1.What is economics?

Economics is the study of how people choose to allocate scarce resources to satisfy their unlimited wants. There are several words in this definition that should be emphasized. First, people allocate scarce resources. If there was enough of a resource to go around so that everyone could have as much as he or she wanted, there would be no need to allocate.

The definition states that people have unlimited wants. Notice that it says wants, not needs. People act on the basis of their wants, not necessarily on the basis of their needs. (Otherwise they would not buy strawberry sundaes.) If each of us made a list right now of the top ten things we would like to have and our fairy godmother popped out of the air and gave us what we wanted most of us immediately would find that there are ten more things we'd like to have. Because resources are scarce and wants are unlimited, economics studies the best way to allocate resources so that none are wasted.

2.What are the principles of economics?

Because scarcity is universal, people must make choices. The choices they make are in their rational self-interest; that is, people make choices that they think will give them the most satisfaction.

3.What are opportunity costs?

The opportunity cost of something is what you need to give up in order to get it. For example, if you would prefer to be sleeping now instead of studying economics, the opportunity cost of studying is the sleep you could be enjoying. Opportunity costs are a key element in the way economists look at the world.

4.How are specialization and opportunity costs related?

Opportunity costs determine which activities people should specialize in. For example, think about a small law office with just one lawyer and one secretary. The lawyer earns $100 per hour working as a lawyer, and the secretary earns $15 per hour for typing. Even if the lawyer types faster than the secretary, it wouldn't make sense for the lawyer to do her own typing-every hour spent typing has an opportunity cost of $100 to the lawyer. It is more efficient for the lawyer to specialize in practicing law, and let the secretary do the typing.

5.Why does specialization occur?

It pays to specialize whenever opportunity costs are different. Two parties can specialize and then trade, which makes both parties better off. Even if one person or nation does something more efficiently than another in the production of a good or service, it does not mean than that person or nation should produce that good or service. Specialization occurs as a result of comparative, not absolute, advantage. Specialization according to comparative advantage minimizes opportunity costs.

6.What are the benefits of trade?

If both parties specialize according to comparative advantage, trading enables them to acquire more of the goods and services the wants.