This article reviews relationship between limited resources on Earth, human unlimited wants and scarcity which is causing the economic problem. It talks about economic decisions, the dilemma of choice and the opportunity cost.
It also explains the difference between normative statements and positive statements.
Relationship between limited resources, unlimited wants and scarcity
Finite resources of the planet Earth and infinite wants of human beings give rise to the economic problem. We all have infinite wants, the never-ending desire to consume goods and use services.
Finite resources
Nearly all resources are scarce. Resources are anything that we, and other economic agents, can use. An economic agent is any person, group or organization that exists in the economy. Examples of resources are land, coal, food, water, gold, time, etc. We do not have enough resources for all the things that we want to do, thus resources are scarce.
Many resources are non-renewable, but even those we can replace, the renewable ones, are limited. Therefore, choices must be made about how we should use these finite resources.
Why is this an economic problem?
Economic agents have to make choices on daily basis which result in an opportunity cost. People have an infinite number of uses for these resources.
Suppose the government own some land. The government could build a hospital, an army base, sell it to a building contractor or a real estate developer, or do many other things. However, the government can only do one of these things. The fact that there are not enough resources for all desires gives rise to the basic economic problem. Therefore, resources are described by economists as scarce.
Economic decisions and opportunity cost
Now, let’s illustrate the concept of opportunity cost with examples from everyday life.
Economic decisions involve choosing how to use your resources. Naturally, we choose what we consider to be the best and the most efficient use of our resources.
Thinking about the government example above, imagine that the government has decided to build a hospital instead of an army base. The benefits of the hospital would be gained, for example more accessible medical care for local people. But, the possible benefits of the army base would be lost as the resources are used up, for example a bigger and stronger national army. We call losing the benefits of the second-best choice an opportunity cost.
Positive statements and normative statements
Now, it is time to distinguish between positive statements and normative statements.
Economics is considered to be a social science. Science is involved with proving a suggested theory or model to be either right or wrong. A theory is a useful tool to help us understand a more complicated and realistic thing. Therefore, economic theories are designed to help us to better understand reality, not give a perfect representation of it.
Economic models are presented in one of the two forms: positive statements and normative statements.
Positive statements are concerned with facts and they are value free (here value means a personal view). For example, the West of China is poorer than the East of China.
Normative statements are concerned with our value judgments about what is good or bad (an opinion), therefore they have value (a personal view). For example, China should devote more resources into developing the poorer areas of the country.
Summary
In summary, economics is a social science concerned with how economic agents manage and consume scarce resources.
Economists use positive statements and normative statements to help explain how, why and what should be in the world of economics. Positive statements can be said to be objective (free from personal views), whilst normative statements can be described as subjective (containing personal views).
