlimited and the means of
satisfying them are limited, man is constrained to make choices not only in
relation to which want to satisfy but also on how resources are to be applied
to satisfy the want. Economic choice (decision –making) permeate all aspects of
human existence. Every day, man faces the issue of economic choice. The
individual will have to choose between going for higher education or joining
the labor force after completion of junior or senior secondary, whether to
spend on a burial ceremony or to use the money to start business etc. the
student will have to choose between studying law and engineering, buying a textbook
or spending more on clothing, spending more hours on study or enjoying more of
leisure etc. Similarly, the household must make a choice between having an
additional child and concentrating resources on the development of existing
members, spending more on clothing or on the acquisition of physical assets,
building a house or buying an additional care etc. Much the same way, a nation
is often faced with choosing between spending more on the education of its
citizens or on defense, producing more of capital goods or of consumption
goods, spending on direct production of goods or on social services etc. Often,
economic agents (individuals, households, firms and nations) make the choices
in a systematic (or scientific) manner rather than erratically. In general, the
agent will consider all his wants and try to determine which of them is most desirable
(i.e. which will bring the highest level of satisfaction or fulfillment at the
present time).
satisfying them are limited, man is constrained to make choices not only in
relation to which want to satisfy but also on how resources are to be applied
to satisfy the want. Economic choice (decision –making) permeate all aspects of
human existence. Every day, man faces the issue of economic choice. The
individual will have to choose between going for higher education or joining
the labor force after completion of junior or senior secondary, whether to
spend on a burial ceremony or to use the money to start business etc. the
student will have to choose between studying law and engineering, buying a textbook
or spending more on clothing, spending more hours on study or enjoying more of
leisure etc. Similarly, the household must make a choice between having an
additional child and concentrating resources on the development of existing
members, spending more on clothing or on the acquisition of physical assets,
building a house or buying an additional care etc. Much the same way, a nation
is often faced with choosing between spending more on the education of its
citizens or on defense, producing more of capital goods or of consumption
goods, spending on direct production of goods or on social services etc. Often,
economic agents (individuals, households, firms and nations) make the choices
in a systematic (or scientific) manner rather than erratically. In general, the
agent will consider all his wants and try to determine which of them is most desirable
(i.e. which will bring the highest level of satisfaction or fulfillment at the
present time).
He will then proceed to arrange his wants in the
order of preference. Hence, a scale of preference (a sequential arrangement of
wants in the order of preference) may be drawn. Figure 1-1 present hypothetical
scales of preferences for a student, a household and a nation.
order of preference. Hence, a scale of preference (a sequential arrangement of
wants in the order of preference) may be drawn. Figure 1-1 present hypothetical
scales of preferences for a student, a household and a nation.
Opportunity
cost
cost
Opportunity cost is a concept used in economics
to measure the real cost of a particular line of resource utilization. Given
the student’s preference scale (panel 1 of fig. 1-1) for example, assume that
he has an income ofN500 and the prices
of a textbook and a pair of shoes isN400
respectively. Obviously, the limited income of the student does not permit him
to consume the two goods even though both are desirable. Since the scale of
preference reveals that the student ranks books above shoes, he will buy the
textbook and forget about the pair of shoes for the present time. The explicit
cost of the textbook isN250, but the
opportunity cost to the student is the pair of shoes that was not bought (i.e.
the benefits that would have been derived from the pair of shoes).
to measure the real cost of a particular line of resource utilization. Given
the student’s preference scale (panel 1 of fig. 1-1) for example, assume that
he has an income of
of a textbook and a pair of shoes is
respectively. Obviously, the limited income of the student does not permit him
to consume the two goods even though both are desirable. Since the scale of
preference reveals that the student ranks books above shoes, he will buy the
textbook and forget about the pair of shoes for the present time. The explicit
cost of the textbook is
opportunity cost to the student is the pair of shoes that was not bought (i.e.
the benefits that would have been derived from the pair of shoes).
Similarly, the opportunity cost of traveling
(the fourth item on its scale of preference) to the student is the charity
foregoing. Hence, we can define opportunity cost as the next best or most
desirable alternative that was foregone in order to utilize resources along a
particular line. To the consumer it is the satisfaction that would have been
derived from the alternative good that was not bought. To the businessman, it
is gain from the alternative business that was not entered into. For the
nation, it is the benefit the society would have derived from the alternative
good/services that was not produced.
(the fourth item on its scale of preference) to the student is the charity
foregoing. Hence, we can define opportunity cost as the next best or most
desirable alternative that was foregone in order to utilize resources along a
particular line. To the consumer it is the satisfaction that would have been
derived from the alternative good that was not bought. To the businessman, it
is gain from the alternative business that was not entered into. For the
nation, it is the benefit the society would have derived from the alternative
good/services that was not produced.
Figure 1-1 Hypothetical scales of preference for
a student, an household and a nation (society).
a student, an household and a nation (society).
Economic agents often make their choices in
systematic manners. Either in the mind, or on paper, a scale of preference is
usually drawn or resources are mobilized to satisfy human wants according to
the order revealed in the scale of preference. A student may consider
purchasing course textbooks of higher priority than buying shoes or spending
frivolously on in-between-food drinks and snacks. A typical household may
consider food of more importance than clothing or having a car or a house of
one’s own. Similarly, a nation may accord to food security a higher priority
than military defense etc.
systematic manners. Either in the mind, or on paper, a scale of preference is
usually drawn or resources are mobilized to satisfy human wants according to
the order revealed in the scale of preference. A student may consider
purchasing course textbooks of higher priority than buying shoes or spending
frivolously on in-between-food drinks and snacks. A typical household may
consider food of more importance than clothing or having a car or a house of
one’s own. Similarly, a nation may accord to food security a higher priority
than military defense etc.
It is clear from the foregoing that the study of
economics provides us with a framework for analyzing solution to each economic
problem. This framework (which is the economic way of thinking or the economic
perspective) reveals three inter- related features: scarcity and choice,
rational behavior and marginalize. We reiterate by looking more closely at
these features.
economics provides us with a framework for analyzing solution to each economic
problem. This framework (which is the economic way of thinking or the economic
perspective) reveals three inter- related features: scarcity and choice,
rational behavior and marginalize. We reiterate by looking more closely at
these features.
Scarcity and
choice
choice
As earlier pointed, scarcity is at the root of economics.
In other words, economists view the world through the lens of scarcity.
Resources are scarce and so are the goods and services that can be produced
with them. No commodity or service is free in the economic sense. A society may
enjoy free education of its citizens, or free health services, but such
services are provided at some costs to government, and hence to society, and
the resources used in their provision could have been used to produce other
goods and services.
In other words, economists view the world through the lens of scarcity.
Resources are scarce and so are the goods and services that can be produced
with them. No commodity or service is free in the economic sense. A society may
enjoy free education of its citizens, or free health services, but such
services are provided at some costs to government, and hence to society, and
the resources used in their provision could have been used to produce other
goods and services.
Scarcity of resources makes it mandatory for
economic agents to make intelligent choice in all matters of decision-making, a
choice that weight every decision every output in terms of its opportunity
cost.
economic agents to make intelligent choice in all matters of decision-making, a
choice that weight every decision every output in terms of its opportunity
cost.
Rational
Behavior
Behavior
Economic agents are assumed to act rationally in
the employment of their limited resources. The individual, household and
society, are all assumed to pursue their “self –interest” by allocating their
resources in a way that will yield the maximum benefits to them. There is a
difference of course, between rational self-interest and selfishness. Rational
self-interest seeks to get the best for oneself from utilizing any given
resources. But the maximum satisfaction may come from using the resources for
the improvement of others.
the employment of their limited resources. The individual, household and
society, are all assumed to pursue their “self –interest” by allocating their
resources in a way that will yield the maximum benefits to them. There is a
difference of course, between rational self-interest and selfishness. Rational
self-interest seeks to get the best for oneself from utilizing any given
resources. But the maximum satisfaction may come from using the resources for
the improvement of others.
Consider a millionaire who desires to invest a
certain sum of money in the development of his locality. Such will be faced
with a wide range of choices and will have to choose the course of action that
will best satisfy his desire. Rational behavior does not mean that two
individuals (households or societies) will make the same choice when faced with
the same alternatives and even the same amount of resources. This is because
the preferences, circumstances and information available to individuals differ.
certain sum of money in the development of his locality. Such will be faced
with a wide range of choices and will have to choose the course of action that
will best satisfy his desire. Rational behavior does not mean that two
individuals (households or societies) will make the same choice when faced with
the same alternatives and even the same amount of resources. This is because
the preferences, circumstances and information available to individuals differ.
But it does mean that given these factors, the
individual will make a choice that will yield him the greatest satisfaction, by
consideration of his family background, available resources and mental
abilities. Bode may decide to work rather than go to higher institution. But
David may choose otherwise. Again, rational decisions change with changes in
circumstances.
individual will make a choice that will yield him the greatest satisfaction, by
consideration of his family background, available resources and mental
abilities. Bode may decide to work rather than go to higher institution. But
David may choose otherwise. Again, rational decisions change with changes in
circumstances.
Marginalize
This concept is derived from the word “margin”
which means “extra” additional or change in. quite often, decision-making or
economic choice involves a change in the status quo. In economics, it is
assumed that an individual (household or society) will normally compare the
marginal benefit to be derived from a given choice to the marginal cost and
will only take a course of action when the marginal benefit to be derived is
greater, or at least equal, to the marginal cost. This, of course, flows from
the assumption of rational self-interest.
which means “extra” additional or change in. quite often, decision-making or
economic choice involves a change in the status quo. In economics, it is
assumed that an individual (household or society) will normally compare the
marginal benefit to be derived from a given choice to the marginal cost and
will only take a course of action when the marginal benefit to be derived is
greater, or at least equal, to the marginal cost. This, of course, flows from
the assumption of rational self-interest.
Marginalism not only teaches us to compare
additional benefits with costs, but also shows us that there can be too much of
a good thing. When we keep having more and more of a particular good, we come
to a point where the marginal cost of having an additional unit exceeds the
benefits to be derived.
additional benefits with costs, but also shows us that there can be too much of
a good thing. When we keep having more and more of a particular good, we come
to a point where the marginal cost of having an additional unit exceeds the
benefits to be derived.
