101 Economics: You--and people like you--are the most important part of any economic system. (Money and You).

Most students yawn when they hear their parents and teachers talk about economics. What could be more boring than a discussion of interest rates, bonds, and savings!

You may not realize it, but you already make lots of economic decisions each day. When you buy a candy bar rather than save your money for a new CD, that's an economic choice. When you make a birthday present for a friend because you can't afford to buy him or her a new video game, that's also an economic decision.

Economics is the study of how people use limited resources to make, distribute, and consume (use up) goods and services. Economists try to understand the relationships between consumers wants and needs and all of the products that are made, bought, and sold.

For decades, people have been arguing over what's included in the study of economics--a vast field that covers just about everything having to do with money. One scientist got tired of the discussion and finally said, "Economics is what economists do."

"Scarcity" of Goods and Services

The Earth has only so many resources, and there just aren't enough things--cars, computers, CDs, even candy--for everyone. Economists call this phenomenon scarcity. Due to scarcity, people have to make choices about what they can buy (a new T-shirt) and what they can only dream about buying (a tropical island).

The things people buy and sell come in two basic forms. Goods are items of value that can be seen and touched, such as baseball mitts and TVs. Services are actions that are of value to people and society, such as education, entertainment, and health care.

As you now know, scarcity means that the number of goods and services available are limited. That's why things have a price, and why we have to pay for them.

Supply and Demand

Imagine that you spent the past few months saving up to buy a new leather jacket--a steal at $50. You finally get the money together and go to the store. But something's wrong. The price has gone up, and now your dream jacket is $69.99.

That's not fair! Or is it? The price of an item depends upon supply (the availability of an item) and demand (how many people want an item and how much money they are willing and able to pay for it).

Generally, an increase in demand tends to make prices higher, while a decrease in demand tends to make them lower. Supply works in the opposite direction: An increase in supply often makes prices lower, while a decrease in supply can make them higher.

The availability and price of an item are also determined by the cost of producing and distributing it. Costs include labor, natural resources, and capital (the money and machinery used to make goods).

If an item is cheap and easy to produce, like a pencil, manufacturers will be happy to create it in large quantities. But if an item is expensive and difficult to make, like a 40-foot sailboat, fewer people will be able to produce it.

How might these principles have affected the price of your jacket? Maybe a fire at the manufacturer's (maker's) factory has put your jacket in short supply. You know what happens when the supply of something goes down: The price goes up.

Or maybe your jacket has become the season's must-have item. Suddenly, everybody wants one. Since demand is so high, the manufacturer has decided to raise the price. He or she is in business to make a profit, after all.

Or perhaps the cost of leather has skyrocketed. Your manufacturer now needs to charge more for his or her clothing to make a profit. Whatever the cause, you'll have to make new economic decisions if you still want the jacket.

It's Your Choice

What is the most important part of any economic system? You--and people like you. As a citizen, you can be part of all three of the following groups:

* Consumers, who buy different items and want the best value for their money;

* Producers, who create the items and want to make a profit;

* Governments, which provide public services (like education and health care) and also regulate business.

How do you fit in? You can buy goods at a store. You can create goods or services at a job. And, someday, you can vote for the government that has the best economic plan for people like you.

Human beings are the ones who make economics real, and not just an abstract (theoretical) science. In the end, it's all about you and your money. Spend it wisely.

Your Turn: THINK ABOUT IT

On a piece of paper, list five goods and services that you bought or used recently, and any goods or services that you produced. What did you give up or receive in exchange for each item? How did the law of scarcity affect each of your decisions?