1.2 Defining Economics

The people we share our lives with are all different—different shapes, different colors, different goals, different dreams. Despite those differences, we all share two important things. First among them is that we all desire things we don’t currently have. Sometimes those things are material: reliable transportation, nicer clothes, sufficient food. Sometimes those things are intangible: a loving relationship, more charisma, the athletic ability of Lebron James, a summer internship. Whether we like it or not, this fundamental desire for more is part of the human condition, present from the minute we’re born—“It was warm and safe in there; it’s cold and scary out here! Put me back!” Nobody—not you, not me, not even billionaires like Jeff Bezos and Warren Buffet—has everything they want.

And why not? Because the things we want don’t materialize out of thin air! It takes what economists call resources to produce them: raw materials, land, workers, machinery, and energy are just a few examples. If our resources were unlimited, we could say “Yes!” to each of our wants—and there would be no reason to study economics. The problem, of course, is that at any given time, there is only so much land, so many tractors, so many workers. That’s the second thing that everybody, rich and poor alike, shares: We all have limited resources—even the mega-rich, who get exactly the same 24 hours to binge-watch Tiger King and work on their jump shots as the rest of us. And because of those limitations, saying yes to one thing generally means that we have to say no to another. Whether we like it or not, we must make choices.

Our unlimited wants are continually colliding with the limits of our resources. That intersection—trying to meet unlimited wants with limited resources—reflects what economists call scarcityA condition in which people attempt to meet unlimited wants with limited resources.. It’s scarcity that forces us to pick some activities and to reject others.

A resource is a scarce goodA good for which the choice of one alternative requires that another be given up. if using the resource for one purpose means we can’t use it for something else. Consider, for example, a small parcel of land. That land has several alternative uses: We could build a house on it; we could put a gas station on it; we could create a small park on it. We could even leave the land undeveloped in order to keep our future options open. Choosing one use for the land (building a house, for example) means giving up the chance to use that land for any of its alternatives. Land is a scarce good, and when a good is scarce, you’re forced to choose.

But the choices scarcity forces upon us don’t end there. Suppose we have decided the land should be used for housing. Should we build a large and expensive house, or should we build several modest ones? If we build a large and expensive house, we have to choose who should live in the house: If the Lees live in it, the Nguyens cannot. There are alternative uses of the land both in terms of what we use it for and in terms of who gets to enjoy it. If there were no scarcity, we wouldn’t have to make such tough decisions.

Even the air we breathe is a scarce good—despite the fact that it comes to us at no charge! The true test of whether a good is scarce is whether it has alternative uses. Is this true for air? Clearly, people need to breathe it. But we also pollute it when we drive our cars, heat our houses, and operate our factories. In other words, we use it as a garbage dump! Those two uses are competing alternatives: The more pollution we dump in the air, the less desirable—and healthy—it is to breathe. If we decide we want to breathe cleaner air, we must limit the (also) desirable activities that generate pollution. Air, even at zero charge, is a scarce good because it has alternative uses.

Almost everything is scarce. The extent of a good’s scarcity depends on how available that good is and how badly that good is desired. The scarcest goods are both rare and highly desired. Not all goods, however, confront us with such choices. A good is a free goodA good for which the choice of one use does not require that another be given up. if the decision to use that good for one purpose does not require that we give up another. One example of such a good is gravity. The fact that gravity is holding you to the earth does not mean that your neighbor is forced to drift up into space! One person’s use of gravity isn’t an alternative to another person’s use.

There aren’t many free goods. Outer space, for example, may have been a free good when the only use we made of it was to gaze at it. But now, our use of space has reached the point where one use is an alternative to another. There are conflicts, for example, over who gets orbital slots for communications satellites. And, like our airspace, now outer space is becoming a dumping ground for space junk, a hazard to passing satellites and spacecraft. So parts of outer space are already scarce, and will surely become more so as as we find new ways to use it. The (ironic) lesson in all this? Scarcity is everywhere. That makes the scope of economics wide, indeed!

If you listen to a lot of newscasts, you’ve probably heard lots of experts—both actual and self-proclaimed—discussing the state of the economy. But despite the fact that everyone seems to be an expert on “the economy,” nobody ever really defines what the economy is. Listen to enough newscasts and you may have some notion that the economy is some vague entity whose performance is measured by the health of the stock market and the unemployment rate.

But the economy is much more than that—it encompasses, in one way or another, almost all human activity. At its most basic, an economyAny organization that produces goods and services and then allocates them to people for use. is any organization that produces goods and services and then allocates them to people for use. Economies can be as small as households: “I made this pot of chili; you take a small bowl and leave the big bowl for your sister.” In fact, the word “economy” comes from the Greek oikonomia, which roughly translates to “household management.” So, economies can be small organizations like households, but they can be big organizations, too—like the United States, Central America, or the European Union, each of which produces hundreds of thousands of different products and then distributes them in some fashion for people to use. 

Because of scarcity, every economy must make choices about what should be produced, how it should be produced, and for whom it should be produced. We will return to these questions again and again throughout this book.

Big or small, every economy must deal with scarcity. That means that every economy has to answer these fundamental questions:

Scarcity forces us to make choices. That implies that we face trade-offs: More of one thing necessarily means less of another. Economists have a special name for these trade-offs: opportunity cost. When you choose one activity over another, the value of the option you sacrificed is the opportunity cost. Specifically, opportunity costThe value of the best alternative forgone in making any choice. is the value of the best alternative forgone in making any choice.

Suppose, for example, you’re down to your last $20, and you decide to spend it on a meal for you and your BFF at Chipotle. That $20 could have bought you a movie ticket (and popcorn!); it could have bought you morning coffee for a week; it could even have bought you tickets to see Cardi B perform at a local bar. But because you decided to use it at Chipotle, you lost the chance to do those other things.

But $20 won’t buy you movie tickets and coffee and Cardi B; it will only buy you one of those things! So to determine the true opportunity cost of Chipotle, ask yourself this hypothetical question: If you’d gone to Chipotle, and found it closed, what would you have done with your $20? If you don’t like movies and don’t care for coffee, the real opportunity cost of going to Chipotle is losing your next-best alternative—an evening with Cardi B.  

Sometimes it’s easy to confuse opportunity cost with money, or to attempt to measure opportunity cost in dollars (or euros, or pesos).  Resist that temptation when you can! One reason to resist is because money itself does not make us particularly happy. When you accidentally turn a hundred-dollar bill into lint by running it through the laundry, you’re probably not sad about losing the bill—after all, the bill’s just a colorful piece of paper. You’re more likely disappointed because you were planning to use that bill to go out with your friends, or to buy your Calc II textbook, or to put gas in your Corolla. It’s the loss of those opportunities that is important to you. 

More important, thinking of opportunity cost only in terms of money may lead you to confuse the cost of an item with that item’s purchase price. “What?” you may be saying. “I thought cost and price were the same thing!” And while even economists sometimes use these terms interchangeably in their daily lives, they’re really two distinct notions. Consider, for example, the cost of your college education. That cost includes the money (let’s say, $100,000) you’ll spend for four years’ worth of tuition, fees, and books—money you could have spent on other things. But perhaps the biggest cost of a college education is the time you sacrifice—time that could be spent developing your social media empire, training for an Ironman, or even just working. Suppose, for example, that you’d never gone to college and instead went straight to work. At a modest $15 per hour wage, you could have made $120,000 during the time you spent sleeping in your applied numerology class. That brings the total cost of college up substantially—from the $100,000 sticker price to the $220,000 total cost. 

That kind of thinking helps us solve an important question: Why are so many NBA superstars college dropouts? The less-than-obvious answer is that college is much more expensive for basketball hotshots than it is for the rest of us. That’s not because they pay more to attend college (in fact, many college standouts receive excellent scholarships), but because every year spent in college means forgoing an opportunity—an NBA salary—that’s way more lucrative than the opportunities you and I likely have.

There is one final reason to resist the temptation to express all costs in terms of money: Not all costs are easily measured in dollars. That’s true when your roommate talks you into his 21st birthday party at the expense of studying for your particle physics final. It’s equally true when you and your significant other decide to become exclusive: You lose the chance to date anyone else who may catch your eye. Those opportunities—study time, other romantic partners—are genuine costs, but costs that are hard to assign a dollar value to.

Let’s link the pieces: Scarcity exists because our desires are unlimited but our resources aren’t. That scarcity forces us to make choices, and all of those choices involve opportunity cost. These concepts—scarcity, choice, and opportunity cost—are at the heart of economics. We’ll revisit them often throughout this book.