Scarcity exists because human wants exceed the time, income, natural resources, and productive capacity available to satisfy them. It is not the same as poverty: even a high-income household, university, business, or country must choose among competing uses for limited resources. Every choice therefore has an opportunity cost, the value of the best alternative forgone. For example, a student who spends three hours studying instead of working gives up the wages that could have been earned; a city that uses land for a public park gives up the alternative housing, shops, or offices that land might support. Rational decision-making compares incremental benefits with incremental costs, rather than treating past expenditures as decisive. A cost already paid and impossible to recover is a sunk cost, so it should not by itself determine whether to continue a project. Opportunity cost may be measured in dollars, time, output, leisure, or environmental quality. Recognizing it makes trade-offs explicit and helps explain why economic decisions require prioritization.

Production transforms inputs into goods and services that people value. Economists group these inputs into land, labor, capital, and enterprise. Land includes not only farmland but also mineral deposits, forests, water, locations, and other natural resources. Labor is the physical and mental effort supplied by workers, and its productivity depends on education, health, experience, and technology. Capital consists of produced tools used to make other goods and services, such as machinery, software, factories, delivery vehicles, and communications networks; financial assets are claims on resources, not capital goods themselves. Enterprise, often called entrepreneurship, coordinates the other factors of production, identifies opportunities, makes decisions under uncertainty, and bears the risk of failure. The rewards to factors are commonly described as rent for land, wages for labor, interest or returns for capital, and profit for enterprise. These categories clarify distribution, but they overlap in practice: an entrepreneur may supply labor and capital while also organizing a firm. Productivity rises when factors are combined effectively, not merely when more inputs are used.

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Comparative advantage explains why exchange can benefit both parties even when one producer is more productive at every task. The relevant comparison is opportunity cost: what must be given up to make one additional unit of a good. A person or country has a comparative advantage in the activity with the lower opportunity cost, not necessarily the greater absolute output. Suppose one producer gives up 2 shirts to make a computer, while another gives up 5 shirts. The first has comparative advantage in computers; the second has comparative advantage in shirts because its opportunity cost of a shirt is lower. If each specializes relatively more in its comparative-advantage activity and trades at a mutually acceptable rate, total output can rise. A trade price must fall between the parties' opportunity-cost ratios for both to gain. Trade still creates adjustment costs: workers and communities in import-competing industries may lose income or need new skills. Policies therefore involve a trade-off between aggregate gains from exchange and how those gains and losses are distributed.

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Money is any asset widely accepted for payment. It solves the inconvenience of barter, in which exchange requires a double coincidence of wants: each trader must want exactly what the other offers. Money serves as a medium of exchange, a unit of account for quoting and comparing values, and a store of value that transfers purchasing power into the future. Modern U.S. money includes currency issued by the Federal Reserve and deposits held in checking and similar accounts. Most everyday payments use bank deposits rather than paper cash. Commercial banks help create deposit money when they make loans: a loan typically credits the borrower's deposit account, creating a bank asset and a matching deposit liability. This process is constrained by capital requirements, liquidity needs, regulation, creditworthy borrowers, and the public's demand for loans. Money is valuable largely because people expect others to accept it and because government accepts it for taxes. Unlike commodity money, fiat money has little or no intrinsic nonmonetary value; confidence and institutional credibility are central to its use.

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