Economic Principles FAQ

What exactly is scarcity?

Scarcity refers to the fact that every person, society, and nation faces a set of limitations—and, consequently, they have to make choices.

What is a trade-off?

A trade-off is what occurs when we make a choice. When we sacrifice own thing to obtain another, it is called a “trade-off.” When we only have enough money to buy either a bicycle or a snowboard, there is a trade-off.

What is an opportunity cost?

An opportunity cost is what economists call the thing sacrificed when we choose one thing over another. When we opt to buy a bicycle rather than the snowboard, the snowboard is the opportunity cost of our decision.

Do even wealthy people and wealthy nations have to deal with scarcity and accept trade-offs?

Sure. A rich person might have plenty of money but not very much time. A wealthy nation might have lots of bauxite not very much oil. Every person and every nation has to deal with limitations because every person and nation has limited resources.

By resources, do you mean natural resources like oil and water?

Actually, economists use the term resources to refer to a more comprehensive list of things that we possess in limited supply and must decide how to use. For example, money is a resource, so is time. Most commonly, economists identify five resources, or “factors of productions,” that are needed to produce goods and services—land, labor, capital, technology, and entrepreneurship.

What do economists mean when they refer to land as a factor of production?

Land refers to all natural resources, such as water, game, timber, and minerals.

What do economists mean when they refer to labor as a factor of production?

Labor is the term economists use to refer to the work or human effort invested in the production of a good or service.

What do economists mean when they refer to capital as a factor of production?

Capital refers not just to money, but all types of property, such as machinery and tools, used in producing a good or service.

What do economists mean when they refer to technology as a factor of production?

This refers to the body of knowledge or science that informs or improves a production process.

What do economists mean when they refer to entrepreneurship as a factor of production?

This is one of the human inputs in the production process. The term refers to the creativity and initiative involved in starting a business or developing new production or distribution processes.

How do economists track our success in managing our resources?

They compile a long list of statistics in order to measure how effectively an individual, business, or nation manages their resources.

What are some of the more common statistics used to measure a nation’s economy?

National income and Gross Domestic Product or GDP.

What is measured in the national income?

This is the total income from all sources earned in a nation over specified period of time.

What is measure in the GDP?

This is the total market value of all goods and service produced within a country during a specified period.

If a nation’s national income and GDP increase does that mean that the nation’s people are doing better economically?

It might. But to get a more complete reading economists also like to measure the personal distribution of income. This tells them what share of the nation’s wealth is owned by various sectors of the economy.