Economics – Meaning, Concepts And Problems

Economics – Meaning, Concepts And Problems

Economics – Meaning, Concepts And Problems

Definition Of Economics

The early definitions of the subject of Economics were usually in terms of wealth, Adam Smith who wrote the first major book on the subject entitled it ’’An inquiry into the Nature and Causes of the Wealth of Nations.’’ The book was published in 1778.

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J.S. Mil defined Economics as ’’the practical science of the production and distribution of wealth’’, while Alfred Marshall saw Economics as ‘’the study of mankind in the ordinary business life’’. Since the time these classical economists gave their definitions, more modern attempts have been made to give a more satisfactory definition to the subject. The most popular present day definition is that given by Professor Robbins who defined Economics as ’’the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.’’ The importance of Robbins’ definition is that it spot-lights the central economic problem of scarcity and choice. The definition also points to the fact that the resources (means) at our disposal have more than one use. Land for example, can be used for cash crops or food crops. It can be used as a playground or as a building space, etc. It is left for human beings to decide the use to put it.

In making decisions or choices human beings always try to maximize their satisfactions. The author will therefore like to define Economics as the science which studies how human beings attempt to maximize their satisfactions out of their limited resources. Economics does not deal with the techniques of production. That is left for the production engineer. It deals mainly with how to make choices so as to obtain the greatest benefit from resources available. The non-economists do not know how to ’’economise’’ his resources. He makes wrong choices and therefore obtains less satisfaction. The same resources managed economically will give a much greater satisfaction. Perhaps, it is easier for a beginner in the study of Economics to look at the table of contents of an Economics textbook. This will give him a better grasp of what Economics teaches than any idea he might get from definitions. Alternatively, he should seek to know the kind of questions which the subject deals with: why do some workers earn more than others? How do people decide what goods to produce? Why do countries trade with each other? What causes prices to rise or fall? It is questions of this type that Economics deals with.

The Scope Of Economics

Economics limits itself to the material aspect of human behaviour. It focuses attention on how to satisfy as much as possible the material needs of man out of the scare resources of land, labour, and capital. It deals with the nature of production, distribution, exchange and money. It does not deal with ethical or moral questions. Such matters are better taken care of by other subjects such as philosophy and religion. It also has nothing to do with the political or social side of human behavior.

Is Economics A Science

The answer to this question is ’’yes.’’ Science has laws which hold true at certain conditions. In the same way economic laws hold true in normal economic conditions. However, because Economics deals with human behavior, conditions under which its laws operate frequently alter. For this reason, the economist uses often the term ’’ceteris paribus’’, meaning ’’all things being equal.’’ For example, if price rises, demand will fall, ceteris paribus. What the economist is saying here is that when the prices of most goods rise, demand for them will fall provided there ar normal economic conditions. Very often, there are no normal economic conditions. Governments and trade unions do interfere with the normal workings of economic laws. For instance, if government increases wages and salaries, demand may not fall even though prices have risen. In 1975, the Udoji Award brought about a great increase in the salaries and wages of all categories of workers throughout Nigeria. This led to a great increase in demand for goods and services at a time when inflation was already causing a general price rise. Economics deals with the behavior of human beings. For this reason, it is called a social science. There are other subjects that also study human behavior. Some of these are demography, ethics, psychology, politics, and sociology. These are also social sciences.

Some Basic Concepts In Economics

An Economic Good

Anything that has a price is an economic good. All the commodities (clothes, books, foodstuffs, machines, cars etc.) sold and brought are economic goods. For a thing to have a price, it must fulfill the following conditions:

a) It must be useful.

b) It must be scarce.

c) It must be transferable.

Air is useful and transferable, but it is not an economic good because it is not scarce. Everyone has enough of it. It therefore, has no price even though it is most useful thing on earth. Good health is also useful, and it is also scarce because it is not transferable. A man who has very good health cannot transfer his good health to a person who is sick. Therefore the good health of any person is not an economic good. It cannot be transferred and therefore cannot be sold. All economic goods on the other hand can be transferred and sold. To a man drowning in the sea, water is not an economic good. It is neither useful nor scarce to him. Therefore he will be unwilling to pay any price for it, but to a thirsty man in the desert, water is an economic good. He will be prepared to pay for it. Thus, whether a good will be an economic good or not depends on its location and the circumstances surrounding it.


The term ’’want’’ is well used in economic to refer to all the things which human beings want, desire or need. Human beings want food to eat, they want to wear clothes and they also want to live in houses. People desire to have cars, pleasure boats, jewelry, leisure hours and a host of other things. People who have already got a car may still desire to have one or two more cars. The same applies to other items which people want. Even people who have two houses are still anxious to own more houses. Human wants are so many. In Economics we say that human wants are unlimited. No one can provide all the things that he or she desires. Even the government cannot provide all the things that its citizens need or desire. In other words human wants cannot be completely satisfied.


In Economics, the word scarcity means limited in supply. The means or resources for satisfying human wants are scarce. They are not enough to satisfy all the numerous and unlimited wants of human beings. The first essential needs of man are food, shelter and clothing, but once these have been satisfied other wants emerge; we want television sets, wrist watches, decent furniture etc. We also need aeroplanes, playgrounds swimming pools etc. All these are economic goods and all economic goods are scarce goods are scarce. This does not necessarily mean that they are in severe short supply or that only very little quantities of them are available. What it means is that they are not plentiful enough for everyone to have as many as they want. Human wants are insatiable. While human wants are unlimited the means or resources for satisfying them are limited; that is, they are scarce. By resources we refer to all the things that enable human beings to produce goods and services. Some of these resources are fertile lands, mineral deposits, factory machines, tools, industrial buildings, able workers, good managers, skilful investors and money. Resources such as these are not plentiful enough to provide all the goods and services necessary to satisfy all the wants of mankind.

The economic problem arises because of the scarcity of resources. We have to choose which of our numerous wants to satisfy with the scarce resources available to us and which wants to leave unsatisfied. Some countries such as the United States are said to have abundant resources when compared to the poor countries. Yet the resources of these rich countries are not sufficient to produce all the goods and services desired by their citizens. Thus, even the richest countries also suffer from the security of resources. This is why the study of Economics is necessary for both the rich and the poor countries. Knowledge of Economics leads a nation to employ its scarce resources in the most satisfying manner.


Human wants are unlimited; they are insatiable. Immediately one want is satisfied, another want appears. Anyone can easily write long, endless list of what he or she wants, but while human wants and desires are unlimited, the resources for satisfying them are limited. That is, they are scarce. It is this scarcity that leads to the central economic problem of making choices. We have to decide which wants to satisfy and which to leave unsatisfied. The school boy or girl has to choose whether to use his limited amount of money to but textbooks or to use it to buy clothes. His limited resource in this respect is the amount of money which he has. It is limited and therefore is not enough to satisfy all the wants, needs and desires of everybody, but as things are, everybody is faced with the economic problem. Even the millionaire cannot have everything that he wants. He too has to make choices as to which wants to satisfy and which to leave unsatisfied.

Opportunity Cost

Opportunity coat is the real cost of whatever choice we make. The principle of opportunity cost is very useful to the individual, the firm, as well as the government. Every decision that an individual makes involves an opportunity cost; so also does the decisions of firms and governments. The man who decides to start work very early in the morning and to close late at night will earn more money. The opportunity cost of his heavy earnings is the forfeiture of leisure hours. As the principle is important to the individual, so also it is to the firm. Firm do not make decisions as individuals do. As a result of some decisions, they suffer the attendant opportunity costs also. For example, a firm may decide to increase the wages of its workers to make them more satisfied. The opportunity cost of having satisfied workers is the reduction of its profits. Again a firm may go into manufacturing instead of being a trading concern. The opportunity cost of being a manufacturing company will be the loss of the advantages of being a trading company. The opportunity cost has to be weighed thoroughly before a firm takes a decision. The principle is even more crucial to the government. Every service that government provides, involves an opportunity cost. Whenever government gives more funds to any particular service, it must follow that lesser funds will be available to some other projects. For example, government can provide excellent educational facilities to its citizens at the expense of good roads. The opportunity cost of the excellent educational facilities is the poor roads which the citizens have to endure.

Opportunity Cost And Related Concepts

There is interrelationship between the concepts of want, scarcity, choice and opportunity cost. Human wants are so many, but the resources for satisfying them are so scarce. If the resources were not scarce, we could have been able to produce all the goods and services which we want. Since resources are scarce, we have to choose which wants to satisfy and which to leave unsatisfied. It is the scarcity of resources relative to our wants that brought about the necessity of choosing. Once choice is made there is bound to be opportunity cost. The opportunity cost of what we choose is the alternative which we did not choose. Thus, the four concepts of want, scarcity, choice and opportunity cost are closely related.

Scale Of Preference

It is assumed in Economics that human beings act rationally. If they act rationally, they would like to satisfy their most pressing wants first and the least pressing ones last. It is aimed that everyone has in his mind a list of all his wants in order of preference. This list is referred to as the scale of preference. The most pressing want will come first in the in the scale, while the least pressing need will come last. Because resources are limited, one may not be able to purchase everything in the list. He will however, start from number one and will stop where his money gets exhausted. The idea of scale of preference is closely related to that of opportunity cost.

Standard Of Living

Standard Of Living refers to the conditions under which people live. Standard Of Living is high if people live in decent houses, wear good clothes and feed adequately on good food. In addition, they should also enjoy many other amenities. Standard Of Living is higher in the developed countries than in developing countries.

Developed And Developing Countries

The world is economically divided into two groups-the developed and developing countries. The developed countries are rich countries of the world. They are highly advanced in technology. Some of the most developed countries are United States, Switzerland, Sweden and Western Germany. The poor countries of the world are referred to as the developing countries. These countries have very low income per head. All the countries of West Africa belong to this group.

Basic Economic Problems Of Society

There are four basic economic problems facing any society. It does not matter whether the society practices capitalism, socialism or communism, the problems are the same everywhere. However, how the problems are tackled will depend on the type of economic system being practiced. The four basic problems are:

a) What to produce?

b) How to produce?

c) For whom to produce?

d) How can resources be used most efficiently?

What To Produce?

The first problem facing every society is the determination of what goods and services to produce. Are we to produce more food to feed the teeming population or to increase investment on the armoury by producing more arms and ammunitions? Should the country produce more capital goods such as machinery or produce luxury items such as electronics and clothes? Resources at the disposal of every society are limited. That is they are scarce. They are not enough to produce all the goods and services needed. Increase in the production of certain goods and services often necessitates the reduction of others. For example, if more educational facilities are provided, it will be necessary to cut down the provision of some services such as health service or road maintenance. In capitalist, or free enterprise, the price system will determine the type and quantity of each good and service that should be produced. More of goods and services with rising prices will be produced. Goods with falling prices will have their production reduced. Goods and services which cannot attract a price to cover their production costs will not be produced. In a socialist or communist country, the government will decide the type of goods and services that should be produced and those which should not be produced. However, there are no pure capitalist countries anywhere in the world. Even those countries such as United States which are referred to as capitalist, have their governments making a lot of economic decisions. Provision of social services and public utilities such as health, education, telecommunications, roads, water and electricity supply are usually decided by governments even in the capitalist countries.

How To Produce?

After choosing the goods and services to be produced, the next question is the method to be used in producing them. There are two main methods of production:

a)Labour-intensive and


In the labour-intensive method, more workers are used with little capital goods. It is more economical for a country with abundant labour supply and little capital to use labour-intensive method of production. On the other hand, countries rich in capital should adopt capital-intensive method of production.

In the capital intensive method, more capital goods are used with little labour. Under this method, machines would be used wherever possible to replace labour.

For Whom To Produce?

The next basic problem is to know who will enjoy the goods produced, and what quantity he will enjoy. In the free enterprise, the type and quantity of goods and services a person enjoys will depend on his income or purchasing power. Since income is derived from one’s productive activities, it follows that the more productive one is, the more he will enjoy the goods and services produced in the country. In the socialist or communist countries, the situation is a little different. Here certain goods and services are shared on the basis of equality or need, so that a lazy person may consume as much of these goods and services as a hardworking person.

How To Use Resources Efficiently

The last basic economic problem is how to use resources most efficiently. Resources are efficiently used if the maximum output is obtained from a given quantity of resources. Resources used can be made efficient through careful handling of the following areas:

a) Proper training of staff.

b) Proper maintenance of machines and tools.

c) Division of labour and

d) Avoiding wastage of all types.





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  1. Alhagie Touray says:

    what is the difference between opportunity cost and money cost

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