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1 WELCOME TO ECONOMICS

1 What Is Economics, and why is it important?
2 Microeconomics and Macroeconomics.
3 How economists use theories and models to understand economic issues.

Key words: scarcity, resources, macroeconomics, microeconomics, model

Economics is the study of how humans make decisions in the face of scarcity.
These can be individual decisions, family decisions, business decisions or societal
decisions. If you look around carefully, you will see that scarcity is a fact of life.
Scarcity means that human wants for goods, services and resources exceed what is
available. Resources, such as labor, tools, land, and raw materials are necessary to
produce the goods and services we want but they exist in limited supply. Of course,
the ultimate scarce resource is time – everyone, rich or poor, has just 24 hours in the
day to try to acquire the goods they want. At any point in time, there is only a finite
amount of resources available.
Think about all the things you consume: food, shelter, clothing, transportation,
healthcare, and entertainment. How do you acquire those items? You do not produce
them yourself. You buy them. How do you afford the things you buy? You work for
pay. Or if you do not, someone else does on your behalf. Yet most of us never have
enough to buy all the things we want. This is because of scarcity. So how do we solve
it?
Every society, at every level, must make choices about how to use its
resources. Families must decide whether to spend their money on a new car or a
fancy vacation. Towns must choose whether to put more of the budget into police and
fire protection or into the school system. Nations must decide whether to devote more
funds to national defense or to protecting the environment. In most cases, there just
isn’t enough money in the budget to do everything. So why do we not each just
produce all of the things we consume? The simple answer is most of us do not know
how, but that is not the main reason. (When you study economics, you will discover
that the obvious choice is not always the right answer – or at least the complete
answer. Studying economics teaches you to think in a different of way.) Now that we
have gotten an overview on what economics studies, let’s quickly discuss why you
are right to study it. Economics is not primarily a collection of facts to be memorized,
though there are plenty of important concepts to be learned. Instead, economics is
better thought of as a collection of questions to be answered or puzzles to be worked
out. Most important, economics provides the tools to work out those puzzles. If you
have yet to be been bitten by the economics “bug,” there are other reasons why you
should study economics.
Virtually every major problem facing the world today, from global warming to
world poverty, has an economic dimension. If you are going to be part of solving
those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You
need to be able to vote intelligently on budgets, regulations, and laws in general. A
basic understanding of economics makes you a well-rounded thinker. When you read

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