Economics as a Social Science

Economics is often defined as a social science that studies how individuals, firms, and governments make choices regarding the allocation of scarce resources to satisfy unlimited wants. Lionel Robbins famously defined it as 'the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.'

Basic Concepts

• Wants: These are the insatiable desires of human beings for goods and services. They are unlimited in nature.
• Scarcity: This is the fundamental economic problem. It refers to the limited nature of resources relative to the unlimited wants of society. In economics, scarcity does not mean 'rarity'; it means that resources are not enough to go around at a zero price.
• Choice: Because resources are scarce, individuals must make choices. Choice involves selecting the most pressing want from a list of needs.
• Scale of Preference: This is a list of unsatisfied wants arranged in order of their importance. It helps individuals make rational choices by placing the most important needs at the top.
• Opportunity Cost: Also known as 'Real Cost' or 'Alternative Cost,' it is the next best alternative forgone when a choice is made.
• Rationality: Economists assume that humans are rational, meaning they aim to maximize their utility (satisfaction) or profit given their constraints.

The Three Fundamental Economic Problems

Every economy, regardless of its system, must answer three basic questions:

• What to produce? Determining the types and quantities of goods and services to produce based on consumer demand and resource availability.
• How to produce? Choosing the most efficient technique of production (e.g., Labor-intensive vs. Capital-intensive).
• For whom to produce? Deciding how the total national product is to be distributed among members of the society.

The Production Possibility Frontier (PPF)

The PPF (or Transformation Curve) is a graphical representation showing the maximum combination of two goods that an economy can produce with fixed resources and technology.

• Points on the curve: Represent efficient use of resources (Full employment).
• Points inside the curve: Represent inefficiency or underutilization of resources.
• Points outside the curve: Represent unattainable levels of production given current resources.
• Downward Slope: Reflects the concept of opportunity cost. To get more of one good, some of the other must be sacrificed.
• Shifts: The PPF shifts outward due to economic growth, technological advancement, or discovery of new resources.