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Economics, study of how human beings allocate scarce resources to produce various commodities and how those commodities are distributed for consumption among the people in society (see distribution). The essence of economics lies in the fact that resources are scarce, or at least limited, and that not all human needs and desires can be met. How to distribute these resources in the most efficient and equitable way is a principal concern of economists. The field of economics has undergone a remarkable expansion in the 20th cent. As the world economy has grown increasingly large and complex. Today, economists are employed in large numbers in private industry, government, and higher education (see economic planning). Many subjects, such as political science and sociology, which were once regarded as part of the study of economics, have today become separate disciplines, although the study of any one generally implies a working knowledge of the others.

Ancient and Medieval Periods

The first attempts to analyze economic problems appear in the writings of the ancient Greeks. Plato recognized the economic basis of social life and in his Republic organized a model society on the basis of a careful division of labor. Aristotle, too, attributed great importance to economic security as the basis for social and political health and saw the owner of a middle-sized plot of land as the ideal citizen. Roman writers such as Cicero, Vergil, and Varro gave significant advice about the economics of agriculture. The medieval period was marked by the disruption of the flourishing commerce of the ancient world, and its economic life was dominated by feudalism. Economic writings of the age focus on the just price for goods and criticism of usury.

Mercantilism, the Physiocrats, and Adam Smith

In the transition to modern times (16th–18th cent.), European overseas expansion led to the growth of commerce and the economic policies of mercantilism, a system that inspired a substantial body of literature on the subject of economic nationalism. In the late 17th and the 18th cents., protest against the governmental regulation characteristic of mercantilism was voiced, especially by the physiocrats. That group advocated laissez-faire, arguing that business should follow freely the "natural laws" of economics without government interference. They regarded agriculture as the sole productive economic activity and encouraged the improvement of cultivation. Because they considered land to be the sole source of wealth, they urged the adoption of a tax on land as the only economically justifiable tax.

In the 18th cent. important work in economics was done by the Scottish philosopher David Hume. His analysis of the natural advantages that some nations enjoy in the cultivation of certain products and his observations on the flow of commerce became the basis for the theory of international trade. The most important work of the 18th cent., however, was Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776), which is considered by many to be the first complete treatise on economics. Smith identified self-interest as the basic economic force and, through his analysis of the division of labor and his comprehensive study of the development of economic institutions in the West, established economics as a major area of study. John Millar, a follower of Smith, incorporated and developed these ideas into a highly sophisticated economic interpretation of history. Smith's theories, especially his advocacy of free trade, played an important part in the Industrial Revolution then taking place in Britain.

Malthus, Ricardo, and Mill

One of the most influential writers of the 19th cent. was Thomas Malthus, whose predictions that population growth would always tend to outstrip advances in the means of subsistence earned for economics the title "the dismal science." The most important economist to follow Smith was David Ricardo. His analysis of rent long remained the classic account, while his theory of labor value was later adopted by socialists as well as classical economists. Ricardo's "iron law of wages" supplemented Malthus's pessimistic thesis by asserting that wages tend to stabilize at the subsistence level. John Stuart Mill was a follower of Ricardo and contributed to the study of international trade as well as to the study of the economics of industrial expansion. Among critics of free trade outside Britain were the German Friedrich List and the American Henry C. Carey.

The Socialists and Marx

The early exponents of socialism, especially in France, attacked the idea of the necessity of private property and competition and were interested in revamping the economic and social order. Among those were C. H. Saint-Simon, Robert Owen, Charles Fourier, and Louis Blanc. In Germany the historical school arose under Wilhelm Roscher, Bruno Hildebrand, and Karl Knies, who doubted the existence of universal economic laws and emphasized the particular development of economic institutions in individual nations.

The greatest challenge to classical economics came from the followers of Karl Marx. Marx's critique of capitalism was moral and social, as well as economic; but in the exposition of the workings of the capitalist system he and his followers developed important insights into the structural weaknesses of the market economy, especially the recurrence of economic crises (see depression).

Further Evolution of Classical Economics

At the same time as Marx was writing, the principles of classical economics were being reformulated and refined—it was at this time that the term "economics" replaced the term "political economy," which had been used through the mid-19th cent. The most important refinement was the doctrine of marginal utility, which asserts that the value of an item is determined by the need for it and by its relative scarcity or abundance at any given time—not by any intrinsic or inherent worth. The leading theorists in the development of the concept were William Stanley Jevons of Britain, Leon Walras of France, and Carl Menger of Austria. In the United States, John Bates Clark was notable in the development of marginal utility theory, forming his own hypothesis regarding the distribution of wealth. Classical economics reached its fullest expression at the end of the 19th cent. in the work of Alfred Marshall. Marshall used mathematics to perfect the application of classical techniques and introduced important modifications to the notions of competition, marginal utility, and rent.


Swedish economist Knut Wicksell was influential in the development of monetary theory, which concerned itself with overall price levels and interest rates in an economy. His work foreshadowed the most important modification of classical concepts of the free economy, exemplified in the work of John Maynard Keynes. In his General Theory of Employment, Interest, and Money (1936), Keynes opened up a whole new range of investigation into business cycles. A principal result of Keynes's teaching has been reflected in governmental attempts to control the business cycle by putting money directly into the economy; the "pump-priming" technique, often accompanied by an unbalanced budget, is now a part of most capitalist economic systems.

Since World War II

After World War II, emphasis was placed on the analysis of economic growth and development. Western economists notable for their contributions to the economics of growth and development include Gunnar Myrdal of Sweden, Sir Arthur Lewis of Great Britain, and Joseph Schumpeter of the United States.

In recent years, economic theory has been broadly separated into two major fields: macroeconomics, which studies entire economic systems; and microeconomics, which observes the workings of the market on an individual or group within an economic system. The use of complex mathematical techniques and statistical data in economic forecasting has resulted in a new branch of economics known as econometrics. British economist Arthur Pigou was influential in the development of welfare economics, an important branch of the discipline that suggested that an economic system was better if even one person's satisfaction was increased while no one else's was decreased.

In the 1980s supply-side economics (which sees economic growth as essential for improving the material health of society) was used as a policy tool by the Reagan administration. Another modern economic school that was influential in the Reagan years is monetarism; monetarists, such as Milton Friedman, believe that the money supply exerts a dominant influence on the economy. In the 1990s, Nobel laureate Gary Becker extended the scope of macroeconomic analysis by applying economic reasoning to human behavior, including the use of sociology, anthropology, and other disciplines. Game theory has also been applied to economics (see games, theory of).

Unit 2 Overview

Use of Scarce Resources and Gains from Trade

Unit 2 will introduce you to three economic models that are used in economics. These are the "production possibility frontier", the "comparative advantage" and the "circular-flow diagram". This unit will also discuss why economists often have different perspectives as you learn the difference between positive economics and normative economics. Additionally, you will learn how graphs are commonly used to represent economic concepts. 

After completing this unit, you should be able to:

  • Compare positive and normative economics 

  • Interpret Production Possibility Frontier models and their relationships to changing marginal opportunity costs

  • Explain how scarcity impacts economic and social welfare decisions

Course outcomes practiced in this unit:

BU224-1: Determine how markets allocate scarce resources.

What do you have to do in this unit?

  • Participate in Discussion Board.

  • Complete the unit Assignment.

  • Participate in Seminar or complete alternative assignment.

  • Review the Learning Activities.

  • Choose a Topic for your final paper.

  • Check out Extra! Extra!

Unit 2 Reading

Textbook Reading:

Krugman, P. & Wells, R. (2012). Microeconomics. New York, NY: Worth Publishers.

  • Chapter 2: "Economic Models: Trade-offs and Trades"

  • Chapter 2 Appendix: "Graphs in Economics"

Reading Summary

In this unit, you will read Chapter 2 and the Chapter 2 Appendix.

Chapter 2 introduces our first three economic models. Models are simplified representations of reality that allow us to hold everything else constant while examining the effect of a single change on an economic outcome. The production possibility frontier model illustrates the principles of scarcity, opportunity cost, specialization and trade-offs, and efficiency. The model of comparative advantage examines the gains from trade. The circular flow model helps economists analyze the monetary transactions taking place in the economy as a whole.

This appendix to Chapter 2 reviews basic math principles used in the study of economics. It introduces and defines important mathematical terms and explains their use in the construction of graphs and other visual images used in presenting verbal descriptions, numerical information, or ideas. The authors discuss how graphs work, the significance as well as the calculation of slope, the meaning of maximum and minimum points, and various methods for presenting numerical information, and different ways graphs may mislead or be misinterpreted.

Key Concepts

  • The use of models to simplify complex economic concepts found in the real world

  • Use of the Production Possibility Frontier model

  • Use of the comparative advantage model to explain gains from trade

  • How the circular flow model explains the flow of resources and goods/services in one direction and money in the other direction

  • The difference between positive and normative economic statements

  • Reasons that economists disagree or agree on issues

Download the glossary terms for the following chapters:

Chapter 2

Chapter 2 Appendix 

Download your Assignment instructions and grading rubric from Doc Sharing:

  • BU224_Unit2_Assignment.docx

  • BU224_Unit2_ResearchTopicAssignment.docx

Before you submit your Assignments, you should save your work on your computer in a location and with a name that you will remember. Make sure your Assignment is in the appropriate format (Word®, Excel®, PowerPoint®, or other), then, when you are ready, you may submit on the Dropbox page.

Dropbox Directions:

Go to the Dropbox to submit the saved file.

  • Click the "Dropbox" tab.

  • Click "Submit an Assignment".

  • Using the drop-down box, choose the Assignment. Make sure you have used the correct format (.doc).

  • Click "Add Attachments".

  • Click "Browse..."

  • Go to the folder on your computer that contains your projects. Click on the correct document. The filename should now appear.

  • Click "Attach file". Wait for the file to upload.

  • Click "Ok".

Your project has now been submitted.

This week's Seminar will focus on the concepts and material presented in Unit 2.

The instructor will discuss the main concepts of the material in the chapter(s) assigned for this unit. Students are expected to have read the chapter(s) in the textbook and other material posted by the instructor in "Doc Sharing" or "Announcements."

It is strongly suggested that you attend the graded Seminar at the regularly scheduled time. To obtain full credit, students should post frequently, be actively engaged in the Seminar, provide comments that improve the Seminar quality and advance the discussion by raising new issues and/or ideas.

If you are unable to attend the Seminar, you must complete the following assignment Assignment to obtain points for this part of the class. Write a 2-3 page paper, double spaced that addresses the following:

Write a 2-3 page paper that addresses the following:

  • Explain the Production Possibilities Frontier.

  • Explain the Circular Flow Model.

  • Discuss the difference between comparative and absolute advantage.

  • Discuss the difference between normative and positive economics.

Once completed submit your paper to the drop box for this unit.

Seminars are recorded and will be made available for everyone to review at a later time should you desire. These archived Seminars will remain available for the entire term.

Learning Activities

This section provides additional learning activities and resources for this unit.

Click here for a list of web research resources.�

Click here to test your knowledge.

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