1. The Economizing Problem
Wants and Needs
Choice and Cost

2. Economics Defined
• Economics is the study of how people use their
scarce resources to satisfy their unlimited wants.
• The study of economics begins with a problem
that must be solved. This problem is universally
known as the economizing problem:
• 1. Society's material wants are virtually unlimited.
• 2. Economic resources are limited, or to put it
another way, are scarce.

3. Material Wants
• So let's discover what exactly material wants are
before we tackle this economizing problem. Material
wants are the desires of consumers to obtain and use
various goods and services which provide utility. But
my good professor, you may ask, what does this term
utility mean?
• Utility it the satisfaction received from consumption,
or a basic sense of well being achieved from
consumption. And the overall objective of all economic
activity is to attempt to satisfy all material wants, in
other words; to maximize utility.

4. Factors of Production
• So, now that you know a little more about material
wants, let’s move on to the next economic term in our
discussion of the economizing problem, which is the
subject of economic resources.
• Resources of Economic Systems are the inputs, or
factors of production, used to produce the goods and
services that people want.
• These resources consist of LABOR, CAPITAL, LAND,
AND ENTREPRENEURIAL ABILITY. It may be convenient
to group these four factors of production into two
broader categories:

5. Human Resources
• Human Resources - the productive physical
and mental abilities of people.
• 1. Labor - the physical and mental effort used
to produce goods and services.
• 2. Entrepreneurial ability - managerial and
organizational skills needed to start a
firm, combined with the willingness to take
risks.

6. Material Resources
• Material Resources - natural resources, raw
materials, machinery, transportation, etc....
• 3. Land - plots of ground and other natural
resources used to produce goods and services.
• 4. Capital - the buildings, equipment, and
human skill used to produce goods and
services

7. Prices
• Now, because resources are scarce, they can
command a price in the marketplace:
• WAGES - payment to resource owners for their
labor.
• INTEREST - payment to resource owners for the
use of their capital.
• RENT - payment to resource owners for the use
of their land.
• PROFIT - the reward for entrepreneurial ability;
the revenue from sales minus the cost of
resource used by the entrepreneur.

8. Goods and Services
• I would like to take a moment to briefly interject the
meaning of two terms that I have been using quite a bit
so far, in our discussion of the economizing problem.
• Those two terms would be GOOD and SERVICE. A good
is a tangible item used to satisfy human wants and a
service is an activity used to satisfy human wants. A
good is something like a textbook, or an ice cream
cone, or even an automobile. A service, on the other
hand, is like visiting a doctor's office, getting a haircut,
or having someone prepare your taxes.

9. Scarcity
• Okay, lets finish our discussion of the economizing
problem with the economic term that is most often
misunderstood; SCARCITY. Scarcity occurs where the
amount people desire exceeds the amount available at
a zero price. In other words, it is the condition that
arises because the available resources are insufficient
to satisfy wants.
• Think of scarcity when you make choices throughout
your day, week, or even year. Think of the limitations
on your energy, money, time, knowledge and good
fortune in order to satisfy all your desires.

10. Choice Entails Cost
• And, because resources are scarce, the
decision to use them for one purpose
necessarily precludes their use for another.
• In other words, CHOICE ENTAILS COST and
that without scarcity, there would be no
economizing problem and no need for prices.

11. Things to Think About
• Think about this, just by reading your textbook
you will entail a cost. That cost would be your
next best alternative that you could be doing,
whether it is watching TV, playing games, talking
on the phone, or being with your friends.
• The choices that you make are determined by the
utility that you will gain from that action and
weighing it against the utility of the next best
alternative.