WHAT IS WHAT ARE THESE SCARCE PRODUCTIVE

RESOURCES?

ECONOMICS? Productive resources, sometimes called

factors of production or productive
ECONOMICS is the study of how individuals inputs, are classified into one of four
and societies make choices subject to broad categories: land, labor, capital, and
constraints. The need to make choices entrepreneurial ability.
arises from scarcity. From the Land generally refers to all natural
perspective of society as a whole,
resources. Included in this category are
scarcity refers to the limitations placed
wildlife, minerals, timber, water, air, oil
on the production of goods and services
and gas deposits, arable land, and
because factors of production are finite.
mountain scenery.
From the perspective of the individual,
scarcity refers to the limitations on the
Labor refers to the physical and
consumption of goods and services
intellectual abilities of people to produce
because of limited of personal income
goods and services. Of course, not all
and wealth.
workers are the same; that is, labor is not
homogeneous. Different individuals have
Definition: Economics is the study of how
different physical and intellectual
individuals and societies choose to utilize
attributes. These differences may be
scarce resources to satisfy virtually
inherent, or they may be acquired
unlimited wants.
through education and training. Although
the Declaration of Independence
Definition: Scarcity describes the
proclaims that everyone has certain
condition in which the availability of
unalienable rights, in an economic sense
resources is insufficient to satisfy the
all people are not created equal. Thus,
wants and needs of individuals and
some people will become fashion models,
society.
professional athletes, or college
professors; others will work as
The concepts of scarcity and choice are
clergymen, cooks, police officers, bus
central to the discipline of economics.
drivers, and so forth. Differences in
Because of scarcity, whenever the
human talents and abilities in large
decision is made to follow one course of
measure explain why some individuals'
action, a simultaneous decision is made
labor services are richly rewarded in the
to forgo some other course of action.
market and others, despite their noble
Thus, any action requires a sacrifice.
calling, such as many public school
There is another common admonition
teachers, are less well compensated.
that also underscores the all pervasive
concept of scarcity: if an offer seems too Capital refers to manufactured
good to be true, then it probably is. commodities that are used to produce
goods and services for final consumption.
Individuals and societies cannot have Machinery, office buildings, equipment,
everything that is desired because most warehouse space, tools, roads, bridges,
goods and services must be produced research and development, factories, and
with scarce productive resources. so forth are all a part of a nation's capital
Because productive resources are scarce, stock. Economic capital is different from
the amounts of goods and services financial capital, which refers to such
produced from these ingredients must things as stocks, bonds, certificates of
also be finite in supply. The concept of deposits, savings accounts, and cash. It
scarcity is summarized in the economic should be noted. however, that financial
admonition that capital is typically used to finance a
firm's acquisition of economic capital.
there is no "free lunch." Goods, services,
Thus, there is an obvious linkage
and productive resources that are scarce
between an investor's return on
have a positive price. Positive prices
economic capital and the financial asset
reflect the competitive interplay between
used to underwrite it.
the supply of and demand for scarce
resources and commodities. A In market economies, almost all income
commodity with a positive price is generated from productive activity is
referred to as an economic good. returned to the owners of factors of
Commodities that have a zero price production. In politically and
because they are relatively unlimited in economically free societies, the owners
supply are called free goods.! of the factors of production are
collectively referred to as the household
sector. Businesses or firms, on the
 decision is made to forgo some other
course of action. When a high school
graduate decides to attend college or
Is air a free good? Many students would university, a simultaneous decision is
assert that it is, but what is the price of a made to forgo entering the work force
clean environment? Inhabitants of most and earning an income. Scarcity
advanced industrialized societies have necessitates trade-offs. That which is
decided that a cleaner environment is a forgone whenever a choice is made is
socially desirable objective. referred to by economists as opportunity
Environmental regulations to control the cost. That which is sacrificed when a
disposal of industrial waste and higher choice is made is the next best
taxes to finance publicly mandated alternative. It is the path that we would
environmental pro3742tection programs, have taken had our actual choice not
which are passed along to the consumer been open to us. Definition: Opportunity
in the form of higher product prices. cost is the highest valued alternative
make it clear that clean air and clean forgone whenever a choice is made.
water are not free.

other hand, are fundamentally activities,

and as such have no independent source MACROECONOMICS VERSUS MICROECONOMICS
of income. That activity is to transform
inputs into outputs. Even firm owners are Scarcity, and the manner in which
members of the household sector. individuals and society make choices. are
Financial capital is the vehicle by which fundamental to the study of economics.
business acquire economic capital from To examine these important issues, the
the household sector. Businesses field of economics is divided into two
accomplish this by issuing equity shares broad subfields: macroeconomics and
and bonds and by bor rowing from microeconomics.
financial intermediaries, such as
commercial banks, savings banks, and As the name implies, macroeconomics
insurance companies. looks at the big picture. Macroeconomics
is the study of entire economies and
Entrepreneurial ability refers to the ability to economic systems and specifically
recognize profitable opportunities, and considers such broad economic
the willingness and ability to assume the aggregates as gross domestic product,
risk associated with marshaling and economic growth, national income,
organizing land, labor, and capital to employment, unemployment, inflation,
produce the goods and services that are and international trade. In general, the
most in demand by consumers. People topics covered in macroeconomics are
who exhibit this ability are called concerned with the economic
entrepreneurs. environment within which firm managers
operate. For the most part,
In market economies, the value of land, macroeconomics focuses on the variables
labor, and capital is directly determined over which the managerial decision
through the interaction of supply and maker has little or no control but may be
demand. This is not the case for of considerable importance in the making
entrepreneurial ability. The return to the of economic decisions at the micro level
entrepreneur is called profit. Profit is of the individual, firm, or industry.
defined as the difference between total
Definition: Macroeconomics is the study
revenue earned from the production and
of aggregate economic behavior.
sale of a good or service and the total
Macroeconomists are concerned with
cost associated with producing that good
such issues as national income,
or service. Although profit is indirectly
employment, inflation, national output,
determined by the interplay of supply
economic growth, interest rates, and
and demand, it is convenient to view the
international trade.
return to the entrepreneur as a residual.

OPPORTUNITY COST
By contrast, microeconomics is the study
of the behavior and interaction of
The concepts of scarcity and choice are individual economic agents. These
central to the discipline of eco nomics. economic agents represent individual
These concepts are used to explain the firms, consumers, and governments.
behavior of both producers and Microeconomics deals with such topics as
consumers. It is important to understand, profit maximization, utility maximization,
however, that in the face of scarcity revenue or sales maximization,
whenever the decision is made to follow production efficiency, market structure,
one course of action, a simultaneous capital budgeting, environmental
protection, and governmental regulation.
Definition: Microeconomics is the study of
individual economic behavior.
Microeconomists are concerned with
output and input markets, product
pricing, input utilization, production
costs, market structure, capital
budgeting, profit maximization,
production technology, and so on.
WHAT IS MANAGERIAL ECONOMICS?

Managerial economics is the application

of economic theory and quantitative
methods (mathematics and statistics) to
the managerial decision-making process.
Simply stated, managerial economics is
applied microeconomics with special
emphasis on those topics of greatest
interest and importance to managers.
The role of managerial economics in the
decision-making process is illustrated in
Figure 1.1.

Definition: Managerial economics is the

synthesis of microeconomic theory and
quantitative methods to find optimal
solutions to managerial decision-making
problems.

To illustrate the scope of managerial

economics, consider the case the owner
of a company that produces a product.
The manner in which the firm owner goes
about his or her business will depend on
the company's organizational objectives.
Is the firm owner a profit maximizer, or is
management more concerned something
else, such as maximizing the company's
market share? What specific conditions
must be satisfied to optimally achieve
these objectives? Economic theory
attempts to identify the conditions that
need to be satisfied to achieve optimal
solutions to these and other
management decision problems.

As we will see, if the company's

organizational objective is profit
maximization then, according to

economic theory, the firm should

continue to produce widgets up to the
point at which the additional cost of
producing