Decades of controversy about the nature and appropriate boundaries of his discipline led the economist Jacob Viner to observe that "economics is what economists do." Somewhat more precisely, economists engage in systematic inquiry into the effects of those human activities which are grouped under three broad headings: production, exchange, and consumption. The nature and magnitude of these activities and their implications for individual and social welfare constitute the focus of economics and the policy prescriptions that economists make.
             The basic objective of all economic activity is to achieve the highest possible level of present consumption of goods and services that is compatible with the supply of human and material resources (or factors) available to produce them. The scarcity of human and material resources, as evidenced by the existence of prices, imposes the necessity of allocating resources among alternative present and future uses (see PRICE SYSTEM). Choice, therefore, is the essence of economic decision making. It is necessary to evaluate the relative worth of different kinds and quantities of consumer goods and services (bread, automobiles, houses, schools, and health care, for example) against one another and against future supplies that are likely to become available if present resources are diverted into the production of capital goods (blast furnaces, loading docks, cargo vessels, roads, bridges, and factories, for example).
             The choice process occurs both at the level of the household and at that of the business firm. Households that are free to exercise their choices in the marketplace are assumed to behave in a manner that will yield maximum satisfaction, or utility. The essence of rational behavior for a household is to spend its last (or marginal) unit of money income for that item or service which will provide the greatest possible utility. Such choices underlie households' demands for goods and services in...