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Economics is about choosing. This chapter builds the subject from the ground up - why we must choose at all, what a choice costs us, what economics studies, the three questions every economy has to answer, and the three systems that answer them differently.
Understanding the Name of the Chapter
Building Blocks
The basic ideas we need before anything else in economics.
in Economics
The subject that studies how people use what they have.
The Problem of Choice
Picking one thing and leaving out another, because resources are limited.
What does the name of the chapter mean?
- The name has three parts. Let us take them one by one.
- Building blocks means the basic ideas we need before anything else.
- Economics is the subject that studies how people use what they have.
- The problem of choice means picking one thing and leaving out another.
- Put together: the basic ideas of economics, starting from the problem of choice.
What are needs?
-
Needs
are the things that are essential for survival.
- Example - food, water, clothing and shelter.
What are wants?
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Wants
are the things that are not essential, but they improve our quality of life.
- Example - gadgets, vacations and luxury items.
Needs
Wants
Essential for survival
Not essential, but improve the quality of life
Food, water, clothing, shelter
Gadgets, vacations, luxury items
What is meant by human preferences?
- A preference is what a person chooses to have.
- Some of our preferences are needs, while others are wants.
Can we fulfil all our needs and wants?
- No, we cannot.
- It is because human wants are unlimited, and resources like money are limited.
- So we need to make a choice.
Which problems of choice do people face?
Who has to choose
The choice they face
A student
Spend pocket money on snacks, or save it for a new pair of shoes
A school library
Five copies of a new storybook, but 20 students want to read it
A farmer
Which crop to grow, looking at the soil, the rainfall and market demand
An enterprise
Employ more labour, or more capital, in production
A government
Spend more on building highways, or on hospitals
- Enterprise means a business firm. Capital here means machines and equipment.
- These are not random questions. Each one is an economic choice.
What is the problem of choice?
- The problem of choice is the problem of deciding how to allocate our limited resources.
- Allocate means to divide something up and give each part to a use.
- When one option is picked, the other option is left out.
Why does the problem of choice arise?
- Unlimited wants - people always want more goods, services and comforts than are available.
- Scarcity of resources - natural resources, labour and tools are limited in supply.
- Alternative uses - the same resource can be used in more than one way, so the best use has to be picked.
Why the problem of choice arises
Problem of choice
three reasons it arises
Unlimited wants
People always want more goods, services and comforts than are available.
Scarcity of resources
Natural resources, labour and tools are limited in supply.
Alternative uses
The same resource can be used in more than one way, so the best use has to be picked.
Do our needs and choices remain the same, or do they keep changing?
-
They do not remain the same. They keep changing.
- Example 1 - when we have a bicycle, we want a bike. When we have a bike, we want a car.
- Example 2 - when we have an Android phone, we want an iPhone. When we have an iPhone, we want the latest iPhone.
Why do people's wants keep changing over time?
-
Because once one want is met, people start wanting something better.
- Example - a person with a bicycle wants a bike, and then a car.
How does this affect production in an economy?
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Producers have to keep making new and better goods, because people buy what they want now.
- Example - phone companies keep launching a new model every year.
Why cannot all our wants be satisfied?
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Because wants are unlimited, but resources like money, land and labour are limited.
- Example - with limited pocket money, a student can buy snacks or save for shoes, not both.
How does the constant desire for more create pressure on the environment?
- Suppose we already have a white cotton shirt, and we buy one more cotton shirt.
- Farmers then have to grow more cotton, which uses more soil and more water.
- The factory also has to do more work to make the shirt, which uses more electricity.
- So every extra want puts more pressure on the environment.
How can we balance the fulfilment of wants and the extraction of resources?
- We can reduce our unnecessary wants.
-
We can reuse and recycle our resources.
- Example - dye an old white shirt black and wear it again.
- We can use more renewable energy like solar power, instead of non-renewable energy like thermal power.
What is a market?
- Market - a place where buying and selling of products and services takes place.
- It can be a physical market, or a virtual one on the internet.
Who makes economic choices?
- Individuals, enterprises and governments.
- All three have limited resources, so all three must decide how to divide them among competing uses.
🔎 LET'S EXPLORE
List three things your parents bought this month. Can you classify them into needs or wants?
Thing bought
Need or want
Rice
Need
Milk
Need
School shoes
Need
Mobile phone
Want
Restaurant meal
Want
Holiday trip
Want
Do you think having too many wants may create problems?
- Yes, because the money and resources we have are limited, and wants are not.
- Too many wants mean some of them must always be given up.
📖 Questions from the Book
Q1. Why do you think people's wants keep changing over time? How does this affect production in an economy? Why cannot all our wants be satisfied?
-
Wants keep changing because once one want is met, people start wanting something better.
- Example - a person with a bicycle wants a bike, and then a car.
-
Production has to keep changing too, because producers make what people want to buy.
- Example - phone companies keep launching a new model every year.
- All wants cannot be satisfied because wants are unlimited, but resources like money, land and labour are limited.
Q2. 'Human wants are unlimited and keep changing'. How do you think this constant desire for more creates pressure on the environment? Can the fulfilment of wants and the extraction of resources be balanced?
- Suppose we already have a white cotton shirt, and we buy one more cotton shirt.
- Farmers then have to grow more cotton, which uses more soil and more water.
- The factory also has to do more work to make the shirt, which uses more electricity.
- So every extra want puts more pressure on the environment.
-
A balance is possible in these ways.
- We can reduce our unnecessary wants.
- We can reuse and recycle our resources, like dyeing an old white shirt black and wearing it again.
- We can use more renewable energy like solar power, instead of non-renewable energy like thermal power.
Worth remembering:
A market need not be a place you can walk into. A website where things are bought and sold is also a market.
1. What is the difference between a need and a want?
Show answer
A need is an essential like food, water or shelter; a want is an extra like a gadget or a vacation.
2. Give one example of an economic choice a government has to make.
Show answer
Whether to spend more on building highways or on hospitals.
3. True or false: a market must be a physical place.
Show answer
False - it can also be a virtual market on the internet.
📝 What Have We Learned
- Needs are essential for survival, while wants are not essential but improve our quality of life.
- Wants are unlimited and keep changing, but resources like money are limited, so we cannot fulfil them all.
- The problem of choice is deciding how to allocate limited resources, because picking one option leaves out another.
