Economics is the study of how society allocates scarce resources and goods. Resources
are the inputs that society uses to produce output, called goods
. Resources include inputs such as labor, capital, and land. Goods include products such as food, clothing, and housing as well as services
such as those provided by hair stylists, doctors, and police officers. These resources and goods are considered scarce because of society's tendency to demand more resources and goods than are available.
While most resources and goods are scarce, some are not — for example, the air that we breathe. A resource or good that isn't scarce, even when its price is zero, is called a free resource or good. Economics, however, is mainly concerned with scarce resources and goods. It's the presence of scarcity that motivates the study of how society allocates resources and goods.
One means by which society allocates scarce resources and goods is the market system. The term market refers to any arrangement that allows people to trade with one another. The market system is the name given to the collection of all markets and also refers to the relationships among these markets. The study of the market system, which is the subject of economics, is divided into two main branches or theories: macroeconomics and microeconomics.
The prefix macro means large, indicating that macroeconomics is concerned with the study of the market system on a large scale. Macroeconomics considers the aggregate performance of all markets in the market system and is concerned with the choices made by the large subsectors of the economy — the household sector, which includes all consumers; the business sector, which includes all firms; and the government sector, which includes all government agencies.
The prefix micro means small, indicating that microeconomics is concerned with the study of the market system on a small scale. Microeconomics looks at the individual markets that make up the market system and is concerned with the choices made by small economic units such as individual consumers, individual firms, or individual government agencies.