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In order to begin our discussion of economics, we need first to understand (1) the concept of scarcity and (2) the two branches of study within economics: microeconomics and macroeconomics. 1. Scarcity
Scarcity, a concept we already implicitly discussed in the introduction to this tutorial, refers to the tension between our limited resources and our unlimited wants and needs. For an individual, resources include time, money, and skill. For a country, limited resources include natural resources, capital, labor force, and technology.
Because all our resources are limited in comparison to all our wants and needs, individuals and nations have to make decisions regarding what goods and services they can buy and which ones they must forgo. For example, if you chose to buy one DVD as opposed to two video tapes, you must give up owning a second movie of inferior technology in exchange for the better-quality of the one DVD. Of course, each individual's and nation's values are different, but people and nations, each having different levels of (scarce) resources, form some of their values only because they must deal with the problem of scarcity.
So because of scarcity, people and economies must make decisions over how to allocate their resources. Economics, in turn, aims to study why we make these decisions and how we allocate our resources most efficiently.
2. Macro and Microeconomics
Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor, and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an "invisible hand" turning the wheels of the economy, a market force that keeps the economy functioning.
Microeconomics looks into similar issues but on the level of the individual people and firms within the economy. It tends to be more scientific in its approach, and studies the parts that make up the whole economy. Analyzing certain aspects of human behavior, microeconomics shows us how individuals and firms respond to changes in price and why they demand what they do at particular price levels.
Micro and macroeconomics are intertwined, so as economists gain understanding of certain phenomena, they can help nations and individuals make more-informed decisions when allocating resources. The systems by which nations allocate their resources can be placed on a spectrum where the command economy is on the one end and market economy is on the other. The market economy advocates forces within a competitive market, which constitute the “invisible hand,” to determine how resources should be allocated. The command economic system relies on the government to decide how the country's resources would best be allocated. In both systems, however, scarcity and unlimited wants force governments and individuals to decide how best to manage resources and allocate them in the most efficient way possible. However, there are always limits to what the economy and government can do.
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