Thinking like an economist

Economics is the study of how individuals, businesses, governments and whole societies make choices about using limited resources to satisfy unlimited needs and wants. It has two main branches. Microeconomics looks at the behaviour of individual economic agents and particular markets, for example why the price of coffee changed this month or how one firm decides how many workers to hire. Macroeconomics looks at the economy as a whole, studying aggregates such as total output, unemployment, inflation and economic growth.

Economists use two forms of analysis. Positive economics deals with objective statements that can be tested against evidence, such as "Unemployment fell from 4.1% to 3.9% last quarter". Positive statements can be shown to be true or false. Normative economics involves value judgements about what ought to happen, such as "The government should spend more on public transport".

Normative statements reflect opinions and values, so they cannot be proven true or false by data alone, although data can inform the debate.

Resources, also called factors of production, are the inputs used to produce goods and services. Land includes all natural resources such as soil, water, minerals and forests. Labour is the physical and mental effort of people in production. Capital is human-made equipment used to produce other goods and services, such as machinery, tools, vehicles and buildings.

These resources are used to satisfy needs (necessities for survival such as food, water and shelter) and wants (goods and services that go beyond necessity and improve our lives, such as a new phone or a holiday). Wants are effectively unlimited because as one want is met, new ones appear.

Resources are limited while wants are unlimited, so every society faces relative scarcity. This is the basic economic problem: there are not enough resources to produce everything people would like. Scarcity forces economic decision-making, because choices must be made about how resources are used. Every choice means giving up something else, so every decision has an opportunity cost: the value of the next best alternative that is forgone.

Opportunity cost is not the sum of all the alternatives, only the best one given up.

Because choices involve giving something up, economists talk about trade-offs. To make sensible choices, decision makers use cost-benefit analysis, which lists the benefits and costs of an option (including opportunity costs and less obvious social costs), then compares them. If total benefits exceed total costs the option has a net benefit and is worth considering, although the opportunity cost of the next best use must still be weighed.