economics problem solving example

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• Prof. Jonathan Gruber

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• Microeconomics

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Principles of microeconomics, problem set 1.

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Preparation

The problem set is comprised of challenging questions that test your understanding of the material covered in the course. Make sure you have mastered the concepts and problem solving techniques from the following sessions before attempting the problem set:

• Introduction to Microeconomics
• Applying Supply and Demand

Problem Set and Solutions

• Problem Set Questions (PDF)
• Problem Set Solutions (PDF)

Problem Solving Video

In the video below, a teaching assistant demonstrates his approach to the solution for problems 1 and 4 from the problem set. The teaching assistant notes common mistakes made by students and provides problem solving techniques for approaching similar questions on the problem set and exams.

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Using Documented Problem Solving in Economics

Documented problem solving has been used effectively in Principles of Economics courses at a large, public, research institution over the last few years. It's been used with the topics of production possibilities, supply and demand, price elasticity and consumer demand, market structures, the labor market, unemployment, fiscal and monetary policy, GDP per capita and economic growth, effective tax rates, international trade plus many more. Clearly, it can be applied to virtually any economics course. Students find the process challenging at first, but because the process itself is not graded, they soon relax and enjoy it as a tool that serves to enhance their learning process.

Documented Problem Solving Fosters Development of Critical Thinking and Problem-Solving Skills

Angelo & Cross (1993, p. 222) write "To become truly proficient problem solvers, students need to learn to do more than just get correct answers to textbook problems. At some point, they need to become aware of how they solved those problems and how they can adapt their problem-solving routines to deal with messy, real-world problems. . . Understanding and using effective problem-solving procedures is, after all, a critical component of mastery in most disciplines." Documented problem solving requires students to reflect on how they solve a problem and then write down the steps they use.

As students describe how they break an economic problem down into small, basic steps, they frequently write:

• First, I reviewed the definition of...
• I opened my notes to the section on...
• The first thing my group thought about was...
• I remembered the graph you drew and...
• The directions say to find where the...
• According to the equation...
• I read the question and then I read it again...

Thus, documented problem solving provides a window through which the instructor can see students' thinking processes. It is rewarding for instructors to see students become more purposeful and deliberate in their approach to solving problems and to even develop problem-solving patterns that can be transferred to other areas in economics and other fields of study. Through the use of documented problem solving, students become more efficient learners; more expert-like in their thinking process.

Documented Problem Solving - Question Types

Documented problem solving works well with multiple choice, true/false and short answer questions. Questions from test banks will typically work and are readily available. Alternatively, faculty may choose to write their own questions. Questions do not need to be overly challenging in order to be suitable for documented problem solving, but they must require a multi-step thought process in order to arrive at the answer.

Economics questions that work well with this approach are those that:

• Require students to follow a predictable path to arrive at the correct answer.
• Involve calculations and require students to select the proper equation to use.
• Include data and require students to interpret it.
• Challenge students to think beyond what was delivered in the lecture or discussed in the text.
• Require students to combine several independent concepts or ideas to achieve the correct answer.
• Address topics that students typically struggle with.

A suitable economic question that students can write a documented problem solution for because it requires a multi-step process.

For product XYZ, the price elasticity of demand has an absolute value of 3. Ceteris paribus , this means that quantity demanded will increase by:

a) 1 percent for each 3 percent decrease in price. b) 1 unit for each $3 decrease in price.

c) 3 percent for each 1 percent decrease in price. d) 3 units for each $1 decrease in price.

Student's answer: First I opened my notes to read the definition for price elasticity of demand. Price elasticity measures the change in quantity demanded because of a change in price. The formula is (% change in quantity demanded) ÷ (% change in price). So for the answer to be 3, 3 goes on top (% change in quantity demanded) and 1 goes on bottom (% change in price). The real number is negative 3 because price and quantity demanded move in opposite directions. For this question, if price goes up by 1%, the quantity demanded goes down by 3%. Then I looked at the answer choices to see which one matched. If price goes down by 1%, then quantity demanded will go up by 3%, so c is the correct answer.

Economics questions that don't work well with this approach

Definition-type questions and questions that ask students to pick from a list are not good choices if they merely require students to recall memorized information. In such a case, there are no multiple steps for the student to describe. Remember, one of the primary reasons for using documented problem solving is to help students breakdown their solution process into individual steps which will ultimately assist them in developing analytical and critical thinking skills.

An unsuitable economic question that students cannot write a documented problem solution for because no problem-solving skills are required.

Which of the following countries produces the most output each year?

a) China b) United States c) Russia d) Mexico

Student's answer: The United States because that's what the table in the text says.

However, given that much of economics relies on analytical reasoning, it is easy to find plenty of questions that are appropriate.

Getting started with documented problem solving

The majority of the information that is needed to begin using documented problem solving is presented beginning with the Main page of this module.

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What is the fundamental economic problem?

Last updated 13 Jul 2023

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The basic economic problem, also known as the fundamental economic problem, refers to the scarcity of resources in relation to the unlimited wants and needs of individuals and societies. It is the central issue in economics and arises due to the imbalance between what people desire and the resources available to fulfill those desires.

In essence, the basic economic problem can be summarized by three key questions:

• What to produce: Since resources are limited, societies must decide what goods and services to produce and in what quantities. This involves making choices about which products or services are most needed or desired by the population.
• How to produce: Once the decision on what to produce is made, societies must determine the most efficient and effective methods of production. This involves deciding on the combination of resources to use, such as labor, capital, and technology, to produce the desired goods and services.
• For whom to produce: After determining what and how to produce, societies need to allocate the produced goods and services to different individuals and groups. This raises questions about the distribution of resources and the equitable allocation of goods and services among the population.

The basic economic problem arises from the reality of scarcity. Resources such as land, labor, capital, and natural resources are limited, while human wants and needs are virtually unlimited. As a result, individuals, businesses, and societies must make choices and trade-offs to allocate resources efficiently, optimize production, and satisfy the most pressing needs and desires.

Economics as a social science discipline seeks to study and analyse the basic economic problem and develop theories and models to understand how societies make decisions regarding resource allocation, production, and distribution in the face of scarcity.

Here are some of the ways that economic systems try to address the fundamental economic problem:

• Market economies: Market economies are based on the principle of supply and demand. Prices are determined by the interaction of buyers and sellers in the market. This system allows for the efficient allocation of resources, but it can also lead to inequality and environmental problems.
• Planned (command) economies: Planned economies are based on the principle of central planning. The government decides what goods and services will be produced and how resources will be allocated. This system can ensure that everyone's basic needs are met, but it can also be inefficient and inflexible.
• Mixed economies: Mixed economies combine elements of market economies and planned economies. The government plays a role in the economy, but it also allows for some degree of free market activity. This system is often seen as a way to balance the efficiency of market economies with the equity of planned economies.

The fundamental economic problem is a complex issue that has no easy solutions. However, different economic systems offer different approaches to addressing the problem.

• Water Scarcity
• Scarcity bias
• Resource Scarcity
• Opportunity cost

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• Basic Problems Of An Economy

If there is a central economic problem that is present across all countries, without any exception, then it is the problem of scarcity. This problem arises because the resources of all types are limited and have alternative uses. If the resources were unlimited or if a resource only had one single use, then the economic problem would probably not arise. However, be it natural productive resources or man-made capital /consumer goods or money or time, scarcity of resources is the central problem. This central problem gives rise to four basic problems of an economy. In this article, we will look at these basic problems in detail.

The Four Basic Problems of an Economy

As discussed in the paragraph above, the central economic problem of scarcity of resources is broken down into four basic problems of an economy. Let’s look at each of them separately.

Basic Problems of an Economy – #1 – What to Produce?

What does a society do when the resources are limited? It decides which goods/service it wants to produce. Further, it also determines the quantity required. For example, should we produce more guns or more butter? Do we opt for capital goods like machines, equipment, etc. or consumer goods like cell phones, etc.? While it sounds elementary, society must decide the type and quantity of every single good/service to be produced.

Browse more Topics under Introduction To Business Economics

• Meaning Of Business Economics
• Nature of Business Economics
• Scope of Business Economics
• Capitalist Economy
• Socialist Economy
• Mixed Economy
• Role Of Price Mechanism

Basic Problems of an Economy – #2 – How to Produce?

The production of a good is possible by various methods. For example, you can produce cotton cloth using handlooms, power looms or automatic looms. While handlooms require more labour, automatic looms need higher power and capital investment.

Hence, society must choose between the techniques to produce the commodity. Similarly, for all goods and/or services, similar decisions are necessary. Further, the choice depends on the availability of different factors of production and their prices . Usually, a society opts for a technique that optimally utilizes its available resources.

Basic Problems of an Economy – #3 – For whom to Produce?

Think about it – can a society satisfy each and every human wants ? Certainly not. Therefore, it has to decide on who gets what share of the total output of goods and services produced. In other words, society decides on the distribution of the goods and services among the members of society.

Basic Problems of an Economy – #4 – What provision should be made for economic growth?

Can a society use all its resources for current consumption? Yes, it can. However, it is not likely to do so. The reason is simple. If a society uses all its resources for current consumption, then its production capacity would never increase.

Therefore, the standard of living and the income of a member of the society will remain constant. Subsequently, in the future, the standard of living will decline. Hence, society must decide on the part of the resources that it wants to save for future progress.

Solved Question on Basic Problems Of An Economy

Q1. What are the four basic problems of an economy ?

Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are:

• What to produce?
• How to produce?
• For whom to produce?
• What provisions (if any) are to be made for economic growth?

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Solution to the Basic Economic Problems: Capitalistic, Socialistic and Mixed Economy

Solution to the Basic Economic Problems: Capitalistic, Socialistic and Mixed Economy!

Uneven distribution of natural resources, lack of human specialization and technological advancement etc., hinders the production of goods and services in an economy. Every economy has to face the problems of what to produce, how to produce and for whom to produce. More or less, all the economies use two important methods to solve these basic problems.

These methods are:

(a) Free price mechanism and

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(b) Controlled price system or State intervention.

Price mechanism is defined as a system of guiding and coordinating the decisions of every individual unit within an economy through the price determined with the help of the free play of market forces of demand and supply. Such system is free from state intervention.

Price of goods and services are determined when quantity demanded becomes equal to the quantity supplied. Price mechanism facilitates determination of resource allocation, determination of factor incomes, level of savings, consumption and production. Price mechanism basically takes place in a capitalistic economy.

On the other hand, Controlled price mechanism is defined as a system of state interventio n of administering or fixing the prices of the goods and services. In a socialist economy, the government plays a vital role in determining the price of the goods and services. The government may introduce ‘ceiling price’ or ‘floor price’ policy to regulate prices.

However, how a capitalist, a socialist and a mixed economic system solve their basic problems is given below:

1. Solution to Basic Problems in a Capitalistic Economy:

Under capitalistic economy, allocation of various resources takes place with the help of market mechanism. Price of various goods and services including the price of factors of production are determined with help of the forces of demand and supply. Free price mechanism helps producers to decide what to produce.

The goods which are more in demand and on which consumers can afford to spend more, are produced in larger quantity than those goods or services which have lower demand. The price of various factors of production including technology helps to decide production techniques or methods of production. Rational producer intends to use those factors or techniques which has relatively lower price in the market.

Factor earnings received by the employers of factors of production decides spending capacity of the people. This helps producers to identify the consumers for whom goods could be produced in larger or smaller quantities. Price mechanism works well only if competition exists and natural flow of demand and supply of goods is not disturbed artificially.

2. Solution to Basic Problems in a Socialistic Economy:

Under socialistic economy, the government plays an important role in decision making. The government undertakes to plan, control and regulate all the major economic activities to solve the basic economic problems. All the major economic policies are formulated and implemented by the Central Planning Authority.

In India, Planning Commission was entrusted with this task of planning. The Planning Commission of India has now been replaced by another central authority NITI Ayog (National Institution for Transforming India). Therefore, the central planning authority takes the decisions to overcome the economic problems of what to produce, how to produce and for whom to produce.

The central planning authority decides the nature of goods and services to be produced as per available resources and the priority of the country. The allocation of resources is made in greater volume for those goods which are essential for the nation. The state’s main objectives are growth, equality and price stability. The government implements fiscal policies such as taxation policy, expenditure policy, public debt policy or policy on deficit financing in order to achieve the above objectives.

The methods of production or production techniques are also determined or selected by the central planning authority. The central planning authority decides whether labor intensive technique or capital intensive technique is to be used for the production. While deciding the appropriate method, social and economic conditions of the economy are taken into consideration.

Under socialistic economy, every government aims to achieve social justice through its actions. All economic resources are owned by the government. People can work for wages which are regulated by the government as per work efficiency. The income earned determines the aggregate demand in an economy. This helps the government in assessing the demand of goods and services by different income groups.

3. Solution to Basic Problems in a Mixed Economy:

Practically, neither capitalistic economy nor socialistic economy exists in totality. Both the economic systems have limitations. Consequently, a new system of economy has emerged as a blend of the above two systems called mixed economy. Therefore, mixed economy is defined as a system of economy where private sectors and public sectors co-exist and work side by side for the welfare of the country.

Under such economies, all economic problems are solved with the help of free price mechanism and controlled price mechanism (economic planning).

Free price mechanism operates within the private sector; hence, prices are allowed to change as per demand and supply of goods. Therefore, private sector can produce goods as per their demand and their price in the market. The government may control and regulate production of the private sector through its monetary policy or fiscal policy.

On the other hand, controlled price mechanism (economic planning) is used for the public sector by the planning authority. The goods and services to be produced in the public sector, hence, are determined by the central planning authority.

Private sector determines the production technique or production method on the basis of factor prices, availability of technology etc. On the other hand, production technique or production method for the public sector is determined by the central planning authority. While determining the production technique for the public sector, national priority, national employment policy and social objectives are major considerations.

Private sector allocates its resources to produce those goods which are demanded by people who command high purchasing power. Although, production by the private sector is sometimes controlled and regulated by the government through various policies such as licensing policy, taxation policy, subsidy etc., the price determined by free price mechanism may go beyond the purchasing power of low or marginal income group.

Therefore, the government may undertake production of certain goods in its hands. The rationing policy is also introduced to provide essential goods at reasonable price to the poor people. The government, thus, ensures social justice by its actions in the mixed economy.

Related Articles:

• Basic Problems of an Economy and Price Mechanism (FAQs)
• Mixed Economy: Meaning, Features and Types of Mixed Economy
• Price Mechanism: in Free, Socialistic and Mixed Economy
• 5 Basic Problems of an Economy (With Diagram)

Scarcity in economics

Definition: Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics.

Examples of scarcity

• Land – a shortage of fertile land for populations to grow food. For example, the desertification of the Sahara is causing a decline in land useful for farming in Sub-Saharan African countries.
• Water scarcity – Global warming and changing weather, has caused some parts of the world to become drier and rivers to dry up. This has led to a shortage of drinking water for both humans and animals.
• Labour shortages . In the post-war period, the UK experienced labour shortages – insufficient workers to fill jobs, such as bus drivers. In more recent years, shortages have been focused on particular skilled areas, such as nursing, doctors and engineers
• Health care shortages . In any health care system, there are limits on the available supply of doctors and hospital beds. This causes waiting lists for certain operations.
• Seasonal shortages. If there is a surge in demand for a popular Christmas present, it can cause temporary shortages as demand as greater than supply and it takes time to provide.
• Fixed supply of roads . Many city centres experience congestion – there is a shortage of road space compared to number of road users. There is a scarcity of available land to build new roads or railways.

How does the free market solve the problem of scarcity?

If we take a good like oil. The reserves of oil are limited; there is a scarcity of the raw material. As we use up oil reserves, the supply of oil will start to fall.

Diagram of fall in supply of oil

If there is a scarcity of a good the supply will be falling, and this causes the price to rise. In a free market, this rising price acts as a signal and therefore demand for the good falls (movement along the demand curve). Also, the higher price of the good provides incentives for firms to:

• Look for alternative sources of the good e.g. new supplies of oil from the Antarctic.
• Look for alternatives to oil, e.g. solar panel cars.
• If we were unable to find alternatives to oil, then we would have to respond by using less transport. People would cut back on transatlantic flights and make fewer trips.

Demand over time

In the short-term, demand is price inelastic. People with petrol cars, need to keep buying petrol. However, over time, people may buy electric cars or bicycles, therefore, the demand for petrol falls. Demand is more price elastic over time.

Therefore, in a free market, there are incentives for the market mechanisms to deal with the issue of scarcity.

Causes of scarcity

Scarcity can be due to both

• Demand-induced scarcity
• Supply-induced scarcity

and a combination of the two. See more at: Causes of scarcity.

Scarcity and potential market failure

With scarcity, there is a potential for market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes scarce, there might not be any practical alternative that has been developed.

Another problem with the free market is that since goods are rationed by price, there may be a danger that some people cannot afford to buy certain goods; they have limited income. Therefore, economics is also concerned with the redistribution of income to help everyone be able to afford necessities.

Another potential market failure is a scarcity of environmental resources. Decisions we take in this present generation may affect the future availability of resources for future generations. For example, the production of CO2 emissions lead to global warming, rising sea levels, and therefore, future generations will face less available land and a shortage of drinking water.

The problem is that the free market is not factoring in this impact on future resource availability. Production of CO2 has negative externalities, which worsen future scarcity.

Tragedy of the commons

The tragedy of the commons occurs when there is over-grazing of a particular land/field. It can occur in areas such as deep-sea fishing which cause loss of fish stocks. Again the free-market may fail to adequately deal with this scarce resource.

Further reading on Tragedy of the Commons

Quotas and scarcity

One solution to dealing with scarcity is to implement quotas on how much people can buy. An example of this is the rationing system that occurred in the Second World War. Because there was a scarcity of food, the government had strict limits on how much people could get. This was to ensure that even people with low incomes had access to food – a basic necessity.

A problem of quotas is that it can lead to a black market; for some goods, people are willing to pay high amounts to get extra food. Therefore, it can be difficult to police a rationing system. But, it was a necessary policy for the second world war.

Related pages

• Opportunity cost
• Production possibility frontiers
• Is economics irrelevant in the absence of scarcity?
• Dealing with food scarcity

12 thoughts on “Scarcity in economics”

• Pingback: Is Economics Irrelevant in Absence of Scarcity? | Economics Help

Good from what are you doing but you have to provide to us some of sample questions concerning the University level

l want to be explained further on scarcity as it is becoming hard topic for me to understand

When we even make a choice we have to forgo the other alternative.The alternative forgone in making am informed choice is also known as oppotunity

I really learned a lot in this website, thank you very much I appreciate

I want my text book explanation of social subject

Actually, I don’t understand about the entrepreneurship.. Can you please help me?.. I’m a senior high student for the upcoming school year..and We don’t have a actual class so please could you help me to understand this?😅

Thank you so much its clear

This makes some sense but the graphs just messed my head up pls help

I enjoyed the nature of information

The only “problem” with the free market is when it is interfered with. It is a natural process, by interfering with it you are indirectly interfering with nature. Everything on our planet is finite, everything has to be paid for. Every action has an equal and opposite reaction. The is no free lunch. Interfering with the free market is like kicking a can down the road, it may seem just and righteous in the instant, but it is by no means sustainable ultimately over time.

Thank you so much

Comments are closed.

1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

• Discuss the importance of studying economics
• Explain the relationship between production and division of labor
• Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158 million workers, according to the U.S. Bureau of Labor Statistics. The total land area was 3,794,101 square miles. While these are certainly large numbers, they are not infinite. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Introduction to FRED

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand. A variety of government agencies publish economic and social data. For this course, we will generally use data from the St. Louis Federal Reserve Bank's FRED database. FRED is very user friendly. It allows you to display data in tables or charts, and you can easily download it into spreadsheet form if you want to use the data for other purposes. The FRED website includes data on nearly 400,000 domestic and international variables over time, in the following broad categories:

• Money, Banking & Finance
• Population, Employment, & Labor Markets (including Income Distribution)
• National Accounts (Gross Domestic Product & its components), Flow of Funds, and International Accounts
• Production & Business Activity (including Business Cycles)
• Prices & Inflation (including the Consumer Price Index, the Producer Price Index, and the Employment Cost Index)
• International Data from other nations
• U.S. Regional Data
• Academic Data (including Penn World Tables & NBER Macrohistory database)

For more information about how to use FRED, see the variety of videos on YouTube starting with this introduction.

If you still do not believe that scarcity is a problem, consider the following: Does everyone require food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. If you do not, someone else does on your behalf. Yet most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. How do we use our limited resources the best way possible, that is, to obtain the most goods and services we can? There are a couple of options. First, we could each produce everything we each consume. Alternatively, 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 do we not 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. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith ( Figure 1.3 ) in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the concept of division of labor , which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

To illustrate division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that different people performed—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory ( Figure 1.4 ), or a hospital can have hundreds of job classifications.

Why the Division of Labor Increases Production

When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith noticed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to complete two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, geography affects specialization. For example, it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more effective than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music, and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case? In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs. . . . This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

• Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
• It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
• A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

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The power of economics to explain and shape the world

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Nobel Prize-winning economist Esther Duflo sympathizes with students who have no interest in her field. She was such a student herself — until an undergraduate research post gave her the chance to learn first-hand that economists address many of the major issues facing human and planetary well-being. “Most people have a wrong view of what economics is. They just see economists on television discussing what’s going to happen to the stock market,” says Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics. “But what people do in the field is very broad. Economists grapple with the real world and with the complexity that goes with it.”

That’s why this year Duflo has teamed up with Professor Abhijit Banerjee to offer 14.009 (Economics and Society’s Greatest Problems), a first-year discovery subject — a class type designed to give undergraduates a low-pressure, high-impact way to explore a field. In this case, they are exploring the range of issues that economists engage with every day: the economic dimensions of climate change, international trade, racism, justice, education, poverty, health care, social preferences, and economic growth are just a few of the topics the class covers. “We think it’s pretty important that the first exposure to economics is via issues,” Duflo says. “If you first get exposed to economics via models, these models necessarily have to be very simplified, and then students get the idea that economics is a simplistic view of the world that can’t explain much.” Arguably, Duflo and Banerjee have been disproving that view throughout their careers. In 2003, the pair founded MIT’s Abdul Latif Jameel Poverty Action Lab, a leading antipoverty research network that provides scientific evidence on what methods actually work to alleviate poverty — which enables governments and nongovernmental organizations to implement truly effective programs and social policies. And, in 2019 they won the Nobel Prize in economics (together with Michael Kremer of the University of Chicago) for their innovative work applying laboratory-style randomized, controlled trials to research a wide range of topics implicated in global poverty. “Super cool”

First-year Jean Billa, one of the students in 14.009, says, “Economics isn’t just about how money flows, but about how people react to certain events. That was an interesting discovery for me.”

It’s also precisely the lesson Banerjee and Duflo hoped students would take away from 14.009, a class that centers on weekly in-person discussions of the professors’ recorded lectures — many of which align with chapters in Banerjee and Duflo’s book “Good Economics for Hard Times” (Public Affairs, 2019). Classes typically start with a poll in which the roughly 100 enrolled students can register their views on that week’s topic. Then, students get to discuss the issue, says senior Dina Atia, teaching assistant for the class. Noting that she finds it “super cool” that Nobelists are teaching MIT’s first-year students, Atia points out that both Duflo and Banerjee have also made themselves available to chat with students after class. “They’re definitely extending themselves,” she says. “We want the students to get excited about economics so they want to know more,” says Banerjee, the Ford Foundation International Professor of Economics, “because this is a field that can help us address some of the biggest problems society faces.”   Using natural experiments to test theories

Early in the term, for example, the topic was migration. In the lecture, Duflo points out that migration policies are often impacted by the fear that unskilled migrants will overwhelm a region, taking jobs from residents and demanding social services. Yet, migrant flows in normal years represent just 3 percent of the world population. “There is no flood. There is no vast movement of migrants,” she says. Duflo then explains that economists were able to learn a lot about migration thanks to a “natural experiment,” the Mariel boat lift. This 1980 event brought roughly 125,000 unskilled Cubans to Florida over a matter a months, enabling economists to study the impacts of a sudden wave of migration. Duflo says a look at real wages before and after the migration showed no significant impacts. “It was interesting to see that most theories about immigrants were not justified,” Billa says. “That was a real-life situation, and the results showed that even a massive wave of immigration didn’t change work in the city [Miami].”

Question assumptions, find the facts in data Since this is a broad survey course, there is always more to unpack. The goal, faculty say, is simply to help students understand the power of economics to explain and shape the world. “We are going so fast from topic to topic, I don’t expect them to retain all the information,” Duflo says. Instead, students are expected to gain an appreciation for a way of thinking. “Economics is about questioning everything — questioning assumptions you don’t even know are assumptions and being sophisticated about looking at data to uncover the facts.” To add impact, Duflo says she and Banerjee tie lessons to current events and dive more deeply into a few economic studies. One class, for example, focused on the unequal burden the Covid-19 pandemic has placed on different demographic groups and referenced research by Harvard University professor Marcella Alsan, who won a MacArthur Fellowship this fall for her work studying the impact of racism on health disparities.

Duflo also revealed that at the beginning of the pandemic, she suspected that mistrust of the health-care system could prevent Black Americans from taking certain measures to protect themselves from the virus. What she discovered when she researched the topic, however, was that political considerations outweighed racial influences as a predictor of behavior. “The lesson for you is, it’s good to question your assumptions,” she told the class. “Students should ideally understand, by the end of class, why it’s important to ask questions and what they can teach us about the effectiveness of policy and economic theory,” Banerjee says. “We want people to discover the range of economics and to understand how economists look at problems.”

Story by MIT SHASS Communications Editorial and design director: Emily Hiestand Senior writer: Kathryn O'Neill

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Prof. Esther Duflo will present her research on poverty reduction and her “proposal for a global minimum tax on billionaires and increased corporate levies to G-20 finance chiefs,” reports Andrew Rosati for Bloomberg. “The plan calls for redistributing the revenues to low- and middle-income nations to compensate for lives lost due to a warming planet,” writes Rosati. “It also adds to growing calls to raise taxes on the world’s wealthiest to help its most needy.”

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Lesson Explainer: Fundamental Economic Problem Economics • Third Year of Secondary School

In this explainer, we will learn how to recognize the fundamental economic problem.

The basic building blocks of economic activities are human needs and resources. Let us recall the definition and characteristics of human needs.

A need of an individual is a feeling of distress leading them to act to diminish or satisfy the need. While a need may be satisfied by consuming suitable resources, the quantity of an individual’s needs continues to increase over time. In the context of a society, we also know that human needs are widely varied between different individuals. In other words, there is a limitless and diverse demand for resources in a society.

We also recall that resources are categorized as free or scarce, in terms of their availability. The availability of free resources, such as air and water, far exceeds the demand for their consumption. If all resources were free, there would not be any economic problem in the society since they would be able to satisfy everyone’s needs.

However, we know that most resources are scarce, which means that needs for the resources far exceed their availability. Any economic problem can be traced back to the fundamental conflict between scarcity of resources and the limitless and diverse nature of human needs, which is known as the fundamental economic problem.

Definition: Fundamental Economic Problem

The fundamental economic problem states that human needs are diverse and continuously increasing, while resources to satisfy them are relatively limited.

We can represent the fundamental economic problem using the following diagram.

For instance, we can consider a need for transportation, which can be satisfied by purchasing a car. We know that a car is a scarce resource, which means that there is a greater number of people with this need compared to the number of available cars. Hence, some individuals will be able to obtain cars to satisfy their needs, while other individuals’ needs will not be satisfied. Furthermore, individuals with cars will likely develop new needs, for example, to obtain better cars, leading to an unending cycle of the fundamental economic problem that cannot be fully resolved.

Recall that a need for transportation is a secondary need, which is for achieving the happiness of the individual or improving the condition of the society. When we consider the fundamental economic problem involving this secondary need, its consequences do not seem grave. Let us consider this problem involving a primary need, which is essential for an individual’s survival.

The need to eat is a primary need, and every individual in a society has this need. The need to eat is also frequently renewed, and the satisfaction of the primary need to eat often motivates a new secondary need to eat better or more scarce food. Since these needs are limitless and diverse, there will not be enough food to satisfy every individual’s need. Because this need is tied to the individual’s survival, the scarcity of food creates a much more serious problem compared to the scarcity of cars. The survival of individuals is at stake when the fundamental economic problem is tied to primary needs.

In our first example, we will consider the root causes of the fundamental economic problem.

Example 1: The Fundamental Economic Problem

Which of the following are the two root causes of the fundamental economic problem?

• Scarcity of resources
• Maximizing profit
• Social welfare
• Unlimited human needs

In this example, we need to identify the root causes of the fundamental economic problem. Recall that the fundamental economic problem states the following: human needs are diverse and continuously increasing, while resources to satisfy them are limited.

The first part of the statement addresses the unlimited and diverse human needs, option IV, while the second part of the statement refers to the scarcity of resources, option I. Hence, the root causes of the fundamental economic problem are the scarcity of resources and unlimited human needs, which are I and IV.

In the previous problem, we identified the scarcity of resources and unlimited human needs as the root causes of the fundamental economic problem. Let us now consider how we, as individuals or as a society, can address the fundamental economic problem.

Definition: Economic Choices

Individuals or economic entities can address the fundamental economic problem by making economic choices. The objective of any economic choice is to allocate the limited resources to maximize their utility.

In the definition above, the term utility refers to the total satisfaction derived from the consumption of resources. Hence, when an economic entity , that is, an individual, a firm, or a government, makes economic choices, it considers how to maximize the benefits of the existing resources.

Making economic choices requires the entity to set priorities of different needs so that some will be satisfied before others. For instance, an individual can choose to satisfy the need to tour Italy, or a government can choose to fund the construction of a new school. These are examples of economic choices where an individual or a government decides to satisfy a specific need over others. Since making a choice inevitably means that we are not choosing the other options, we leave other needs unsatisfied when an economic choice is made.

Definition: Opportunity Cost

Opportunity costs are the effects or consequences of alternative options in an economic choice. If the effects are financial, which include profits and losses, the opportunity cost, or the cost of foregone options, can be written as a difference between the alternate and chosen options.

The relationship between the fundamental economic problem, economic choices, and opportunity costs are represented in the following diagram.

Opportunity costs are also known as missed opportunities. Let us consider possible opportunity costs of the economic choice to tour Italy. An example of nonfinancial opportunity costs may be the missed opportunity to visit relatives during that time. On the other hand, the cost of travel is a financial opportunity cost, which is measured in terms of the difference between the travel costs incurred by the tour and the savings that could be made by not undertaking the tour. Before making economic choices, the opportunity costs of all available options should be considered in order to maximize the benefit.

In the next example, we will examine the relationship between economic choices and opportunity costs.

Example 2: Economic Choices and Opportunity Costs

Which of the following correctly describes the relationship between opportunity costs and choices?

• Opportunity cost refers to the financial implications of making choices.
• If two individuals make the same economic choice, the opportunity cost for the two individuals is the same.
• Every economic choice is accompanied by an opportunity cost.
• Opportunity cost is always positive.
• Opportunity cost is always negative.

In this example, we need to identify the correct statement regarding the relationship between opportunity costs and choices. Recall that choices are necessary because of the scarcity of resources and that the purpose of an economic choice is to allocate the limited resources to maximize benefits. We also recall that opportunity costs are the effects or consequences of alternative options in an economic choice.

Let us consider each option.

Option A: This option could be appealing since the word cost has a financial connotation. However, the opportunity cost does not have to be related to financial implications. Instead, it may represent the qualitative effects of foregone options. Hence, this statement is inaccurate.

Option B: Let us consider an example of opportunity cost in order to determine whether this statement is accurate. Say that two different individuals make the choice to tour Italy over summer. For one, the opportunity cost could be the missed opportunity to visit relatives, while for the other, the opportunity cost could be the missed opportunity to take courses over the summer to further their education. As this example demonstrates, opportunity costs of the same economic choices could vary between different individuals due to the different availability of alternative options. Hence, this statement is inaccurate.

Option C: Opportunity costs are inevitable in economic choices since there are always alternatives to consider. This is a true statement.

Options D and E: If the effects are financial, the opportunity cost is written as the difference between the alternate and chosen options. Since it is a difference, the opportunity cost may be positive or negative depending on which quantity is larger. Hence, this statement is inaccurate.

Option C is the only accurate description of opportunity costs and choices since every choice is accompanied by opportunity costs.

In the previous example, we considered the relationship between economic choices and opportunity costs. We learned that opportunity costs are widely varied depending on available alternative options. Opportunity costs for financial costs and benefits are often considered more objectively since they can be expressed explicitly as a difference. Qualitative opportunity costs should also be considered, although it is more difficult to remain objective regarding these items.

In the next example, we will identify different opportunity costs associated with a specific economic choice made by a national government.

Example 3: Understanding Opportunity Costs

After careful review, a national government decided to fund the construction of a bridge. Alternatives considered were the construction of a new high school and an increase in the wages of government employees. Which of the following is not an opportunity cost for the national government’s choice to fund the construction of the bridge?

• Improved morale among government employees due to the raise in pay
• Improvement in the quality of high school education
• Improved efficiency in traffic due to the new bridge
• Difference in financial cost between the construction of the bridge and the alternatives considered

The national government in this example decided to fund the construction of a bridge, where the alternative options considered were the construction of a new high school and an increase in the wages of government employees. We need to identify which of the given statements does not relate to opportunity costs. Recall that opportunity costs, also known as missed opportunities, are the effects or consequences of alternative options in an economic choice.

Option A: Improved morale among government employees is an effect we can expect from the alternative option of an increase in the wages of government employees. This can be considered as a possible missed opportunity; hence, it is an example of an opportunity cost associated with the current choice.

Option B: Improvement in the quality of high school education is an effect we can expect from the alternative option of the construction of a new high school. This can be considered as a possible missed opportunity; hence, it is an opportunity cost associated with the current choice.

Option C: Improved efficiency in traffic is an effect we can expect from the chosen option, which is the construction of a bridge. This is not an example of missed opportunities; hence, it is not an opportunity cost.

Option D: Recall that when opportunity costs are financial, they are expressed as the difference between the effects of the alternative and chosen options. Hence, the difference as mentioned here represents a financial opportunity cost associated with the current choice.

Option C, which describes the effect of the chosen option, is not an example of opportunity costs.

In the previous examples, we learned about opportunity costs resulting from economic choices. Let us now consider the efficiency of an economic system.

The efficiency of an economic system is measured by the amount of resources wasted during their allocation. An economic system is efficient if few to no resources are wasted. Since the goal of any economic choice is to allocate the limited resources to maximize benefits, good economic choices will lead to an efficient economic system. Other than considering the opportunity costs, what other factors affect the ability for governing entities to make good economic choices?

For a government to make good economic choices, it needs accurate and detailed information about the population it serves. Information can greatly aid economic decision making by reducing wasted resources during their allocation. In other words, the efficiency of an economic system is, for a large part, determined by the ability to obtain accurate and appropriate information when making economic choices. For instance, accurate data on the number of children in different regions of a nation will enable the government to choose the optimal location to build a new school and to satisfy the need for education. Accurate information about the state of poverty will enable the government to deliver available resources where the need is the greatest.

We can also consider the importance of information for individuals and companies. An individual with a need for shelter should have accurate information about available public shelters to efficiently satisfy the need. A company producing goods should have accurate information about how many consumers have the need for the goods it is producing. As we can see, the availability of accurate and appropriate information enables the reduction of wasted resources in economic choices made by individuals or companies.

Conversely, the problem of missing or inaccurate information is known as information failure.

Definition: Information Failure

Information failure is the deficiency in available information necessary for making economic choices.

Information failure often leads to bad economic choices, which lead to inefficient economic systems. For instance, inaccurate information about the number of children in different regions of a nation will likely cause the government to choose a site for a new school that is not optimal. This will produce wasted resources both from unnecessary transportation for children to get to school and some families deciding not to use the new school. This is an example of information failure in a government.

Information failure can occur for individuals as well. Incomplete information about harmful effects of certain ingredients may lead individuals to consume unhealthy food, which can worsen their health. This leads to wasted healthcare resources.

In the next example, we will identify an example of information failure.

Example 4: Understanding Information Failure

Which of the following is a description of information failure?

• The government releases inaccurate unemployment numbers, causing the stock market to tumble.
• A company produces an oversupply of toys due to data from an inaccurate survey.
• An individual is undecided on which product to use due to too much available information from the Internet.
• Reporting of unemployment numbers by the government is delayed, causing uncertainties in the stock market.

We recall that information failure is the deficiency in available information necessary for making efficient economic choices. Hence, we need to identify which of the given examples are poor economic choices resulting from deficiency in available information.

Let us consider each scenario.

Option A: In this scenario, the government produced an inaccurate report, which resulted in falling stock prices. While inaccurate information is involved in this scenario, falling stock prices is not an example of bad economic choices. Hence, this is not an example of information failure.

Option B: In this scenario, data from an inaccurate survey led a company to overproduce toys. Overproduction of toys is an example of an economic choice that resulted from the survey’s inaccurate information. This is an example of information failure.

Option C: In this scenario, too much information has left an individual undecided on a type of product to use. No economic choices have been made by the individual, and the problem is the oversupply of information rather than the deficiency of information. Hence, this is not an example of information failure.

Option D: In this scenario, the report of unemployment numbers is delayed, causing uncertainties in the stock market. The deficiency of information at this time has caused the problem, but there are no economic choices involved in this scenario. Hence, this is not an example of information failure.

Option B, which describes a company making a bad economic choice based on inaccurate information, is an example of information failure.

We have learned about the fundamental economic problem and its components as well as the effects of economic choices. When only a small number of needs and resources are involved in the fundamental economic problem, the optimal economic choices appear to be within reach. However, economic issues in today’s society are complex and multifaceted. The diversity of human needs and interconnected networks of different economic systems make economic issues very difficult and profound, but they also make this subject interesting and exciting.

Definition: Economics

Economics is a social science studying how individuals and societies use scarce resources to satisfy increasing and diverse needs.

In other words, economics seeks to solve the fundamental economic problem. Depending on the types of economic problems considered, economics can be divided into several branches.

In terms of the scale of economic problems considered, the subject is split into micro- and macroeconomics.

Macroeconomics studies economic behaviors of an overall economy or society. Economic choices examined here include the ones made by the national government as well as international organizations. Microeconomics considers economic problems in context of smaller entities, such as individuals or firms. Economic choices studied here concern behaviors of, and interactions between, consumers and producers of resources. The distinction between these two branches of economics is represented in the following diagram.

There are many other subdivisions in economics, which are specialized in the scope of economic problems considered. For instance, welfare economics studies various social welfare models, aiming to design an efficient economic system to deliver available resources to individuals in need. Development economics concerns developing countries and various priorities and strategies for these countries to achieve economic growth over time.

In our final example, we will consider what is studied in microeconomics.

Example 5: Distinguishing Different Fields of Economics

Which of the following best describes what is studied in microeconomics?

• Behaviors of consumers and producers
• General levels of economic activity
• Evaluating the efficiency of economic decisions
• Improving economic and social conditions

In this example, we need to identify which phrase best describes the study of microeconomics. Recall that we have encountered several branches of economics: macroeconomics, microeconomics, welfare economics, and development economics. Let us match each subject with the topics in the options.

Option A: Behaviors of consumers and producers lead to small-scale economic problems, which are studied in microeconomics. Hence, this option describes what is studied in microeconomics.

Option B: General levels of economic activity describe the types and quantities of economic activities in a large population, which lead to large-scale economic problems. We recall that macroeconomics mainly deals with large-scale economic problems at regional, national, or international levels. Hence, this is a topic studied in macroeconomics.

Option C: Efficiency of economic decisions involves reducing waste when allocating limited resources. This topic often arises when considering different social welfare models, where resources should be delivered to individuals in need with as little waste as possible. Such problems are studied in welfare economics.

Option D: Recall that development economics addresses various priorities and strategies for developing countries to achieve economic growth. This involves improving economic and social conditions of developing countries; hence, this is a topic of development economics.

Option A, behaviors of consumers and producers, best describes what is studied in microeconomics.

Let us finish by recapping a few important concepts from this explainer.

• The fundamental economic problem states that human needs are diverse and continuously increasing, while resources to satisfy them are limited.
• Individuals or economic entities can address the fundamental economic problem by making economic choices. The objective of any economic choice is to allocate the limited resources to maximize benefits.
• Opportunity costs are the effects or consequences of alternative options in an economic choice. If the effects are financial, the opportunity cost can be written as a difference between the alternate and chosen options. Some opportunity costs are qualitative and many do not involve financial implications.
• The efficiency of an economic system is largely determined by the ability to obtain accurate and appropriate information when making economic choices. Information failure is the deficiency in available information necessary for making economic choices.
• Macroeconomics studies economic behaviors of an overall economy or society.
• Microeconomics considers economic problems in the context of smaller entities, such as individuals or firms.
• Welfare economics studies various social welfare models, aiming to design an efficient economic system to deliver available resources to individuals in need.
• Development economics concerns developing countries and various priorities and strategies for these countries to achieve economic growth over time.

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The problem with pronatalism: Pushing baby booms to boost economic growth amounts to a Ponzi scheme

Assistant Professor of Science and Technology Studies, University of California, Davis

Research Affiliate, Center for Studies in Demography and Ecology, University of Washington

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Emily Klancher Merchant is affiliated with the Population Association of America.

Win Brown is affiliated with the Population Association of America.

University of California, Davis and University of Washington provide funding as members of The Conversation US.

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In the face of shrinking populations , many of the world’s major economies are trying to engineer higher birth rates.

Policymakers from South Korea , Japan and Italy , for example, have all adopted so-called “ pronatalist” measures in the belief that doing so will defuse a demographic time bomb. These range from tax breaks and housing benefits for couples who have children to subsidies for fertility treatments.

But here’s the thing: Low – or, for that matter high – birth rates are not a problem in and of themselves. Rather, they are perceived as a cause of or contributor to other problems: With low birth rates come slow economic growth and a top-heavy age structure ; high birth rates mean resource depletion and environmental degradation .

Moreover, birth rates are notoriously hard to change , and efforts to do so often become coercive, even if they don’t start out that way.

As demographers and population experts , we also know that such efforts are usually unnecessary. Manipulating fertility is an inefficient means of solving social, economic and environmental problems that are almost always better addressed more directly through regulation and redistribution.

A new pronatalist movement

According to the most likely scenario, the world’s population will peak around the beginning of 2084 at about 10.3 billion people – approximately 2 billion more than we have today. After that, the global population is projected to stop growing and will likely shrink to just below 10.2 billion by 2100.

Yet many countries are already ahead of this curve, with populations predicted to decline in the next decade. And that has prompted concerns among some nations’ economists over economic growth and old-age support. In some instances, it has also prompted nativist fears about “ replacement” through immigration .

As of 2019, 55 countries – mainly in Asia, Europe and the Middle East – had explicit policies aimed at raising birth rates .

The U.S. does have a child tax credit but no policies directly aimed at raising birth rates, according to the U.N., which tracks population policies worldwide .

Even so, in recent years a new pronatalist movement has emerged in the U.S., drawing heavily from a range of ideologies, including racism, nativism, neoliberalism, effective altruism and longtermism .

Among the voices pushing for pronatalist policies are Elon Musk and influencers Malcolm and Simone Collins , who warn that the human population is on the verge of collapse .

Republican presidential nominee Donald Trump has indicated he wants incentives for women to have more babies , and his running mate, JD Vance, has been a rare voice on the floor of Congress warning of a U.S. baby bust .

New babies to solve old problems

The pronatalist movement is, we believe, inherently misguided. It is premised on the belief that ever-larger populations are needed to spur economic growth, which alone will lift individuals and communities out of poverty.

But absent direct state intervention, this additional wealth generally accrues to those with established higher incomes , often at the expense of workers and consumers.

Seen this way, pronatalism is a Ponzi scheme . It relies on new entrants to produce returns for earlier investors, with the burdens falling most heavily on women , who are responsible for the bulk of childbearing and child-rearing, often without adequate medical care or affordable child care.

Government intervention in reproduction

For nearly a century, governments have used access to birth control and abortion as levers with which to try to adjust their population growth rates, but usually in the other direction: making birth control and abortion more widely available – and often pushing them on people who wanted more children – when birth rates were deemed too high . Such policies were implemented in numerous countries between the 1960s and 1990s to stimulate economic growth, with China’s one-child policy the most extreme example. Ironically, while high birth rates were once seen as a barrier to economic development , today low birth rates are seen as a drag on economic growth.

Advocates of efforts to reduce birth rates have pointed to the beneficial effects of family planning services. But critics warn that instrumentalizing reproductive health care – offering it as a means to the end of slowing population growth rather than an end in itself – makes it vulnerable to being taken away if population growth is deemed too slow.

Indeed, several of the countries that now restrict access to birth control and abortion, including South Korea and Iran, once promoted them in order to reduce their birth rate.

In 1968, the International Conference on Human Rights declared that couples had the right to decide the number and spacing of their children. At that time, the growth of the world’s population was at its all-time high of just over 2% per year.

But if humans have the inherent right to control their reproductive lives, it follows that governments need to protect that right when birth rates are low as well as when they are high. It is, in our view, incumbent on policymakers to use other interventions to reach economic and social goals.

And these more direct approaches can be effective. For example, in the U.S., we saw child poverty cut in half during the COVID-19 pandemic as a result of a higher tax credit, only to return to pre-COVID-19 levels when Congress allowed the supplemental credit to lapse.

Little effect on birth rates

To date, pronatalist policies have largely focused on subsidizing the cost of child-rearing and helping parents remain in the labor force.

While enormously beneficial to parents and children, such policies have had little effect on birth rates. For example, Italy’s 2020 Family Act – a comprehensive program that provides family allowances, increases paternity leave, supplements the salaries of mothers and subsidizes child care – has not stemmed the country’s falling fertility rate .

As fertility rates continue to drop, and as popular anxiety about population collapse heightens, governments are beginning to take more draconian measures. Along with promoting assisted reproductive technologies, South Korea banned abortion in 2005 . China’s State Council recently announced the goal of “reducing non-medically necessary abortions,” supposedly to promote “women’s development.”

Around the same time, Iran severely restricted access to abortion, sterilization and contraception for the express purpose of increasing the birth rate.

Borrowing from the future

Those who deny racist, nativist or religious intentions in promoting pronatalism – especially in the U.S. – usually advocate for it on economic grounds.

Their reasoning is that declining fertility produces a top-heavy age structure. In the U.S. context, this means a large number of elderly people collecting Social Security relative to the number of working people paying into the system.

Experts have been projecting the insolvency of Social Security for decades. But the truth is that the U.S. does not need more babies to keep Social Security afloat. Rather, policymakers can increase the size of the working-age population through pro-immigration policies and can increase the amount of money flowing into Social Security by lifting the income cap on contributions .

Governments can provide education, contraception and other health care services, not because doing so will reduce birth rates but because these are vital components of a progressive, fair-minded society. And they can provide parental leave, child tax credits and high-quality child care, not because doing so will increase birth rates but because it will help the children who are born get the best possible start in life.

Seen through this lens, pronatalism offers a hollow-ringing promise that simply having more people will solve social and economic problems faced by a nation’s current population. But that amounts to borrowing from the future to pay the debts of the past.

Karen Hardee , an independent social demographer, contributed to this article.

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Pronatalism won't solve our social, economic problems

In the face of shrinking populations , many of the world's major economies are trying to engineer higher birth rates.

Policymakers from South Korea , Japan and Italy , for example, have all adopted so-called " pronatalist" measures in the belief that doing so will defuse a demographic time bomb. These range from tax breaks and housing benefits for couples who have children to subsidies for fertility treatments. Advertisement

But here's the thing: Low -- or, for that matter high -- birth rates are not a problem in and of themselves. Rather, they are perceived as a cause of or contributor to other problems: With low birth rates come slow economic growth and a top-heavy age structure ; high birth rates mean resource depletion and environmental degradation .

Moreover, birth rates are notoriously hard to change , and efforts to do so often become coercive, even if they don't start out that way. Advertisement

As demographers and population experts , we also know that such efforts are usually unnecessary. Manipulating fertility is an inefficient means of solving social, economic and environmental problems that are almost always better addressed more directly through regulation and redistribution.

A new pronatalist movement

According to the most likely scenario, the world's population will peak around the beginning of 2084 at about 10.3 billion people -- approximately 2 billion more than we have today. After that, the global population is projected to stop growing and will likely shrink to just below 10.2 billion by 2100.

Yet many countries are already ahead of this curve, with populations predicted to decline in the next decade. And that has prompted concerns among some nations' economists over economic growth and old-age support. In some instances, it has also prompted nativist fears about " replacement" through immigration .

As of 2019, 55 countries -- mainly in Asia, Europe and the Middle East -- had explicit policies aimed at raising birth rates .

The United States does have a child tax credit but no policies directly aimed at raising birth rates, according to the United Nations, which tracks population policies worldwide . Advertisement

Even so, in recent years a new pronatalist movement has emerged in the United States, drawing heavily from a range of ideologies, including racism, nativism, neoliberalism, effective altruism and longtermism .

Among the voices pushing for pronatalist policies are Elon Musk and influencers Malcolm and Simone Collins , who warn that the human population is on the verge of collapse .

Republican presidential nominee Donald Trump has indicated he wants incentives for women to have more babies , and his running mate, JD Vance, has been a rare voice on the floor of Congress warning of a U.S. baby bust .

New babies to solve old problems

The pronatalist movement is, we believe, inherently misguided. It is premised on the belief that ever-larger populations are needed to spur economic growth, which alone will lift individuals and communities out of poverty.

But absent direct state intervention, this additional wealth generally accrues to those with established higher incomes , often at the expense of workers and consumers.

Seen this way, pronatalism is a Ponzi scheme . It relies on new entrants to produce returns for earlier investors, with the burdens falling most heavily on women , who are responsible for the bulk of childbearing and child-rearing, often without adequate medical care or affordable child care. Advertisement

Government intervention in reproduction

For nearly a century, governments have used access to birth control and abortion as levers with which to try to adjust their population growth rates, but usually in the other direction: making birth control and abortion more widely available -- and often pushing them on people who wanted more children -- when birth rates were deemed too high . Such policies were implemented in numerous countries between the 1960s and 1990s to stimulate economic growth, with China's one-child policy the most extreme example. Ironically, while high birth rates were once seen as a barrier to economic development , today low birth rates are seen as a drag on economic growth.

Advocates of efforts to reduce birth rates have pointed to the beneficial effects of family planning services. But critics warn that instrumentalizing reproductive health care -- offering it as a means to the end of slowing population growth rather than an end in itself -- makes it vulnerable to being taken away if population growth is deemed too slow.

Indeed, several of the countries that now restrict access to birth control and abortion, including South Korea and Iran, once promoted them in order to reduce their birth rate. Advertisement

In 1968, the International Conference on Human Rights declared that couples had the right to decide the number and spacing of their children. At that time, the growth of the world's population was at its all-time high of just over 2% per year.

But if humans have the inherent right to control their reproductive lives, it follows that governments need to protect that right when birth rates are low as well as when they are high. It is, in our view, incumbent on policymakers to use other interventions to reach economic and social goals.

And these more direct approaches can be effective. For example, in the United States, we saw child poverty cut in half during the COVID-19 pandemic as a result of a higher tax credit, only to return to pre-COVID-19 levels when Congress allowed the supplemental credit to lapse.

Little effect on birth rates

To date, pronatalist policies have largely focused on subsidizing the cost of child-rearing and helping parents remain in the labor force.

While enormously beneficial to parents and children, such policies have had little effect on birth rates. For example, Italy's 2020 Family Act -- a comprehensive program that provides family allowances, increases paternity leave, supplements the salaries of mothers and subsidizes child care -- has not stemmed the country's falling fertility rate . Advertisement

As fertility rates continue to drop, and as popular anxiety about population collapse heightens, governments are beginning to take more draconian measures. Along with promoting assisted reproductive technologies, South Korea banned abortion in 2005 . China's State Council recently announced the goal of "reducing non-medically necessary abortions," supposedly to promote "women's development."

Around the same time, Iran severely restricted access to abortion, sterilization and contraception for the express purpose of increasing the birth rate.

Borrowing from the future

Those who deny racist, nativist or religious intentions in promoting pronatalism -- especially in the United States -- usually advocate for it on economic grounds.

Their reasoning is that declining fertility produces a top-heavy age structure. In the U.S. context, this means a large number of elderly people collecting Social Security relative to the number of working people paying into the system.

Experts have been projecting the insolvency of Social Security for decades. But the truth is that the United States does not need more babies to keep Social Security afloat. Rather, policymakers can increase the size of the working-age population through pro-immigration policies and can increase the amount of money flowing into Social Security by lifting the income cap on contributions . Advertisement

Governments can provide education, contraception and other health care services, not because doing so will reduce birth rates but because these are vital components of a progressive, fair-minded society. And they can provide parental leave, child tax credits and high-quality child care, not because doing so will increase birth rates but because it will help the children who are born get the best possible start in life.

Seen through this lens, pronatalism offers a hollow-ringing promise that simply having more people will solve social and economic problems faced by a nation's current population. But that amounts to borrowing from the future to pay the debts of the past.

Emily Klancher Merchant is an assistant professor of science and technology studies at University of California, Davis . Win Brown is a research affiliate at the Center for Studies in Demography and Ecology at University of Washington . This article is republished from The Conversation under a Creative Commons license. Read the original article . The views and opinions expressed in this commentary are solely those of the author. Advertisement

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A capital is born: The impact of Indonesia moving its capital city

• Indonesia is planning to move its capital from Jakarta to Nusantara, as Jakarta faces the threat of sinking beneath the waves without urgent intervention.
• This relocation will boost the country’s construction outlook, with the total construction work done in Indonesia expected to grow by an average 8.5% p.a. over the four years to 2028.
• We do not expect the moves to establish Nusantara as the new capital to lead to a mass exodus from Jakarta.

Indonesia’s President Joko Widodo is expected to mark the country’s 79th anniversary of independence this month by hailing the official relocation of the country’s national capital away from Jakarta. The new capital will be a city named Nusantara, still under construction and located over 1,000km away from Jakarta in East Kalimantan province on Borneo Island. At an expected cost of construction of $35 billion and a population projected to reach nearly 2 million by 2045, the new capital city will be the new base of the country’s president and the government’s administration and ministries.

Chart: Indonesia’s new capital will be located over 1,000km away from the current capital Jakarta

Why is Indonesia moving its capital city?

The idea of moving Indonesia’s capital away from Jakarta has existed since the first days of Indonesia’s independence.

The primary driver for this move is the potentially irretrievable impact of land subsidence in Jakarta, caused by rapid urbanisation and excessive groundwater extraction. Jakarta is one of the fastest sinking cities in the world. Many commercial and residential areas, especially in the north of the city, have already been destroyed due to flooding which has also been exacerbated by climate change. Some areas are sinking by as much as 25cm per year and estimates suggest large swathes of the city could be fully submerged by 2050 .

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Other motivations for the relocation are related to spreading the distribution of wealth and activity more evenly throughout Indonesia, the economy of which has historically been centred on the island of Java.

However, the relocation plan has long been politically and logistically contentious. Plans for Nusantara, first announced by President Widodo in 2019, have been no exception, notably with regards to the impact of building a new city on an undeveloped area of ecological importance. The government’s funding strategy of relying on private investment to fund 80% of the construction costs has also been called into question .

Building a $35 billion new capital

According to the plan announced previously, building the new capital, Nusantara, will cost an estimated $35 billion and will not be finished until 2045.

This mega project is expected to boost the nation’s construction outlook significantly. We forecast the total construction work done in Indonesia will grow an average 8.5% p.a. over the four years to 2028. Activity is anticipated to ramp up over the forecast horizon, supported by a strong project pipeline, primarily from developments around the capital relocation. This major infrastructure project is a driver for increased fixed capital expenditure from both the private sector and foreign direct investment (FDI). This will stimulate construction activities across all segments:

• Residential construction: Government and private developer initiatives for new residential areas in Nusantara, along with the country’s “One Million Houses” programme will help drive the growth. Residential building work done is forecast to grow an average 4.7% p.a. from 2024 to 2045.
• Non-residential construction: A strong pipeline of projects connected to Nusantara will support social building (+5.1%), along with commercial (+4.9%), industrial (+4.8%) and ‘other non-residential’ (+4.6%) building from 2024 to 2045.
• Civil engineering construction: Civil engineering work done is forecast to lift 6.7% in 2024, down from a previously expected 6.9% growth, as some projects continue to be postponed and delayed. Nonetheless, activity is forecast to grow, with the government remaining steadfast with its infrastructure objectives, continuing to promote significant spending in this sector, particularly in relation to the construction of Nusantara.

However, there remains significant downside risks should continued construction delays see activity pushed out further along the forecast horizon.

Beyond benefitting construction prospects on a national level, we expect the new capital’s construction and relocation of the central administration to provide an economic benefit to the East Kalimantan province. Indonesia’s Ministry of National Development Planning expects it will create between 4.3 million and 4.5 million jobs in East Kalimantan by 2045.

Despite this, it is important to highlight that we do not expect this relocation to represent either a significant threat to Jakarta’s economic importance or a reprieve from its problems.

Jakarta will not be replaced, neither its role, nor its problems

Jakarta is Indonesia’s economic capital and is the primary location for Indonesia’s high value services such as finance, business services, and information and communications (IT). Public administration represents around just 4% of economic output and employment in Jakarta. Although we would expect public administration activity to slow down or even shrink in Jakarta, we do not expect this to lead to a mass relocation of other activities. There may be some relocation of businesses and their workers that need to be in close proximity to the political establishment, but the majority will likely gain more from the agglomeration effects of being within the established commercial zones of the former capital.

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Historical examples of capital moves to pre-planned cities, such as the relocation of Myanmar’s capital to Nay Pyi Taw from Yangon in 2006, also suggest that relocating the government administration does not normally lead to a substantially negative economic impact on the previous capital.

Hence, we would expect Jakarta to continue to develop as Indonesia’s economic and business centre of gravity despite the loss of central government representation.

Jakarta has been experiencing fast economic development through the expansion of its private services sectors and has the fastest growing IT sector among the major cities in Southeast Asia and indeed one of the fastest growing across Asia-Pacific more generally. Forecasts from our Asia Cities and Regional Forecasts Service show that in real terms by 2050, we expect its economy will be almost three times as large as it is today, while its population will peak at close to 11 million. Moreover, according to our own projections for Jakarta’s wider functional urban area, which includes Jakarta province and its satellite cities, the city is expected to have a population of more than 40 million by 2050, vastly dwarfing the projected population of the new capital.

However, Jakarta’s continued development does mean the capital relocation is unlikely to provide much reprieve from the environmental and infrastructure pressures it faces.

The national and provincial authorities are certainly aware of the issues and have pledged funds towards Jakarta’s urban regeneration, including improving public transportation and water management . Even the long gestating and often-shelved plans for constructing a giant sea wall have recently been revived .

Certainly, a major effort is required to arrest the city’s subsidence. If the situation becomes more acute, then a much greater displacement of people, businesses, and economic activity could become unavoidable.

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Calculate the travel time or distance between paired origins and destinations

How can I calculate the distance from each student’s home to their assigned school to determine if they’re eligible to ride the school bus? How can I calculate the commute time from each employee’s home to their work site so I can most effectively target ridesharing incentives? How can I calculate the driving time from each patient’s home to the location of their doctor’s appointment to better understand access to health care in my state?

All these questions are examples of a common class of network analysis problem: calculating the travel time, distance, or route path between preassigned pairs of origins and destinations.

In this type of analysis, the goal isn’t to find the closest destination (a closest facility analysis) or to calculate the travel time or distance from all origins to all destinations (an origin destination cost matrix analysis). Nor is the goal to find the optimal way to dispatch a fleet of vehicles for paired pick-ups and drop-offs (a vehicle routing problem analysis). Rather, the goal is to calculate the optimal path from each origin to its assigned destination and get the travel time, distance, or route geometry of that path. This type of problem can be solved using the Network Analyst route solver.

Learn more about the Network Analyst analysis types

This post describes how to set up and solve this type of problem using the route solver. Then, it covers some ready-to-use tools that make solving this type of problem easier.

Configure the route solver for preassigned origin-destination pairs

As long as you set up the problem correctly, the Network Analyst route solver can calculate routes between multiple pairs of locations within one solve operation.

The input to the route solver is a single table of stops. Ordinarily, when you solve the analysis, you get a single route that visits all the stops in the table.

For example, you can set up a Stops table with four stops:

When you solve the route, you get a single route that visits each stop:

However, you can assign stops to different routes by setting a value in the RouteName field. Stops with the same RouteName field value will be assigned to the same route, and the analysis results will include a separate route for each unique RouteName in the table.

Revisit the example with four stops, but this time, use the RouteName field to split the four stops into two routes. Stops A and B both have a RouteName field value of Route 1, and Stops C and D have a RouteName field value of Route 2.

When you solve the analysis, there are two separate routes: one from Stop A to Stop B and another from Stop C to Stop D.

So, if you have preassigned origin-destination pairs, you can load each pair into the Stops table and give them a unique RouteName field value. This way, when you solve the analysis, each pair will get a unique route connecting the origin and destination.

The screenshots above show an analysis in ArcGIS Pro, but this configuration works for all the various APIs across the ArcGIS platform where you can access the Network Analyst route solver.

Learn more about the route solver in ArcGIS Pro , in the ArcPy site package , and the ArcGIS developer APIs .

A real-world example

Unfortunately, real-world data is usually a little more complicated, and it may take some effort to manipulate it into the right format for the Stops table. Next, you’ll look at a more realistic example.

Suppose you have a dataset of commuters with their assigned work sites and another dataset with the locations of the work sites. You want to calculate the route and mileage of each commuter to their work site.

You want to add each commuter and their assigned work site to the Stops input table for the route analysis. Because you want a separate route for each commuter to their work site, you must use a unique RouteName field value for each commuter-work site pair. You’ll learn how to set this up in a moment, but first, the table below shows the output you want to achieve:

The Stops table has eight stops: four for each of the four commuters and four for the work sites each commuter is assigned to. Since two commuters work at the same site (Excellent Elementary), that site is included in the Stops table twice, once for each worker assigned there.

Each commuter-work site pair has a unique RouteName field value to ensure that there’s a separate route connecting each commuter and their work site. Since the commuter names are unique, you can use them for the RouteName values, but you could use anything, as long as each origin and its assigned destination have the same value and that value is unique to the pair.

The map below shows the resulting routes:

To load the Stops table from the original inputs, you have to do a bit of data manipulation.

When loading the commuters, you can use field mapping to transfer the commuter’s name from the original dataset to the Name and RouteName fields in Stops. In ArcGIS Pro, this is accomplished using the Add Locations tool.

Loading the work sites is trickier because you must make a copy of each work site for each commuter who works there. You can do this using a one-to-many join with the Add Join tool.

Joining the Commuters table to WorkSites using a one-to-many join results in a copy of each work site for each commuter assigned there. The fields on the right side of the table come from the joined Commuters table.

Now you can load the joined WorkSites table into the Stops table for the Route analysis. Use field mapping to map the WorkSites table’s Name field (the work site’s name) to the Stops table’s Name field and the joined Commuters table’s Name field (the commuter’s name) to the Stops table’s RouteName field. With the Add Locations tool in ArcGIS Pro, it looks like this:

As shown earlier, the resulting Stops table includes an entry for each commuter and an entry for each commuter’s work site with the RouteName field used to define origin-destination pairs.

Ready-to-use tools to solve preassigned origin-destination pair problems

Manually configuring your data in the format described above can be challenging. However, ready-to-use tools for solving preassigned origin-destination pair problems are available in the Map Viewer and ArcGIS Pro. These tools use the route solver, but they simplify setting up the inputs.

Solve preassigned origin-destination pair problems in Map Viewer

The Calculate Travel Cost tool in Map Viewer in ArcGIS Online and ArcGIS Enterprise is specifically designed to calculate routes between origins and destinations. You can specify matching ID fields in the input origins and destinations to define which origin is paired with which destination.

If you’re a developer, you can also access this tool with ArcGIS REST API and ArcGIS API for Python .

Solve large preassigned origin-destination pair problems in ArcGIS Pro

If you have a large set of paired locations or you’re struggling to set up your data as described above, you can download and use the Solve Large Analysis With Known OD Pairs tool from Esri’s large-network-analysis-tools GitHub repository .

This tool offers two options for setting up pairs of input locations:

• A field in the origins table defines the assigned destination (one-to-one).
• A separate table defines the origin-destination pairs (many-to-many).

The tool improves performance by solving the routes in parallel. It’s usable out of the box in ArcGIS Pro with no coding required, but it’s also open-source Python code you can modify to suit your needs.

You can calculate the travel time, distance, and route paths between paired locations using the ArcGIS Network Analyst route solver. You can configure the analysis manually, or you can use ready-to-use tools in the Map Viewer or ArcGIS Pro. Give it a try!

If you have questions or suggestions about this workflow, reach out on Esri Community . We would love to hear from you!

About the author

Melinda Morang

Melinda Morang is a product engineer on Esri's Network Analyst Team.

Article Discussion:

Related content:.

• transportation
• arcgis api for python
• arcgis network analyst
• arcgis online
• arcgis rest api
• network analysis
• od cost matrix
• spatial analysis
• travel time

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