what is economics

Economics is a social science that studies how societies allocate scarce resources among competing uses to satisfy human wants.

The basic economic problem. Human wants are essentially unlimited, but the resources to satisfy them are limited (scarce). Every society must therefore make CHOICES about how to use resources.

Factors of production (the resources used to produce goods and services):

Factor	What it is	Income earned
Land	Natural resources (soil, water, oil, fish, forests)	Rent
Labour	Human physical and mental effort	Wages
Capital	Manufactured aids to production (machines, factories, computers)	Interest
Entrepreneurship	Risk-taking organisation of the other three factors into production	Profit

Opportunity cost = the value of the NEXT BEST ALTERNATIVE forgone when a choice is made. Every choice has an opportunity cost because resources have alternative uses.

Worked example. A government spends $1 billion on a new hospital. The opportunity cost is the next best use of that money — perhaps 2 new schools, or repaying public debt, or a tax cut.

Opportunity cost is the cornerstone of economic thinking. It forces decision-makers to consider trade-offs rather than just direct costs.

Every society — household, firm, or country — must answer three fundamental questions:

1. WHAT to produce? Which goods and services should be produced, and in what quantities?
2. HOW to produce? What combination of resources and methods should be used?
3. FOR WHOM to produce? How should output be distributed among the population?

Different economic systems answer these questions differently.

System	WHAT, HOW, FOR WHOM decided by	Examples
Free market	Consumer demand and the price mechanism (no government interference)	Hong Kong (historically), idealised model
Command (planned)	Central government planning	North Korea, USSR (historically), Cuba
Mixed	Combination of market forces + government intervention	Almost every real-world economy (USA, UK, Singapore, India, etc.)

Most economies are mixed because pure free markets fail to provide public goods (defence, lighthouses) and produce inequality, while pure command economies fail to allocate efficiently (no price signals).

Positive vs normative statements — a critical methodological distinction.

Type	What it does	Example
Positive	Describes what IS — testable in principle	"Raising income tax from 20% to 25% reduces consumer spending."
Normative	Describes what OUGHT to be — based on value judgments	"Income tax SHOULD be raised to fund healthcare."

Economists try to be POSITIVE when analysing; policy choices inevitably involve NORMATIVE judgments about fairness and priorities.