When you set aside an evening for studying, what do you give up, and what does that have to do with economics? In this episode we look at why economics begins with the concept of “scarcity”; at the concepts of need, opportunity cost, human capital, production, consumption, investment, economic growth and development; and at the two-way relationship between education and the economy.

What will you learn in this episode?

• Explain the concept of scarcity and what the science of economics deals with
• Define need and list the common features of economic needs
• Explain the concept of opportunity cost with examples from daily life and education
• Explain the concept of human capital and its relationship with education
• Distinguish between the concepts of production, consumption and investment
• Explain the difference between economic growth and economic development
• Explain the two-way relationship between education and the economy

Summary of this episode

Why does economics begin with scarcity?

The source notes that in the 21st century, education and the economy have come to the fore as the two basic indicators of a society's level of development. What these two institutions have in common is that they share responsibility for training the manpower society needs. Both also affect large-scale variables that concern the whole of society, such as population, employment and investment.

To sustain their lives, people must consume the goods and services that meet their needs. However, these goods and services are not unlimited. While human needs are considered unlimited, the limited availability of the goods and services that meet them is called scarcity. Scarcity does not mean that goods or services do not exist; it means that a certain economic effort is required to produce them. All the scientific efforts that study this imbalance between unlimited needs and limited resources and try to bring about a balance form the subject of economics.

Need

Needs are feelings that give the individual pleasure when they are met and sorrow and pain when they are not. As in the other social sciences, the focus of economics is the human being. Economics studies people's efforts to meet their unlimited needs rationally with limited resources. The common features of economic needs are as follows:

• Human needs are endless.
• Needs differ in intensity.
• The intensity of a need decreases as it is met.
• Needs that are not essential at first may become essential over time.
• Needs, and the goods and services that meet them, can substitute for one another.

Economics is concerned not with all human needs, but with economic needs.

Opportunity cost (alternative cost)

Because needs are unlimited and resources are limited, people are forced to make choices. When a choice is made, the value of the best alternative given up, or the loss incurred as a result, is called opportunity cost or alternative cost. Here is an example from daily life: if a student spends the evening studying for an exam, they give up the chance to go to the cinema with friends that evening; the activity given up is the opportunity cost of the decision to study. The same holds for countries. Budgets may not be enough to invest in every area every year. When resources are divided among areas such as education, health, roads or school construction, the investments that cannot be made constitute the opportunity cost for society.

Human capital (beşeri sermaye)

The source stresses that in the 21st century, as communication and information technologies develop rapidly, individuals who can access knowledge and internalize it are regarded as the most important capital. For this reason, many countries are restructuring their education systems to give priority to raising people who produce knowledge. Human capital is the capital made up of the knowledge, habits and competencies acquired through education and training activities in order to develop individuals' working and mental abilities, increase their productivity and enable them to gain economic strength in the future. The fact that people can reach better economic conditions in the future by investing in themselves through education brought this concept to the fore. The economics of education, a specialized field of economics, studies human capital in detail. This investment in people benefits both the individual and society.

Production, consumption and investment

Production is the whole of the efforts to create goods and services in order to meet human needs. Production takes place either by bringing out a good or service that did not exist before, or by changing the features of an existing one to make it more valuable. Land, labor, capital and entrepreneurship are the basic factors of production. According to the source, the human being is the most productive of these factors, because it is people who can direct all the other factors rationally towards a goal.

Consumption is the use of goods and services to satisfy human needs. Since the common aim of all economic effort is to meet needs, consumption is one of the important topics of economics; a rise in the level of consumption is one of the basic indicators that the economic conditions of individuals and societies are improving.

Investment is spending made over a certain period in order to increase the means of production in the economy. For spending to count as investment, it must create production capacity that did not exist before. Building a new factory or a new school is therefore an investment. Spending that does not contribute to production is not considered investment.

Economic growth and development

Although these two concepts are often seen as close to each other, they are not the same. Economic growth is the annual rate of increase in a country's total real national income. Real income means income adjusted for the effect of price increases. It is assumed that the standard of living will rise as per capita income increases, but the two do not always move together. Growth is mainly a quantitative concept. Development, by contrast, includes quality as well as quantity; it covers social transformation alongside economic transformation. This is why some countries can grow without developing. The source considers development efforts in terms of production and technology, people's standard of living, employment, leadership in global competition, production that does the least harm to the environment, and freedom that raises people's economic, social and political quality of life.

The relationship between education and the economy

The economy is both a branch of science and a social institution; it covers the institutions that carry out production and distribution in society and the way they operate. The main aim of educational institutions, in turn, is to achieve social and economic development by raising individuals with the knowledge, skills and competencies that change requires. The relationship between the education level of a society's members and that society's level of development shows the importance of education for development. Education enables individuals to know their environment and use natural resources efficiently; individuals whose level of education rises both fulfil their potential and gain respected positions in society.

There is a two-way relationship between education and the economy. Education contributes to producing the technologies needed for development, training the manpower the economy needs, and giving individuals skills that make their lives easier. On the other hand, the rules, principles and workings of the economy also shape how education operates; the economy's expectations in a given period and changes in the economy directly affect education. Individuals gain the ability to be good producers and consumers, to act thriftily, and the knowledge their future professions require in educational institutions. The branch of science that forms the common ground between education and the economy is the economics of education, which seeks solutions to problems in educational institutions with its own methods.

In short

Economics arises from the imbalance between unlimited needs and limited resources, that is, from scarcity. Scarcity requires making choices, and every choice brings an opportunity cost. As an investment in people, education builds human capital; the concepts of production, consumption and investment are the basis for understanding the economic side of education. Growth is quantitative progress, while development is both quantitative and qualitative. Education and the economy are two basic social institutions that influence each other.

Key concepts

• Economy: The branch of science that studies efforts to meet unlimited human needs rationally with limited resources.
• Scarcity: The limited availability of the goods and services that meet needs, in the face of unlimited needs.
• Need: A feeling that gives pleasure when met and sorrow and pain when not met.
• Opportunity cost (alternative cost): The value of the best alternative given up when a choice is made.
• Human capital: The knowledge and competencies acquired through education and training that increase an individual's productivity and future economic strength.
• Production: The whole of the efforts to create goods and services in order to meet human needs.
• Consumption: The use of goods and services to satisfy human needs.
• Investment: Spending aimed at increasing the means of production that creates production capacity that did not exist before.
• Economic growth: The annual rate of increase in a country's total real national income.
• Economic development: Quantitative and qualitative progress that covers social transformation alongside economic transformation.
• Economics of education: The branch of science that forms the common ground between education and the economy and studies human capital.

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Sources used:
Ağaoğlu, E. (2008). Eğitimin ekonomik temelleri [Economic foundations of education]. In M. Gültekin (Ed.), Eğitim Bilimine Giriş [Introduction to Educational Science] (Unit 6). Eskişehir: Anadolu Üniversitesi Yayınları.

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