Key Concepts and Summary

Key Concepts and Summary

Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons:

1. It allows the agents to focus on areas of advantage due to natural factors and skill levels;
2. It encourages the agents to learn and invent;
3. It allows agents to take advantage of economies of scale.

Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.

Glossary

division of labor

the way in which the work required to produce a good or service is divided into tasks performed by different workers

economics

the study of how humans make choices under conditions of scarcity

economies of scale

when the average cost of producing each individual unit declines as total output increases

scarcity

when human wants for goods and services exceed the available supply

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process

Critical Thinking Questions

• Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.
• Why would division of labor without trade not work?
• Can you think of any examples of free goods, that is, goods or services that are not scarce?