‘Economics is the art to meet unlimited needs with scarce resources’
– Laurence J.Peter
To the untrained eye, economics is a subject of statistics, money and loose ends; many students are led to believe that the subject exposes the secret to making money. However, with some disappointment, they will discover this is not the case. I too was tricked by this fallacy.
Economics, in its basic form, is the study of how resources are allocated among competing uses, and to illustrate this it might be useful to analyse a transaction.
A farmer gives an apple to an artist in exchange for a painting.
Firstly, let’s focus on the allocation of resources within production. The farmer has the skills and resources to produce apples, while the artist has the skills and materials required to compose a painting. Both individuals have different mental and physical resources available, and so it follows that they will produce different goods. Moreover, it is rational that they offer goods, and that they are comparatively better at producing- it reduces production costs as well as the risk of mistakes.
Secondly, let’s look at why they might be exchanging the goods. For instance, the farmer may want to gift a painting to his wife and the artist may be hungry. By exchanging goods, they both satisfy their needs. The price of each product may have been pre-arranged (the value of one painting equals one apple) or arranged through discussion (“I’ll offer you an apple for one of your paintings”). Either way, an agreement is met and the transaction occurs.
As an extension, an economist might consider the effect of a competitor upon the transaction. For example, another farmer might want the painting and thus value it at two apples. If this farmer makes a bid for the painting, it is more than likely that the artist will select his offer over the original offer set by the first farmer. As a result, it can be shown that the entry of a competitor can alter outcomes. The artist ends up with a better deal, whereas the original farmer is left without a painting, leaving them with two choices: increase their offering, or search for an alternative.
The transaction can be further applied to economics in many ways, but for the sake of this article, I will stop here. What I hope has been made obvious is that transactions can include many elements. Just like paintings are made up of different colours and tones, and apples are grown in different climates and soil types. No two transactions are the same- the way they react to external factors will vary.
Therefore, economics does not aim to find a ‘perfect’ transaction as such, but rather an ideal allocation of resources- an allocation that accommodates exchange and maximises the welfare of agents. This is the art of economics.