What is Economics?
“Economics” is such a big word that it is hard to believe that it can be understood. First, we will look at the explanation of economics. Next, we will break each word down so we can understand it. After that, we will put all the words together and come up with a definition that we can all understand.
First, economics is the efficient allocation of scarce resources. Don’t panic; we’ll break it down.
Efficient. Efficiency is when you get the most done in the least amount of time. For example, being efficient with homework means that you finish all the assigned math questions in 45 minutes instead of 1 hour. You could take your time and do it in an hour, but if you did everything as fast as you could, even double-checking the problems, you would be done in 45 minutes.
Allocation. Allocation simply means distribution. Teachers distribute test papers during an exam. Parents distribute snacks during a picnic. However, in economics, not everyone gets the same amount. That is why it is called allocation instead of distribution. People are allocated different amounts of whatever is being distributed at the moment.
Scarce. Scarce means “limited,” or “not enough.” Scarce is when a parent buys you and your 3 friends ice cream bars, but accidentally buys only three. There are not enough ice cream bars to go around. This is where allocation comes in—how are you and your friends going to distribute the ice cream bars so that everyone has a fair share? Or, will you promise your friend that you will buy him an ice cream bar the next time you get your allowance?
Resources. Resources are whatever you have that is meant for a specific purpose. For example, in our example for scarce, we talked about a limited amount of ice cream bars. Ice cream bars are meant to be eaten, so they are also resources. For a Popsicle-stick tower, the resources would be Popsicle sticks, glue, string, spray paint, and whatever else you need for the project.
So let’s go through that again. Economics is the efficient allocation of scarce resources. In other words, those who study economics study how to make sure that limited resources reach where they are supposed to be, in the least amount of time.
For example, let’s look at an exam day. What are the limited resources? The test question sets and answering sheets. Where are they supposed to be? With the students, each student has to get one. What is the most efficient way to distribute the papers? It depends on the teacher.
Say each student should get one set of test questions, and three blank answering sheets. If there are 20 students, there should be 20 test question sets, and 60 blank answering sheets. What if there are 20 test question sets, but only 50 blank answering sheets? The teacher will have to efficiently allocate the scarce resources.
She could get back the third sheet of paper from all the students who have them, and then distribute them later to anyone who needs. Or, she could say that anyone who needs an extra sheet of paper during the test just has to raise his or her hand, and a student with extra will pass it. Whatever decision the teacher makes, she is already practicing economics.