Economics: the Study of How People Use Their Limited Resources - Coursework Example

Introduction Economics is the study of choices and deals directly with the human behavior under certain conditions. Everyone of us make decisions which are one way or other related with the field of economics and we even often do not consciously whether we have made any decision which have economic consequences even. The study of economics is so influential in our everyday affairs that it acts as the very mortar which bonds the different bricks of commerce. The study of economics is largely based on the study of scarce resources and unlimited wants- the mismatching of scarce resource with the unlimited wants create a web of actions which than force every one of us to make choices. The problem is that though our wants and desires are unlimited however means to satisfy them are limited therefore in order to satisfy our needs, we must make choices to rationally utilize our means to achieve our desires. Resources are considered as scarce when it is not sufficient to satisfy any wants and since resources are scarce therefore people must make choices among their desires. It is however, also critical to note that in order to choose one choice, we have to often forgo our other choices too because in our given resources, we may not be to satisfy all our wants and desires. The role of economics emerges at this point because it tells individuals as to how to use our resources to satisfy our wants. This paper will provide comments on whether economics is the study of how people use their unlimited resources to try to satisfy unlimited wants. Resources Resources are the very inputs which are utilized to manufacture and produce goods and services that we want. The resources are also called factors of production as they are used to produce the goods and services that we want. These resources can be broadly categorized into four bigger categories of labour, capital, land and entrepreneurial ability. Labour, as an input, is probably one of the most controversial resources in economics because it comprises of the human effort which is used to produce any good or service. It is important to note that human effort comprises both physical as well as mental efforts. Further, labour as a source of production itself has been driven from time as time is considered as the ultimate raw material of all the time. Time is also critical in the sense that it is limited and one has to accomplish as many tasks as one can under a given time period therefore time must be combined with different other resources specially labour to produce the desired outcomes. Capital is also one of the most important factors of production which basically represents human effort to produce any good or service. Capital comprises of the buildings, equipments, money as well as human skills required to produce any given good or service and comprise of both physical capital and human capital.1 Physical capital consists of the plant, machinery, equipments, and other tools which are basically used to produce any good or service. For example, in order to produce a car, Ford Motors have to first set up manufacturing plant and then it would start manufacturing the cars so that it can meet any demand. Human capital on the other hand comprises of the knowledge and the skills of the people involved in the process of producing any particular good or service. It is also important to understand that the knowledge and skills of human capital also help to improve the efficiency and productivity of the labour. Land is another resource which represents not only the physical land in its more conventional meaning but also comprises of all the nature resources which nature has offered to use. Such natural resources include air, water, minerals, and gases etc which often use for free i.e. without paying for them in monetary terms. Land is often considered as one of the most important resource which is not only limited but also contributes towards other factors of production. For example, a plant has to be fixed on a piece of land on which labour have to perform their skills to produce any good or service. One of the special kinds of the factors of production is called the entrepreneurial ability- the talent and skills required to find ways and means to produce goods and services in most effective and efficient manner. In its more strict sense, entrepreneurial ability is described as the managerial and organizational knowledge and skills combined together with taking risk. Almost all the success stories of today including Microsoft and Ford Motors started just an idea for individuals who were willing to take risks. The above discussion was important from the point of view of the fact that the above resources combined together in different combinations to produce any good or service which satisfy our wants. Since these resources are scarce therefore it is important that these resources are combined in ways which optimize their use and provide maximum benefits to the end user. This is also critical due to the fact that goods and services are produced from these resources which themselves are scarce. A resource, a good or service becomes scarce when the amount an individual desires to consumes exceeds the amount that is available for the consumption at a given price. It is because of this reason that the people or the different economic agents have to make choices between different combinations of the goods and services which provide them maximum utility while remaining in the budget constraint. The above discussion therefore now brings us to discuss the concept of utility to further argue how people use their limited resources to fulfill their unlimited wants. Utility, Indifference Curve and Budget Constraints Utility is the pleasure, satisfaction or need fulfillment that people get from their economic activity” (Nicholson). People often use their preferences in the light of utility which is basically the pleasure and individual drives from consuming any good or service. The concept of utility is one of the most important concepts of how people make rational decisions to fulfill their unlimited wants. Though utility cannot be perfectly measured however, people also often assign imaginary values to utility driven from the consumption of any particular good or service. However, there are certain assumptions which govern the utility and individuals often take them into account subconsciously. One of the critical assumptions underlying utility is the assumption of consistent preferences i.e. while using their limited resources to satisfy the unlimited wants, people often make consistent preferences to drive their utility. For example, if a person is faced with a choice between A & B than a customer has to make a clear preference between A&B and she has to clearly declare either A is preferred over B or B is preferred over A. This is also critical from the point of the view of the completeness of preferences also as the individuals have to clearly state which combination of options is preferred. Further, preferences also need to transitive in nature i.e. if a consumer prefers A over B than she must prefer B over C. (Gravelle and Rees) Based on the concept of utility, an individual also tend to prefer more over less and as such a rational mind while maximizing her utility to satisfy her unlimited wanted under limited resources must therefore prefer more to less. This concept further leads us to the concept of indifference curve which shows “all the combinations of goods or service that provide the same level of utility” (Nicholson). An indifference curve is one of the most important tool which basically depicts the different combinations of goods and services and corresponds to the assumption that more are preferred over less. For example, if a person has to make a choice between pepsi and coke then indifference curve will visually depict all the combinations which a person would be willing to take. As discussed above that in order to prefer one choice over another, we often have to forgo other choice therefore indifference curve also reflects the different combinations which must be forgone in order to avail another combination of goods or services. This also means that the people must have to define the marginal rate of substitution which is basically the rate at which our consumer is willing to forgo one option over an other therefore as our consumer moves down the indifference curve, this rate decreases as consumption of more and more of any good would decrease the utility and our coumsumer will experience a diminishing marginal rate of substitution. (Bowles) Finally, since resources are limited therefore indiviudals have to make a budget in order to allocate the available resources more efficiently. In order to prefer any combination of goods or services on any given indifference curve, a consumer will choose the option which coincides with her budget constraints and at the same time provides maximum utility. Conclusion The point where the indifference curve coincides with the budget constraint curve of the individual is the point where a person satisfies her wants using limited resources. Works Cited 1. Bowles, S. Microeconomics: Behavior, Institutions, and Evolution. Oxford: Princeton University Press. , 2004. 2. Gravelle, H. and R. Rees. Microeconomics,. 3rd. London: Pearson Education, 2004. 3. Nicholson, Walter. Intermediate Economics and its application. Florida: Dryden Press, 2000. Read More