Lesson: What Is Economics and Why It Is Important 

The Problem of Scarcity (continued)

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  • If each person produces what they need to eat, there will be no scarcity. If people produce different foods, they can trade with others to get what they need.
  • Most families are not able to produce everything they need. Therefore, they must find other ways to get their food, shelter, clothing, and other resources.
  • The division and specialization of labor means that we do not need to make everything ourselves. We can work with others to buy what we need.

How do we use our limited resources the best way possible to obtain the most goods and services we can? There are a couple of options. On way is that we could each produce everything we consume. Or, we could each produce some of what we want to consume and “trade” for the rest of what we want.

Let’s explore these options.

Why don't we each just produce all of the things we consume? Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things, but it is not because we could not learn. Rather, we do not have to. This is called the "division and specialization of labor," which is a production innovation first put forth by Adam Smith in his book, The Wealth of Nations.

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Topic 2: Scarcity, Demand, and Supply ▶︎