What does economics study? Economics analyzes the allocation of scarce resources. Although this answer appears straightforward, several defini- tions are needed to make this sentence understandable. Resources include anything useful in consumption or production. From the perspective of a manager, resources include the flow of services from supplies or equipment the organization owns and the flow of services from employees, buildings, or other entities the organization hires. A resource is scarce if it has alternative uses, which might include another use in the organization or use by another person or organization. Most issues that managers deal with involve scarce resources, so economics is potentially useful for nearly all of them.
Economics focuses on rational behavior—that is, it focuses on indi- viduals’ efforts to best realize their goals, given their resources. Because time and energy spent in collecting and analyzing information are scarce resources (i.e., the time and energy have other uses), complete rationality is irrational. Everyone uses shortcuts and rules to make certain choices, and doing so is rational, even though better decisions are theoretically possible.