1. Economics Basics: Introduction
  2. Economics Basics: What Is Economics?
  3. Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade
  4. Economics Basics: Supply and Demand
  5. Economics Basics: Elasticity
  6. Economics Basics: Utility
  7. Economics Basics: Monopolies, Oligopolies and Perfect Competition
  8. Economics Basics: Conclusion

In order to begin our discussion of economics, we first need to understand (1) the concept of scarcity and (2) the two branches of study within economics: microeconomics and macroeconomics.

1. Scarcity
Scarcity, a concept we already implicitly discussed in the introduction to this tutorial, refers to the tension between our limited resources and our unlimited wants and needs. For an individual, resources include time, money and skill. For a country, limited resources include natural resources, capital, labor force and technology.

Because all of our resources are limited in comparison to all of our wants and needs, individuals and nations have to make decisions regarding what goods and services they can buy and which ones they must forgo. For example, if you choose to buy one DVD as opposed to two video tapes, you must give up owning a second movie of inferior technology in exchange for the higher quality of the one DVD. Of course, each individual and nation will have different values, but by having different levels of (scarce) resources, people and nations each form some of these values as a result of the particular scarcities with which they are faced.

So, because of scarcity, people and economies must make decisions over how to allocate their resources. Economics, in turn, aims to study why we make these decisions and how we allocate our resources most efficiently.

2. Macro and Microeconomics
Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an "invisible hand" turning the wheels of the economy: a market force that keeps the economy functioning.

Microeconomics looks into similar issues, but on the level of the individual people and firms within the economy. It tends to be more scientific in its approach, and studies the parts that make up the whole economy. Analyzing certain aspects of human behavior, microeconomics shows us how individuals and firms respond to changes in price and why they demand what they do at particular price levels.

Micro and macroeconomics are intertwined; as economists gain understanding of certain phenomena, they can help nations and individuals make more informed decisions when allocating resources. The systems by which nations allocate their resources can be placed on a spectrum where the command economy is on the one end and the market economy is on the other. The market economy advocates forces within a competitive market, which constitute the "invisible hand", to determine how resources should be allocated. The command economic system relies on the government to decide how the country's resources would best be allocated. In both systems, however, scarcity and unlimited wants force governments and individuals to decide how best to manage resources and allocate them in the most efficient way possible. Nevertheless, there are always limits to what the economy and government can do.

Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade

Related Articles
  1. Markets

    Scarcity

    Scarcity is the basic economic problem that arises because people have unlimited wants, but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources ...
  2. Markets

    Economics 101

    Economics is the study of how individuals, governments, businesses and other organizations make choices that effect the allocation and distribution of scarce resources.
  3. Markets

    Macroeconomics: Microeconomics Foundation

    By Stephen Simpson While there are relatively clear definitions separating microeconomics and macroeconomics, the reality is that both sections of economics draw heavily from certain shared ...
  4. Investing

    Microeconomics vs. Macroeconomics: Which Is More Useful for Investment?

    Find out why investors are better off ignoring macroeconomic forecasts, and should instead focus on the lessons that microeconomics can teach them.
  5. Markets

    Macroeconomics: Introduction and History

    By Stephen Simpson In general, economics is the study of how agents (people, firms, nations) use scarce resources to satisfy unlimited wants. Macroeconomics is the branch of economics that concerns ...
  6. ETFs & Mutual Funds

    Natural Resource Investing

    ETFs and futures are just some of the various investment options available to natural resource investors.
  7. Markets

    Economics Basics: Conclusion

    Recap of the key learnings from Investopedia's economics tutorial .
  8. Personal Finance

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  9. Markets

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  10. Markets

    Microeconomics: Introduction

    by Marc DavisIn every area of human enterprise and endeavor, there's a big picture and a little picture, the macro and the micro. The macro looks at things through a wide-angle lens; the micro ...
Trading Center