Economics is the study of scarcity—the study of the allocation of scarce
resources to satisfy human wants. People’s material wants, for the most
part, are unlimited. Output, on the other hand, is limited by the state of
technology and the quantity and quality of the economy’s resources.
Thus, the production of each good and service involves a cost. A good is
usually defined as a physical item such as a car or a hamburger, and a service
is something provided to you such as insurance or a haircut.
Scarcity is a fundamental problem for every society. Decisions must
be made regarding what to produce, how to produce it, and for whom to
produce. What to produce involves decisions about the kinds and quantities
of goods and services to produce. How to produce requires decisions
about what techniques to use and how economic resources (or factors of
production) are to be combined in producing output. The economic resources
used to produce goods and services include:
• Land. The economy’s natural resources—such as land, trees,
and minerals.
• Labor. The mental and physical skills of individuals in a society.
• Capital. Goods—such as tools, machines, and factories—used
in production or to facilitate production.
The for whom to produce involves decisions on the distribution of output
among members of a society.