What is economics?

Economics is difficult to do. It can be even more difficult to define. 

What is economics?

Let’s start by asking a different question: what is an economy?

An economy is a way of organising society. 

This sounds complicated. Your teacher may have used these exact words. But we’ll simplify it.

Coming at things from a different angle

Think about this question: how does society produce an apple?

You might want an apple today, tomorrow or some point in the future. But how do we make sure that you can actually get this apple when you want it?

Society doesn’t automatically produce apples, pears, oranges, iPhones or anything. We have to make choices. 

More specifically, we have to make deliberate decisions to ensure:

1. Certain goods and services are actually provided (like apples!)

2. That enough goods and services are provided for society (like enough apples, so you can have one today, tomorrow and in the future).

These decisions don’t happen automatically. We have to make choices on what to produce, how much to make and where to make it. 

So what is economics?

Economics is all about how we organise society to produce the goods and services that society requires. You can think about economics as the study of choices.

For example, what are all the things that need to happen in society so that you can walk into a shop and purchase a pair of sneakers?

[Just a brief reminder: sneakers don’t automatically exist in society. They have to be deliberately produced.]

For the sneakers:

• The sneaker company needs to organise its designers to come up with a new shoe model. The company needs to decide which designs will actually be produced.

• The sneaker company then needs to find all the raw materials that will go into making the shoe. It needs to choose the materials and purchase them in sufficient quantities to produce the right number of shoes.

• The sneaker company then needs to decide how it will ship the sneakers to stores and consumers.

And so on. 

Economics is about how society — which includes individuals, firms and governments — organises itself to produce goods and services. Economics involves the choices that individuals, firms and governments need to make to produce these goods and services.

But why do we have to make choices?

Society cannot have all the goods and services that it wants. This is because of the concept of scarcity.

The things that are used to produce goods and services, known as resources, are limited. For example, you don’t have all the time in the world — you’ve got 24 hours a day. The Australian Government doesn’t have infinite money — it only has access to limited funds at any time. 

This means choices must be made. The sneaker company can’t produce all of its designs, nor can it make an unlimited number of sneakers. It has to make choices.

Thus, economics is the study of choices.

This all relates to the economic problem. I’ve written about the economic problem as well.

How to solve the economic problem?

In a previous blog post I looked at the economic problem. That is, how do economies solve the challenges of scarce resources and unlimited wants. 

This economic problem applies to individuals, companies and governments. But, at an economy-wide (country-wide) level, how does a government seek to solve the economic problem?

The key element is that a government must make choices. It must prioritise how it uses the scarce resources to achieve the best outcomes for society as a whole. 

There are four key economic questions that a society needs to answer.

Economic question one: What to produce?

An economy cannot produce every single good and/or service demanded by consumers and businesses. It does not have sufficient resources to do this. Instead it must choose which goods and services to produce...and maybe import the others from overseas.

Economic question two: How much to produce?

An economy cannot produce an infinite number of goods and services. Scarce resources put a limit on production levels. Here, a government wants to avoid waste. For example, if you produce more goods than consumers demand, you’ve got excess supply and a bunch of products sitting on shelves.

Economic question three: How to produce?

How will an economy make the goods and services? Labour? Capital? A mix? The key here is to make the goods and services efficiently — so with as little waste as possible. Maximum output for the inputs!

Economic question four: How to distribute production?

Who gets to access the goods and services? Does it depend on your income? Are they subsidised by the government? Are they given out free? This will depend on the goals of the government (whether it’s essential for everyone to have this good or service) and the role of the free market.

The challenge for governments is the difficulty in getting these questions ‘right’. It is hard to predict which goods and services to make — particularly how much of each to produce to precisely meet demand. Governments (and markets) don’t always get it right when answering the economic questions.

View from 3:15 onwards.

What's the (economic) problem?

One of my favourite questions to get as an Economics teacher is: what is Economics?

My answer?

Economics is all about trying to solve a problem. A very specific problem. The problem of scarce resources and unlimited wants.

Think about it this way. You want to learn a musical instrument. You want the instrument, you want a teacher, you want the time to practice and you want to get good. Look at all these wants.

But! You’ve got limited money (with which to buy the equipment and hire a teacher) and limited time (to practice and take lessons). 

Your wants are large but your resources are limited. 

In Economics, this issue is known as the economic problem. That is, how does a whole society solve the problem of scarce resources and unlimited wants? 

Essentially, if an economy (or an individual) can’t have everything it wants, it must choose. It must prioritise, it must select one course of action over another. 

If you want to practice the instrument, you’re going to have to sacrifice doing something else.

If a restaurant wishes to employ another chef, maybe it can’t buy a new oven at the same time. Not enough resources (money). 

Governments deal with the economic problem all the time. Let’s say the federal government wants to stimulate the economy, to boost aggregate demand and increase gross domestic product. To achieve this goal they would like to build new schools and hospitals, fix public transport, cut taxes and give everyone cash handouts...but they simply do not have the resources to achieve all these ‘wants’ with their scarce resources.

Next time someone asks you what Eco is all about, tell them it’s all about solving a problem.

Today's economics lesson: marshmallows

The study of economics is vast and complex. So, where to start?

When I take an economics class for the first time in Year 11 — day one, lesson one — I start the same way: without talking about economics.

As a teacher, I’m a huge fan of throwing students in the deep end, keeping them confused and guessing and thinking. I don’t feel like thinking happens when I ask students to stay seated, to write a definition of economics and the economic problem, and proceed from there.

Instead I use a hands-on activity to spark interest and engagement. And it involves marshmallows.

You may be familiar with the marshmallow challenge. People are placed in teams and asked to build the tallest free-standing structure they can create using only the following things:

• 20 sticks of spaghetti

• 1m of sticky tape

• 1m of string

• Pair of scissors

• 1 single marshmallow.

The marshmallow must remain whole and intact. It’s placed at the very top of the structure. The structure can’t be attached to anything...you have to be able to pick it up and easily move it. The pasta, string and tape can be cut and broken up.

But this is all you get. Teams can’t get any more of any item.

The participants also have a time limit. I tend to use 20-25 minutes, but you could use less or potentially more. 

I like this challenge because of its adaptability to Economics. As students create their structures, I write down the words and phrases they use on the board (see image below). I want to record their thinking as it takes place, as they experience frustration and encounter challenges.

Verbatim questions/comments from students during the challenge.

Because...the point of this challenge is to convey the economic problem: unlimited wants, limited resources. It would be much easier if students had days to complete this task, or infinite materials, or access to a qualified builder or engineer, or could consult the internet...the list goes on.

But the point is that, in economics, we have to make decisions with resource constraints: time, money, land, etc. Just as the students have to here.

This usually takes a whole lesson. The next lesson, I ask students to reflect on their experiences in the challenge and then introduce the idea of the economic problem. Which hopefully has more relevance as they’ve just experienced the nature of the economic problem with their marshmallows.