Economics: Definition & Universal Goals

Economics: Definition & Universal Goals
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  • 0:01 Not Enough for Everyone
  • 1:21 Efficiency
  • 3:30 Who Gets What?
  • 5:05 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

From rising prices to debates on pollution, there is plenty of evidence that there's simply not enough for everyone. Economics is the applied science that tackles this issue, and this lesson explains how.

Not Enough for Everyone

Applied sciences, from medicine to engineering, all exist to solve a real problem faced by society. Medicine exists to cure diseases. Engineering exists to build safe structures and machines. In this respect, economics is the same as any other applied science in that it exists to solve a very real problem: scarcity. One of the first things you would hear in economics class is that there is no free lunch, meaning that nothing in life is free. Everything exists in a limited supply. That means that everything has value.

But, think about it, scarcity also plays into the value of something. That's what makes a diamond ring more valuable than a piece of rice. There are trillions of pieces of rice, but a much smaller number of diamond rings. Therefore, first and foremost, economists study scarcity. Two major subsections of economics exist. Macroeconomics is the term given to the study of scarcity between whole economies, especially between countries. Microeconomics is the term given to analyze scarcity on a much smaller scale, often in predicting the best behavior for companies and individuals.

Efficiency

Luckily for economists, and society really, there are ways to make what is scarce go further. We do this through increasing the efficiency with which scarce resources are used, and remember, everything is scarce. Two particular methods are worthy of note, even this early in your study of economics. The first of these is called allocative efficiency, which means making sure that the resources are allocated in the best possible way. This sounds like it just means making sure those diamonds end up at a jeweler, and not at a rice packaging plant, but it really goes much further than just allocating a good properly in that initial step. Instead, allocative efficiency really speaks to making sure that a good is worth to the buyer what it is worth to the seller.

Take a loaf of bread that you spent two dollars on and want to make eight more dollars from, bringing your total to ten. Now let it mold. Chances are you won't find anyone to buy that bread. Now instead of letting it rot, make it into croutons and sell it to a salad restaurant for ten dollars. Now, you've made a decision with allocative efficiency, because you not only used the resource efficiently, but in such a way that ensured that you sold it for the amount you wanted to sell it.

Another form of efficiency exists. Technical efficiency means that a company is making the most goods possible for the smallest cost. To help remember this, think about technology. Think about how a technology like the Internet has made so much more possible for an even smaller price. Now imagine you own an encyclopedia company. It would cost a great deal of money to still print every volume and ship all your customers a copy, which only a few people could use at once. An encyclopedia company operating at technical efficiency would put it all online, letting anyone with permission use it. The company makes more of its product, in this case by allowing more people to read the encyclopedia, while reducing the cost of production by not using so many physical books.

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