DECISION MAKING IN WANTS, SCARCITY AND CHOICE

Decision making units are people and organisations that make decisions on, for instance prices, output and employment. Economist sometimes refer to decision making units as economic agents.

Source

The three main decision making units that economists study are households, firms and the government. Households refers to people in their roles as buyers (consumers) and as workers. Firms are producers of goods and services and employers of workers.

The government is the state organisation that, for instance, spends money on education and defence and raise taxes. It also regulated private sector firms.

Wants scarcity and choice

If all the people of working age were employed, all machines were being used, all land was being farmed and all waters were being fished, there would still not be enough products produced to satisfy people's wants. We always want more foods and services than can be produced. This gap between people's wants and output arises because of the scarcity of resources. Over time, the amount of products that most economics are capable of producing increases as the quantity and quality of resources rise. Wants, however also increase and the problem of scarcity continues

Economists refer to this as the economic problem. This is that unlimited wants exceed scarce resources. As well as the resources that are used to produce products, time and income are also limited. There are only twenty-hours in the day, and for most people their income is less than they would like. As a result of the shortage of time, income and resources, households, firms and governments have to make choices.

Households have to decide how to use their time and how they will spend their money. Firms have to decide what to produce, and the government how to spend the tax revenue it raises. For instance, if you spend the next forty minutes studying history or playing sports. If I buy an economics textbook, I cannot use the same money to buy food or buy some magazines. For instance, if farmers use their land to grow pulses, they are giving up the opportunity to grow potatoes or sugarcane. If a government decides to spend more money on education, then it will have less money to spend on defence

Scale of preference

Households, firms and the government are often faced with a range of choices. For instance, a government may have the finance available to build three new schools, a new hospital or a new train station. It is likely to list the options in terms of preference. It's first choice might be the hospital, it's second choice the schools and it's third choice the train station.