Lesson Overview
Economics is not just about money, markets, or stock prices. At its core, economics is a way of thinking—a framework for understanding how people make choices when faced with limits.
In this lesson, you’ll learn what economics really studies, why scarcity is the starting point of all economic thinking, and how economists separate facts from opinions when analyzing the world.
By the end of this lesson you should begin to see yours and others’ everyday decisions through an economic lens.
What Is Economics?
Economics is the social science that studies how individuals, businesses, governments, and societies allocate scarce resources to satisfy unlimited wants. At its core, economics asks:
"How do we decide what to produce, how to produce it, and who gets it when resources are limited?"
Learning Objectives
- Define economics as the study of choices under scarcity.
- Explain scarcity as the central economic problem.
- Distinguish between positive and normative statements.
- Apply “thinking like an economist” questions to real-life decisions.
What Do Economists Study?
Economics is the study of how individuals, firms, and societies make choices when resources are limited.
Resources include:
- Time
- Money
- Labor
- Natural resources
- Knowledge and skills
Because resources are limited, every choice involves a tradeoff. Choosing one option means giving up another.
Key Idea: Economics exists because we cannot have everything we want.
Scarcity: The Core Economic Problem
Scarcity means that resources are limited relative to unlimited wants.
This applies to:
- Individuals (limited time and income)
- Businesses (limited workers, machines, and capital)
- Governments (limited tax revenue and competing priorities)
Scarcity forces decision-making. Without scarcity, economics wouldn’t exist—there would be no need to choose.
Example: Scarcity in Everyday Life
You have 3 hours tonight and multiple wants: study, relax, work, and socialize. Even though time is free, it is scarce. Choosing one activity means giving up another.
Economics Is About Choices (Not Just Outcomes)
Economists focus less on what people choose and more on why they choose it.
They ask:
- What alternatives were available?
- What incentives were present?
- What tradeoffs were involved?
- What was given up?
This mindset helps economists analyze consumer behavior, business decisions, public policy, and social outcomes.
Positive vs. Normative Economics
Economists distinguish between describing the world and judging the world.
Positive Economics
- Describes what is
- Based on facts, data, and testable claims
- Can be proven true or false
Examples:
- “Raising the minimum wage increases labor costs for employers.”
- “Higher prices reduce quantity demanded, holding other factors constant.”
Normative Economics
- Expresses opinions or value judgments
- Based on beliefs about what should be
- Cannot be proven true or false
Examples:
- “The government should raise the minimum wage.”
- “Income inequality is unfair.”
Key Rule: If a statement contains words like should, ought, fair, or unfair, it’s usually normative.
Why This Distinction Matters
Good economic analysis often starts with positive economics: What happens? Why does it happen? What are the tradeoffs?
Policy debates mix economics with values. Understanding the difference helps you analyze arguments more clearly, separate evidence from opinion, and make more informed decisions.
Thinking Like an Economist
To think like an economist, ask:
- What is scarce?
- What choices are being made?
- What tradeoffs are involved?
- What incentives influence behavior?
These questions will guide you throughout this course.
Practice: Check Your Understanding
-
Which of the following best describes economics?
- A. The study of money
- B. The study of markets
- C. The study of choices under scarcity
- D. The study of government policy
-
Is the following statement positive or normative?
“College tuition should be free for all students.” -
Identify one scarce resource in your daily life and describe a tradeoff you recently faced.
Reflection Prompt
Think about a decision you made in the past 24 hours:
- What did you choose?
- What did you give up?
- How did scarcity influence that decision?
You’ll revisit this way of thinking in every lesson moving forward.
Required Reading
Before continuing to Lesson 1.2 students are required to read Lecture 1.1: Scarcity, Choice & Optimization
What’s Next?
In Lesson 1.2: Scarcity & Tradeoffs, we’ll go deeper into how scarcity forces choices—and why the cost of a decision is more than just money.
Move at your own pace. Re-read if needed, and continue when you’re ready.