1. Why StudyEconomics?
Economicproblemsare an ever-presentandinherentpartof ourlives:the existence of highlevelsof
unemployment,global competitioninworldmarkets,argumentsaboutthe wisdomof free trade
agreements,the meritsof alternativepollutioncontrol policies,andthe Bankof Canada's forceful
endeavourstorestraininflation.While manyissuesare fundamentallyeconomicinnature,there are
manyother social,political andenvironmental problemsthathave importanteconomicconsequences.
The social science of economicsisourattemptto analyze andunderstandthese andmanyother
problems.More formally,economicsisconcernedwiththe material well-beingof humansocieties.Itis
oftendescribedasthe studyof howwe use our limitedresourcestosatisfyourunlimitedmaterial
wants.Anextensivebodyof analysishasdevelopedtodothat.
There are manyreasonsforstudyingeconomics.First,economicsisessentialtounderstandingthe world
inwhichyou live andwork.Whatdeterminesthe pricesof the goods andservicesonwhichyouspend
your income,andthe pricesof the stocksand bondsinwhichyou investyoursavings?How does
educationaffectthe lifetime earningsof people?Whydosome people earnsomuchand othersso
little?Whydosome jobspayhigh wageswhile otherjobspaylow wages?How dofirmsoperatingin
differentmarketenvironmentsdecide whatquantitiestoproduce of theirproductoutputs,whatprices
to charge forthese outputs,andwhatquantitiesof labourandcapital inputstoemploy? How can
economicanalysishelpusunderstandandsolve the problemsof environmental pollutionandresource
depletion?Whatdeterminesthe levelof national incomeandaggregate employment,the rate of price
inflation,the rate of unemployment,the rate of growthof aggregate outputandproductivity,andthe
international value of the Canadiandollar?Whydoaverage standardsof livingvarysowidelyamong
and withincountries?
A secondreasontostudyeconomicsisthat itcan equipyoutoparticipate more successfullyinthe
increasinglyknowledge-basedandinterdependentglobal economyof the twenty-firstcentury.
Economicsisfundamentallyaboutchoice behaviour -- abouthow individuals,families,firmsand
governmentsdeploytheirscarce resourcessoas to maximize the economicwell-beingof their
stakeholders.Howdoindividualsdecide how muchof theirtime todevote topaidwork,how muchand
whatkindsof formal educationtoacquire,how muchof theirincomestospendandsave,how to
allocate theirspendingamongthe vastarray of consumergoodsandservices,how toinvesttheir
savings,andhowmuch to investinhome ownership?Bysystematicallyaddressingthese sortsof
questions,economicscanhelpindividualsmake betterpurchasing,employmentand financialdecisions.
Andby providingin-depthanalysisof firms'decision-makinginavarietyof marketsettings,economics
can helpbusinessmanagersandexecutivesmake betterproduction,employmentandinvestment
decisions.
A thirdreasonto study economicsisthatit can give youa betterunderstandingof the objectives,
methodsandlimitationsof governmenteconomicpolicy.How cangovernmentpolicyhelpreduce
environmental pollution?Howdoesthe tax systemaffectthe incentivesforpeople towork,forfamilies
to spendandsave,and forfirmsto invest?How dogovernmentbudgetdeficitsanddebtaffectthe
economy?Whatare the effectsof freerinternational trade onCanadians'standardof living?Howdothe
actionsand policiesof the Bankof Canada affectinterestratesandthe moneysupply,andthence the
rate of price inflation,the external value of the Canadiandollar,andinternational capital flows?How
can governmentsenhance the competitivenessof domesticmarketsandthe international
competitivenessof Canadianfirms?CanCanadaaffordintheirpresentformthe country'slarge social
welfare programssuchas Medicare andthe Canada PensionPlan?
Top 10 ReasonsforstudyingEconomics
ShouldIstudyEconomics?Here are 10 absolutelyfoolproofreasonsforstudyingeconomics.

2. 1. Economic Forecaster.
As an economistyoucanmake a livingfrompredictingfuture economicevents.The keytobeingagood
economicforecasteristouse a mixture of dice andlotterynumbers.(some economistsmake the
mistake of usingjustlotterynumbers,butthiscanleadtoreallybadforecasting) If thismethodfailsjust
use the statisticsfromthe previousyear;theyare alwaysmore accurate than the actual predictionsof
economists.
Note:Economistshave successfullypredicted10out of the last2 recessions.
2. You can alwaysgive advice.
Whenthe economyentersarecession,youwill be able totell everybodywhythe economyisina
recession.Also,youwill be able tosuggestseveral conflictingreasonsastohow we can getout of a
recession.Thiswillsimultaneously,bothconfuse andimpresseverybody;butitdoesn'tmatterbecause
nobodyeverlistentoeconomists.
3. DiminishingReturns.
Whenyouget ill fromdrinking10 pintsof beerinone night,youwill be able toimpressyourparents
withthe knowledge thatthe lawof diminishingreturnsisactuallyperfectlycorrect.Asaside effect,you
may alsolearnaboutopportunitycost:
Spending£40 on drinkequalshangover.
4. Rational Behavior.
Economicsassumespeople are rational.Economicsassumesthatpeoplechoose the activitywhich
optimisesourutility.Whenpeople wanttobuya seasontickettowatch LeedsUnited,youcantell them
thisisirrational behaviour.However,the LeedsUnitedsupporterwilldefinitelyappreciate the cogency
of youreconomicreasoningandwill,more thanlikely,startsupportingDoncasterRoverswith
immediate effect.
5. Economicsis a veryhumoroussubject.
Didyou knowthat youcan rearrange Economicsto get "comicnose".If,thisalone,wasnotsufficient
proof of the hilarityendemicinthe subjectof Economics,trythese economicsjokes:
How manyFree Market economistsdoesittake tochange a lightbulb?None,inthe longrun,it will
change of itsownaccord.
How manyMarxistsdoesit take to change a lightbulb?None,smashthe lightbulb,alightbulbisa mere
representationof the capitalistideologythatgivesafeeblelight,ratherthanthe True source whichis
the sun.
6. Economicsgets youa high paidjob.
Actually,thisisthe onlyreasonpeople studyeconomics.Unlessof course youhave astrange desire to
be an economicsteacher;inwhichcase youwill enjoyyourstudentsrepeatedlyaskingyouthe question;
"Why didn'tyougeta properjobinthe city,Sir?"

3. 7. It's betterthan studyingGeography.
True,but puristsmayargue thisdoesn'tprove verymuch.
8. Economiesof Scale
Whenyouforgetyour wife's/girlfriendsbirthdayyoucansaythat youwere merelyseekingtomaximise
economiesof scale andproductive efficiency,becauseyouare waitingtogether a reallybigpresentat
Christmas.Thisalwaysgoesdownverywell.
(Inthe incrediblyunlikelyeventitdoesn't,don'tforgettoalsocheckout:
www.nofriendsandsingleconomist.com)
9. However- On the OtherHand
Economicsisthe onlysubjectwhere contradictingyourself isseenasa highlydesirable attribute.To
double the markon youreconomicsessays,justsayaftereachparagraph: however,onthe otherhand
thisisprobablynottrue at all...
10. You will KnowWhyyouare Unemployed
Whenyouare standinginthe unemploymentqueue,youwillbe able totell everyone the type of
unemploymenttheyare sufferingfrom.Thiswill greatlyendearyoutothe ranksof the unemployed;
whowill definitelynot,sarcastically,askyou;
EconomicsinAction
« What CavemenCanTeachUs AboutPropertyRights
Double diprecession:time topanic?»
The benefitsof studyingeconomics
Why StudyEconomics?is a website thatencouragesstudentsfromall educationalbackgroundstostudy
economicsastheirfirstdegree.Italsoprovidesinformationtoteachersandparents.
Where can studentsstudyeconomics?Over95departmentsacrossthe UK offeran Economicsdegree.
Some of these are straight(‘single’)Economicsdegrees.Normallytheyare simplycalledEconomics,but
sometimestheyare more specialist,e.g.Agricultural EconomicsorBusinessEconomics.Otherdegrees
combine Economicswithanothersubject(‘jointdegrees’).The titlesof thesejointdegreesincludes:
Economicsand Management;EconomicsandFinance;EconomicsandPhilosophy;Economicsand
Accounting;EconomicsandBusiness;EconomicsandHistory;andEconomicsandPolitics.
What will economicsstudentsdoatuniversity?Mosteconomicsstudentswill experience agenericfirst
yearat universitywhichbuildsasolidfoundation.The mostimportantmodulesforafirst-year
economicsstudentare IntroductoryMicroeconomics,IntroductoryMacroeconomics andQuantitative
Methodsfor Economics(statistics/mathematics).The conceptstaughtinthese three moduleswillbe
usedthroughoutaneconomicsundergraduate degree.Intheirsecond,andparticularlythird,yearat
university,economicsstudentswillhave anumberof optional units.Studentswillbe able tospecialisein
DevelopmentEconomics,ManagerialEconomics,LabourEconomics,MonetaryEconomicsandsoon.If
studentsare on a jointdegree theywillhave modulesintheirothersubjectinall three years,some of

4. whichwill be compulsory.Studentsoneithersingleorjointeconomicsdegreesmayalsobe able todo
an optional module inanothersubjectareasuchas a modernlanguage.
“Until studyinga course like economicsnotalotof people are aware of how the worldworks,including
industries,businessesandgovernments.Yourealise thatit’sveryimportanttobe educatedinthistype
of thingevenif itgetsto the stage where youbecome annoyedwithfamilyandfriendsformoaning
abouttaxes!”
The workloadat universityisgenerallyheavierthanatA-level.Studentscanexpectaround10 – 15
hoursof contact time a week,consistingof amixture of lecturesandtutorials/seminars/workshops.In
additiontothis,studentswill be expectedtoputina minimumof 20 hoursperweekof independent
study.The numberof contact hours will normallyfall betweenyearsone,twoandthree butthe amount
of independentstudywillrise (atleastitshoulddo!).
Why dostudentsenjoyeconomics?Economicsisthe perfectcombinationof numbersandwords,
problemsandessays,calculationsandinterpretations.Itisbothan art and a science subject.Students
have the opportunitytobuildmodelswhichgive insightsintothe real world,andthentocritique these
modelsonthe basisof theirassumptions.There israrelyarightanswerineconomicsbutany argument
put forwardmustbe backedup by quantitative evidence.Studentsultimatelyenjoyeconomicsbecause
it allowsthemtoemployanddevelopanalytical andevaluative skills.
“My decisiontopursue anEconomicsdegree hasbeenthe single mostvaluable investmentIhave made
to date. It sharpenedmyabilitytocriticallyassessinformation,deliverdisciplinedandwell structured
argumentsandbecome a more confidentteamplayer.”
What do studentsneedtohave studiedtoreadeconomicsatuniversity?
Some universitieshave A-level Mathsasa prerequisitefortheireconomicsdegrees.Evenif itisnot
required,A-level Mathsisstill veryuseful foruniversitylevel economics,especiallythosedegreeswitha
heavynumberof quantitative modules.Those institutionsthatdonot require A-level Mathsstill require
a good GCSE inMaths. Furthermore,some universitiesmaylookmore favourablyoncandidateswith
otherquantitative subjects,suchasPhysicsorAccounting.Nouniversityrequiresstudentstohave
studiedA-level Economics,butithelpsif theyhave.Aside fromthe subjectsstudied,studentsshould
onlychoose toread economicsatuniversity:if theyenjoykeepingupwithcurrentaffairs;if theyare
comfortable workingwithnumbers;andif theyare willingtowrite anumberof essays.
But howcan a student,whohasneverstudiedeconomicsbefore,prepare fortheirdegree?One wayis
throughworkexperience, especiallywhenthisinvolveshandlingmoneyormakinganyformof
economicchoice.Readingeconomicarticlesinnewspapersand/orsubscribingtoThe Economistwill
give studentsanedge overtheirpeerswhenitcomestowritingtheirfirstessay.Students couldalso
reada couple of the bookson theircourse’sreadinglist,particularlythosethatgive lotsof background
information(e.g.“Fool’sGold”byGillianTett).Alternatively,alotof the populareconomicsliterature,
such as the UndercoverEconomistorFreakonomics,willshow studentsthateconomicscanbe usedto
explainvirtuallyanyphenomena.
“Economicsplacesa keyrole inall aspectsof life andisan importantsubjectworthknowingmore
about.”

5. To get an ideaof the level of mathsinvolvedintheireconomicmodules,studentsshouldhave aflick
througha firstyear textbookandhave a go at some of the problemsset.Finally,studentsshouldbrush
up on theirstatisticseitherbygoingbackto theirnotesor,if theydidnot studymaths,by working
throughsome problemsinanA-levelstatisticstextbook.Statisticsisvital forstudentstounderstand
econometrics,atechnique usedbymanyauthorsina numberof economicjournals.
Andwhat can studentsdoafteran Economicsdegree?Economics graduatesare well equipped,having
analytical andproblem-solvingskills,numerical andcomputerskills,aswell asthe abilitytoworkwell
eitheralone orwithinateam.All of these skillsare verytransferable allowingeconomicsgraduatesto
branch intoanythingfrominvestmentbankingandfinancial services,businessandpublic-sector
managementandresearch,toworkingwithcharities,teachingorthe media.There islittle restrictionon
whatstudentscan do afterwards.
“By the endof the degree youemerge asa studentwhocan readas well asa law graduate,compute as
well asan accountant,and analyse dataas well asa statistician.”
Andof course there ismoney.Economicsgraduatestypicallyearn£4000 more thanthe average
graduate intheirfirstposition.
EightReasonsto Studyan EconomicsDegree
For those consideringadegree inthisareabutneedfurtherconvincing,the Complete UniversityGuide
lendsitsexpertise.Here are eightcompellingreasonstostudyan Economicsdegree:
1. Excellentgraduate prospects
Take a lookat our Economicssubjectleague table,readdownthe graduate prospectscolumnandyou’ll
see that economicsstudentsstandafairshotof gainingprofessionalemploymentwithinsixmonthsof
graduating.The top tenuniversitiesforEconomicsall enjoyascore of over80%.
2. Good graduate premium/graduate salaryadvantage
Out of the Complete UniversityGuide’s67subjects,Economicsplacesatan extraordinaryeighthinour
rankingsforprofessional premium.Thismeanseconomicsgraduatesinprofessional jobsearnon
average £8,803 more than those ina non-professional job.
3. Economicsand the world
Economicsistrulyall around us,presentinalmosteveryaspectof our lives.Studyingthe subjectgives
studentsageneralistunderstandingof the worldwe live inanditsinnerworkings.Studentslearn
everythingfromwhatdeterminesthe price of goodsandservicestowhythe average standardsof living
vary so widelywithinandbetweencountries.
4. Combinedcourses
What witheconomicspervadingeveryelementof ourlivesitfollowsthatthe subjectcomplements
othersso well.Manyuniversitiesofferdual honoursdegreessostudentscancombine theireconomics

6. degree withanotherpassionorinterest.Here’salistof EconomicsandLaw coursesat UK providersto
give youan idea.
5. Varietyof modules
Economicshas an impacton all walksof life andtrue to formuniversitiesofferalarge varietyof modules
to reflectthis.Youcouldbe studyinganythingfrompublic policytoenvironmentaleconomics.
6. Internationallydiverse cohort
The qualityof economicseducationatUK universitiesattractsa substantial numberof studentsfrom
overseas.Infactit’sour businessandadministrativedegreeswhichbenefitfrom the largestnumberof
international students.The figure ismore thandouble thanthatof engineering&technology,the next
highestsubjectgroup.
7. Real-lifeapplication
The case-basedlearningemphasisoneconomicsdegreesmakesitreallyeasytosee how the theoryhas
real-lifeapplications,particularlywhenconsideringthe recentvolatilityof global markets.Many
universitiesalsooffertheirthe opportunitytoapplylearninginthe workingworldwhilststudying,with
a year inindustry.Here’salistof Economicssandwichcoursesforyourperusal.
8. Independence
Economicsstudentsdevote alotof theirlearningtime toindependentstudy.Thisequipsthemforlifein
the real-world,where people are expectedtotake responsibilityfortheirown developmentand
conversely,contribution.
Welcome toHES
Since itsformal establishmentin1974, the Historyof EconomicsSocietyhascommitteditself to
encouraginginterest,fosteringscholarship,andpromotingdiscussionamongscholarsandprofessionals
inthe fieldof the historyof economics.The societyisaninternational organizationthatpublishesthe
Journal of the Historyof EconomicThoughtin conjunctionwithCambridgeUniversityPress,sponsorsan
online collectionof workingpapersunderthe name of the SSRN Historyof EconomicseJournal,supports
withothersocietiesthe SHOEemail listhostedbyYorkUniversity,providesgrantsaspart of the Samuels
Young ScholarsProgram,andis a contributingpartnertonew initiatives.
Historyof EconomicseJournal inAssociationwiththe SSRN EconomicsResearchNetwork
SSRN Historyof EconomicseJournal promotescommunicationamongscholarsinterestedinall aspects
of the historyof economicthought.Workrelatedtoall periodsandto anyschoolsof economicthought
are welcome,asisworkthat situateseconomicsinwiderintellectualandcultural contextsorrelatesit
to otherdisciplines.Workrelatedtothe historyof closelycognate disciplines(e.g.,statisticswith
economicapplicationsoreconomicsociology) isalsoaccepted.Essentially,anyworkthattouchesthe
historyof economicsasa discipline orthatwouldbe of interesttoscholarsworkinginsuchan area is
encouraged.KevinD.HooverandStevenG.Medemaare SSRN Historyof EconomicseJournal editors.

7. The Importance of Economics
TejvanPettingerNovember8,2007 economics
ReadersQuestion:Whatare the importance of economics?
Firstly,here isarather, frivolouslookat10 reasonsto studyeconomics
On a more seriousnote.The importance of economicsincludesthe following:
Dealingwithashortage of Raw Materials.Economicsprovidesamechanismforlookingatpossible
consequencesaswe runshortof raw materialssuchasgas and oil.
How to distribute resourcesinsociety. Towhatextentshouldwe redistribute incomeinsociety?Is
inequalitynecessarytocreate economicincentivesordoesinequalitycreate more economicproblems.
The Principle of OpportunityCost.Politicianswinelectionsbypromisingmore spendingandcutting
taxes.Thisisbecause lowertaxesandmore spendingiswhatvoterswanttohear.However,an
economistwill be aware thateverythinghasanopportunitycost.Spendmore onsubsidisingfree
universityeducation,anditmeanshighertaxesandlowerspendingelsewhere.Givingstudents£4,000 a
yearto spendat universitymaybe anoble ideal.But,isitthe bestuse of publicmoney?Are there not
betterusesof money?
Social efficiency.The free marketleadstocountlessexamplesof marketfailure.Ifeel one of the best
usesof economicsisto provide solutionstoovercomingmarketfailure.Forexample,drivingintothe
centre of town createsnegative externalitiessuchaspollutionandcongestion.There is
overconsumption.Aneconomistcansuggestatax on drivingintotownstointernalisethe externality.Of
course newtaxesare not popular,but,itwouldprovide abettersolutionforsociety.Youmaynotwant
to pay £10 a weektodrive intoa citycentre.But,if it savedyou2 hoursof sittingina jam, thenmaybe
youwouldbe quite happytopay it.
KnowledgeWhenYouare Unemployedandwaitinginthe queue forunemploymentbenefits,asan
economistyouwill knowWHYyouare unemployed,whichisof course a great comfort.
The Importance of Economics
ReadersQuestion:Whatisthe Importance of Economics?
I wouldsuggestthe mainimportance of economicsishelpingsocietydecide onthe optimal allocationof
our limitedresources.The fundamentalproblemof economicissaidtobe scarcity - the ideathatwants
(demand) isgreaterthanthe resourceswe have.Frequentlywe face choiceson:
What to produce
How to produce
For whomto Produce
Economicshelpstodecide onquestionslike this.More specificallyeconomicsisimportantinthese
areas.
How to manage the macro economy.
Economistscan advise governmentshow tomanage the economyandavoidproblemssuchasinflation
and unemployment.Bothinflationandmassunemploymentcanbe devastatingforsociety.Economists
argue that both can be avoidedthroughcareful economicpolicies.Forexample:
Policiestoreduce unemployment
Policiestoreduce inflation

8. If economicscan helpreduce unemployment,thenitcanmake a bigimprovementtoeconomicwelfare.
For example,the massunemploymentof the 1930s great depression,ledtomuchpolitical instability
and the rise of extremistpolitical partiesacrossEurope.
However,the problemisthateconomistsmayoftendisagree onthe bestsolutiontothese problems.
For example,atthe startof the great depressionin1930, leadingeconomistsinthe UKTreasury
suggestedthatthe UK neededtobalance the budget;i.e.highertaxes,lowerunemploymentbenefits.
But, thismade the recessiondeeperandledtoa fall indemand.
It was inthe great depressionthatJohnMaynard Keynesdevelopedhisgeneral theoryof Employment,
Income andMoney.He arguedthat classical economicshadthe wrongapproachfor dealingwith
depressions.Keynesarguedthatthe economyneededexpansionaryfiscal policy. - higherborrowingand
governmentspending.
Four Basic Economic Questions
CommandMarket Traditional
1. What to produce?
2. How to produce it?
3. How much to produce?
4. Who getswhat isproduced?
Economic Definitionofthe Four Factors of Production
by Osmond Vitez,DemandMedia
Economic resourcesare the goods or servicesavailable to individualsand businessesusedtoproduce
valuable consumer products. The classic economicresources include land,labor and capital.
Entrepreneurshipisalso consideredan economicresource because individualsare responsible for
creating businessesandmovingeconomic resourcesinthe businessenvironment.These economic
resourcesare also calledthe factors of production. The factors of production describe the function
that each resource performsin the businessenvironment.
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Land
Land isthe economicresource encompassingnatural resourcesfoundwithin a nation’s
economy.This resource includestimber,land, fisheries,farmsand other similarnatural resources.
Land isusually a limitedresource for many economies.Althoughsome natural resources,such as
timber,food and animals, are renewable,the physical land is usuallya fixedresource.Nations must
carefullyuse their land resource by creating a mixof natural and industrial uses.Usingland for
industrial purposesallows nationsto improve the productionprocessesfor turning natural resources
into consumergoods.
Labor
Labor representsthe human capital available to transform raw or national resourcesinto consumer
goods. Human capital includesall able-bodiedindividualscapable ofworking inthe nation’s

9. economyand providingvarious servicesto other individualsorbusinesses. Thisfactor of production is
a flexible resource asworkerscan be allocated to differentareasof the economyfor producing
consumergoods or services.Human capital can alsobe improvedthrough training or educating
workers to complete technical functionsor businesstasks whenworking with othereconomic
resources.
RelatedReading: Factors That AffectEconomic Development
Capital
Capital has two economicdefinitionsasa factor ofproduction. Capital can representthe monetary
resourcescompaniesuse to purchase natural resources,land and other capital goods. Monetary
resourcesflow through a nation’seconomyas individualsbuyand sell resourcesto individuals
and businesses.
Capital also representsthe major physical assetsindividualsand companiesuse when producing
goods or services.These assets include buildings,productionfacilities,equipment,vehiclesandother
similaritems.Individualsmay create their own capital production resources,purchase them from
another individual or business or lease themfor a specificamountof time from individualsorother
businesses.
Entrepreneurship
Entrepreneurshipisconsidereda factor of production because economicresourcescan existin an
economyand not be transformed into consumergoods. Entrepreneursusuallyhave an idea for
creating a valuable good or service and assume the risk involvedwithtransforming economic
resourcesinto consumerproducts. Entrepreneurshipisalso considereda factor of productionsince
someone must complete the managerial functionsof gathering,allocatingand distributingeconomic
resourcesor consumerproducts to individualsand other businessesinthe economy.
4 Factors of Production Economics
by Angie Mohr, Demand Media Google
The resourcesneededtoproduce products and servicesare calledfactors of production.
The resourcesneededtoproduce products and servicesare calledfactors of production.
RelatedArticles
Do Firms Own the Factors of Production?
Factors of Production in a Retail ClothingStore
What Are the Factors of Productionfor the iPodTouch?
How to Start a ClothingBusinessat Home
Economic Definitionofthe Four Factors of Production
Economic Factors of Production
The economictheory of factors of productionencompassesall of the resources and inputsthat go into
the manufacturing ofproducts. Apart from direct inputssuch as materialsand labor, factors of
production include the skills,human resources,and equipmentthat are requiredto create a product.
For small businesses, understandingthese inputsiscritical to the bottom line of the company as small
incremental changesin cost structures can be the difference betweenprofitandloss.
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Production Capital
Besidesthe suppliesand materialsthat go into the manufacturing process, other"hard" assetsare
needed,suchas equipment,buildingsandtrucks. These assetsare known as productioncapital.
Production capital variesdependingonthe type ofbusiness.In a manufacturingsetting,it includesthe
machinery usedto buildthe products, the forkliftsneededtowarehouse and move them,and the
buildingthat housesthe operation.In a service business,itcould include computers,desksand
telephone equipment.
Human Capital
No businessiscompletelyautomated;humans are involvedin producingany business' productor
service.Labor isoftenone of the largest expensesofa businessand managing human capital
appropriatelyand efficientlyisone ofthe hallmarks ofa successful business.Humancapital can also
impact a businessina lessdirect,but just as important, way. Customersand clientssee the employees
in a businessas a reflectionofthat company. The way that the human resourcesof a company
interact with the customer base has a large impact on customerlongevityand loyalty.
RelatedReading: What Factors Impact the Elasticity of Demand for Products?
Resource Capital
The buildingand equipmentrequiredtorun a businessneedtobe located somewhere.Resource
capital encompassesthe physical space a company occupies,as well as other non-man-made
resourcessuch as water and air. Manufacturing operationsoften use more resource capital than
service businessesbecause the manufacturing process requiresmore space for production,
warehousingand showcasing.
Intellectual Capital
A businessisfar more than the sum of itsphysical parts. It takes entrepreneurial spirit,experience,
creativity and know-howto make a businesssuccessful.These componentsare collectivelycalled
intellectual capital.Alsoincludedare rights, patents and trademarks; everythingthat you can't touch
or see but isoftenthe reason a businessgrowsand succeeds.Sometimes,these "assets" ofa business
are not captured on a traditional financial statementas their value is indeterminable.Itisalmost
impossible forcompetitorsto duplicate intellectual capital,making it one ofthe most covetedand
useful assetsa businesscan own.
Gettingthe Most Out ofLife: The Concept of OpportunityCost
Russell Roberts*
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"To get the most out oflife,to think like an economist,you have to be know what you're givingup in
order to get somethingelse."

11. One ofthe challengesofbeingan economistisexplainingwhat you do for a living.People understand
that one of the thingsa professorof economicsdoesis teach economics.But what is that, exactly?
Most presume it has somethingto do with investingand financial management.WhenI once told my
seatmate on an airline flightthat I was an economist,she said,what a shame,my husband lovesthe
stock market. Hmm. I didn'ttell her that otherthan the advantages of investingin indexedmutual
funds,I know nextto nothing about the stock market.
My seatmate mighthave profitedfrom reading AlfredMarshall who calledeconomics"the study of
mankind in the ordinary businessof life." Thiswas the enterprise ofMarshall and Adam Smith and
FriedrichHayek and Milton Friedman:they triedto understand what people do and the implications
of theirbehavior for the society at large.
But my favorite definitionofeconomicsisa variant ofMarshall's.It comesfrom a studentwho heard
it from another teacher ofhers: economicsis the study ofhow to getthe most out of life.I like this
because it strikesat the true heart of economics—the choiceswe make,giventhat we can't have
everythingwe want. Economicsis the study of infinite wantsand finite means,the study of
constrainedchoices.This is true for individualsand governments,familiesandnations.Thomas Sowell
said it best:no solutions,onlytradeoffs.To get the most out of life,to thinklike an economist,you
have to be know what you're givingup inorder to getsomethingelse.That's all opportunity cost is:
Opportunity cost is what you have to give up to getsomething.
What could be more straightforward? If you want somethingyou have to give up something.The idea
turns out to be a little subtlerthan it appears at first glance.Let'slook a little more closely.
MiltonFriedmanused to say that economicsis simple.All you have to rememberisthat demand
slopesdownward and that nothing'sfree.The hard part isapplying those two simple ideas.When
Friedmansaid that nothingwas free,he meant that everythinghas a cost. Take the proverbial free
lunch that Friedmandelightedinpointingout didn't exist.Suppose I invite you to lunch and it'son
me—Ipromise to pay and I keepthat promise.Free,right?No, says the economist.
Economist: There'sno monetary cost. Today. But there'san expectationthat you'll return the favor
and treat me to a future lunch.
You (believerinthe free lunch): But you don't realize I'mnot a nice person.I don'tplan on
reciprocating and I'mgoing to keepthat promise to myself.Today's lunchis free.
Economist: No. Evenif you don'tplan to reciprocate,the guilt at beinga moocher is a cost.
You: Youdon't realize justhow not-nice I am. I have no conscience.SoI do get a free lunch.
Economist: Alas,no. You have to listento me talk while we're eating.
You: I won't be listening.I'mgoingto daydream about an upcoming vacation. I'm goingto pretendto
be pay attention.
Economist: Still not free.The cost of having lunchwith me, evenwhenI pay, evenwhen you don't
plan on reciprocating and evenwhenI do all the talking that you ignore,is the pleasure you would
have receiveddoingsomethingelse instead.Whateveryougave up to have lunchwith me. Not just

12. the money.Not just the time. But the value or pleasure youwould have receivedfromdoing
somethingelse.
So one ofthe keys to thinkinglike an economistisalways rememberingthat everythinghas a cost.
This may be one reason economistshave fewerfriendsthan theyotherwise would.Sometimespeople
are very happy holdingon to the naïve viewthat somethingis free.We like the idea of a bargain. We
don'twant to hear about the hiddenor non-obviouscosts. Thinkingabout foregone opportunities,the
choiceswe didn'tmake, can lead to regret.Choosingthis college meansyou can't go to that one.
Marrying this personmeans not marrying that one.Choosingthis desert(usually) meansmissingout
on that one.Sometimes,people justwant to eat their cake and have it, too, withoutbeingreminded
that theymissedout on a spectacular piece ofpie.
Many people thinkthat this constant harping on opportunity costs and alternativesand tradeoffsis
why economicsis calledthe dismal science.Frequentvisitorsto the Library of Economics and Liberty
know better.See The Secret History of the Dismal Science by David M. Levy and Sandra J. Peart
All true. But ifyou want to get the most out of life,youhave to take account of the opportunity cost,
the foregone alternatives.Betterto make good choicesand learn how to live with them than make
bad choices inblissful ignorance that leadto ruin. Here are some applicationsof how understanding
opportunity costs helpsyou getthe most out of life.
The real cost of college
What'sthe cost of college?The obviouspart of the cost ofcollege is tuition.It'snot room and board
because those would be incurredanyway. But the opportunitycost includesthe foregone wagesfrom
the jobsyou could have had if you hadn'tgone to college.Thisis one ofthe reasons we go to college
whenwe're young without any experience inthe workplace—ourwagesare relativelylowso the
foregone earningsfrom goingto college are lower.
The return on your investments
Economists do know somethingabout the stock market. If you tell me you have a great investment
track record, I want to know: compared to what. A mutual fundmanager who earned 12% last year
for his investorsseemsto have had a banner year. But mutual fundsindexedtothe S&P 500 earned
over 15%. Ifboth funds had a similarlevel ofrisk, that mutual fundmanager had a negative return of
3%. Similarly,holdingyour assets in the form of cash meansforegoingthe opportunityto investthem.
The opportunitycost of cash is the return you could earn by investingit.
Home ownershipand home improvements
Real estate agents like to tell you that a house isa great investment.Yourhouse is appreciating and
you get to live in it. Sometimesbothare true statements.But appreciationof the house isn'tenough
to make it a good investment(ora reasonto buy a particularly large house on the argument that if
the investmentisgoingto appreciate,it'sbetterto have a biggerstake). Home ownerslike to savor
how much they soldtheir house for above what they paid for it. Whenmeasuringthe return, they
rarely subtract the direct monetary costs—the repairs,the taxes,and the feesand commissionsof
lawyers,real estate agents and governmentagencies.But I've neverknown the proud Boston or

13. Washingtonor L.A. house sellerwhocalculates the foregone investmentopportunitiesfromtyingup
the down paymentand the mortgage payments overthe life of the time inthe house.
Similarly,real estate agents (and contractors) like to tell you that re-doingyour kitchenis a good idea
because you'll getthe money back in the form ofa higherprice whenyou sell your house.So the
kitchenis free!And in the meanwhile,youget to enjoythe pleasuresof the kitchen.That logic is fine
as long as you getenoughpleasure from the kitchento offsetthe opportunitycost of tyingyour
moneyup in cabinetry and granite and givingup the return you could have earneddoingsomething
else withthe money.
One aspectof home ownershipand opportunitycost isparticularly tricky. Suppose your house
appreciates.You could sell itand move to a smallerhouse or a house in a differentneighborhood.But
you decide to stay. The appreciationof your house meansit has gottenmore costly to live in it. But
that increase incost, being an opportunitycost rather than an out-of-pocketcostdoes not mean you
are worse off.In fact, it is a signthat you are better off—anassetyou own has appreciatedand your
wealthis higherat least as long as the appreciationstays in place. Opportunitycost isdifferentfrom
what we think of colloquiallyascost, which usuallymeans a monetary payment.Opportunity cost
guidesrational decision-making.Butan increase incosts doesn'tnecessarilymeanthat you are worse
offthan you were before.
Sunk costs are sunk, historical costs are history
Opportunity cost is a forward-lookingconcept. Ifmy car breaksdown and I fixit, and it breaks down
again, the decisionto fixit a second time is independentofthe firstrepairs costs. It isirrational to
think that I have to fixit because I've put so much money into the car already—ifI don'tfix it,I'll lose
all the money I've already invested.I've alreadylostthe moneyon the first repair. NowI shouldonly
ask whether the second setof repairs are worth it.
A variation on the "sunkcost" argument is the irrelevancyof historical costs. Whatthe sellerpaidfor
a house twentyyears ago has little effectonthe market price today. Complainingthat the selleris
charging an exorbitantprice compared to what the sellerpaidoriginally,onlyinsuresyou will have
trouble findingsomeone to sell you a house that meetsyour standards ofa fair price. On the flipside,
explainingtoa prospective buyerin a housing market that has collapsed,that your price is high
because after all, you paida lot for it once and it'sonly fair that you getyour money back plus a fair
return, is unlikelytobe a successful strategy for sellingyourhouse.Market pricesignore history.
Replacementcosts are more relevantthan historical costs. Ifa friendgivesyou a Van Goghas a
weddingpresentand a fewyears later, a drunken dinnerguestplungesa carving knife through it after
losinghis balance,your guest wouldn'ttell you to shrug it off because after all,it was a gift, you didn't
pay anything for it.
Self-sufficiencyvs.relyingonothers
Perhaps the most important application of opportunitycost is the decisionto do thingsfor yourselfvs.
hiringsomeone.Doing it yourselfisoften cheaperand can be fun. But the cost of doing it yourselfis
the value of the otherthings you could have done with your time.Those otherthings might include
working a part-time jobor doingconsulting,which means you foregomoney.So doing it yourselfcan
be costlyin the monetary sense.But the non-monetarycosts can dwarf the monetary costs. Time

14. spentpainting your house yourselfis time you can't spendreading to your childrenor beingwith your
spouse or volunteeringat the local soupkitchen.
Ultimately,anythingclose to genuine self-sufficiencyisthe road to poverty. An avid do-it-yourselfer
might change herown oil, bake her own bread and build a bookcase in herbasementworkshop. But
she won't forge her own steel and the fashionher own car. She won't grow her own wheat or mill her
own flour.She won't cut down a tree and plane the wood for that bookcase.And evenif she did, she'll
buy the saw. She won't make it for herself.
Opportunity cost is keyto understandingthe concept of comparative advantage. See Comparative
Advantage, by Lauren F. Landsburg and Treasure Island: The Powerof Trade Part I. The Seemingly
Simple Story of Comparative Advantage, by Russ Roberts.
By specializingina very small set of skills,sellingthose skillsin the marketplace and relyingon the
skillsof otherspecializingindividualswe create much of what we call specialization.We specialize
because the costs of self-sufficiencyare so high.
Of all the constraints we face, the constraint of 24 hours in a day and a finite lifetime are oneswe
cannot escape. Gettingthe most out of life meansusing that precioustime wisely.Usingthat time
wiselymeansusing and understandingopportunity cost.
Real vs. Nominal
Supplementaryresourcesby topic. Real vs. Nominal isone of 51 key economicsconceptsidentifiedby
the National Council on Economic Education (NCEE) for highschool classes.
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On this page:
DefinitionsandBasics
In the Newsand Examples
A Little History: Primary Sources and References
Advanced Resources
RelatedTopics
DefinitionsandBasics
Definition:The nominal value of a good is its value in terms of money.The real value is itsvalue in
terms of some other good, service,or bundle ofgoods.
Examples:
Nominal:That CD costs $18. Japan's science and technologyspendingisabout 3 trillionyenper year.
Real: A year of college costsabout the value of a Toyota Camry. Those ticketsto see Van Halencost
me three weeks' worth offood!
Relative price is another term for the real price of a good or service.Whenwe say that the relative
price ofcomputers has fallenin recentyears, we meanthat the price of computers relative to or
measuredin terms of othergoods and services—suchas TVs or cars—has declined.Relative pricesof
individual goodsand servicescan decrease evenifnominal prices are all increasing,because of
inflation.

15. Real versusnominal value,at Answers.com
In economics,the nominal valuesof somethingare its moneyvaluesin differentyears.Real values
adjust for differencesinthe price level inthose years. Examplesinclude a bundle of commodities,
such as Gross DomesticProduct, and income.For a seriesofnominal values insuccessive years,
differentvaluescouldbe because ofdifferencesinthe price level.Butnominal valuesdo not specify
how much of the difference isfromchanges inthe price level.Real valuesremove this ambiguity.Real
valuesconvert the nominal valuesas ifprices were constant in each year of the series.Anydifferences
in real valuesare thenattributed to differencesinquantitiesofthe bundle or differencesinthe
amount of goods that the moneyincomescould buy in each year....
GrossDomestic Product, from the Concise EncyclopediaofEconomics
In practice BEA firstuses the raw data on production to make estimatesofnominal GDP,or GDPin
current dollars. It thenadjusts these data for inflationto arrive at real GDP. But BEA also usesthe
nominal GDP figuresto produce the "income side" ofGDP in double-entrybookkeeping.Forevery
dollar of GDPthere isa dollar of income.The income numbersinformus about overall trends inthe
income of corporations and individuals.Otheragenciesand private sources report bitsand piecesof
the income data, but the income data associated withthe GDP provide a comprehensive and
consistentset ofincome figuresfor the UnitedStates. These data can be usedto address important
and controversial issuessuchas the level and growth of disposable income percapita, the return on
investment,andthe level ofsaving....
Interest,from the Concise EncyclopediaofEconomics
The real interestrate on moneyloans will be the stated (or nominal) rate minus the anticipated rate
of inflation.In countriesthat are experiencingrapidgrowthin the amount of moneyavailable,
interestrates will be veryhigh. But these will be not be highreal interestrates. Instead,they will be
high nominal interestrates. If expectedinflationis10 percent,for example,andif the real interest
rate is 5 percent,the nominal interestrate is 15 percent.But someone wholendsmoneyat 15 percent
for a year will not be repaidwith 15 percentmore resourcesat the endof the year. Rather, the lender
will be repaidwith 15 percentmore money and will be able to use that money to buy only 5 percent
more resources....
In the Newsand Examples
Tax FreedomDay 2014 is April 21, Three Days Later Than Last Year. TaxFoundation.org
Tax FreedomDay is the day whenthe nation as a whole has earnedenough moneyto pay itstotal tax
bill for year. A vivid,calendar-basedillustrationof the cost of government,Tax FreedomDay divides
all federal,state,and local taxes by the nation�sincome.In 2014, Americanswill pay $3.0 trillionin
federal taxesand $1.5 trillionin state taxes,for a total tax bill of $4.5 trillion,or 30.2 percent of
income.This year, Tax FreedomDay fallson April 21, or 111 days into the year.
A Little History: Primary Sources and References
Irving Fisher,from the Concise Encyclopediaof Economics
Fisherwas also the first economistto distinguishclearlybetweenreal and nominal interestrates. He
pointedout that the real interestrate is equal to the nominal interestrate (the one we observe)
minusthe expectedinflationrate.If the nominal interestrate is 12 percent,for example,but people
expectinflationof 7 percent,then the real interestrate is only 5 percent.Again,this is still the basic
understandingof moderneconomists....
1. Nominal InterestRates vs. Real InterestRates

16. Suppose we buy a 1 year bond for face value that pays 6% at the endof the year. We pay $100 at the
beginningofthe year and get $106 at the end of the year. Thus the bond pays an interestrate of 6%.
This 6% is the nominal interestrate, as we have not accounted for inflation.Wheneverpeople speak
of the interestrate they're talkingabout the nominal interestrate, unlesstheystate otherwise.
Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today and it will cost
$100, or we can buy that basket nextyear and it will cost $103. If we buy the bond with a 6% nominal
interestrate for $100, sell it after a year and get$106, buy a basket of goods for $103, we will have $3
leftover. So after factoring in inflation,our$100 bond will earn us $3 inincome; a real interestrate of
3%. The relationshipbetweenthe nominal interestrate, inflation,and the real interestrate is
describedby the FisherEquation:
If inflationispositive,whichit generallyis, thenthe real interestrate islower than the nominal
interestrate. If we have deflationand the inflationrate is negative,thenthe real interestrate will be
larger.
2. Nominal GDP Growthvs. Real GDP Growth
GDP, or GrossDomestic Product is the value of all the goods and servicesproducedin a country. The
Nominal Gross DomesticProduct measuresthe value of all the goodsand servicesproduced
expressedincurrent prices.On the other hand, Real Gross DomesticProduct measuresthe value of all
the goodsand servicesproducedexpressedinthe prices of some base year. An example:
Suppose in the year 2000, the economyof a country produced $100 billionworthof goods and
servicesbasedon year 2000 prices.Since we're using2000 as a basis year, the nominal and real GDP
are the same.In the year 2001, the economyproduced $110B worth of goods and servicesbased on
year 2001 prices.Those same goods and servicesare insteadvaluedat $105B if year 2000 pricesare
used.Then: