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 on

Inquiry into the nature and results of the choices that households and business firms make is the concern of microeconomic analysis, the focus of which is the behavior of the individuals, organizations, and institutions in the economy. Whereas all acts are, of course, individual acts, individuals frequently make decisions and act on behalf of some organization or institution, public or private.

The powerful criticism that Marxism leveled against classical political economy summoned up the counterattack, in the late 19th century, of the marginalist school, which, in Britain, ultimately evolved into the neoclassical tradition. The origin of the neoclassical tradition is virtually synonymous with the name of Alfred MARSHALL. Whereas the work of the marginalists modified the classical paradigm by emphasizing the importance of demand and utility (where the classicists explained commodity values largely in terms of cost of production), neoclassicism explained economic phenomena as the outcome of the choices of rational (or "economic") people who conduct their activities in a laissez-faire world ruled by perfect competition.

The size of the GNP, and its income counterpart, reflects the level of employment, another important macroeconomic aggregate. The level of employment is dependent on aggregate effective demand, which consists of the consumption and investment (or capital goods) demands of households and businesses. Macroeconomic aggregates are thus critically linked to the microeconomic decisions made in the household and business sectors of the economy. A major concern of macroeconomics is the influence of the government and the CENTRAL BANK on aggregate demand through implementation of FISCAL POLICY and MONETARY POLICY, respectively.

During the 19th century, Continental philosophers challenged the doctrine of natural law that underlies the classical tradition of political economy. Georg Wilhelm Friedrich Hegel developed a philosophy of history that maintained that the course of history reflects the gradual realization by human beings of their own nature. The course of their development can be understood by using a method of reasoning that Hegel called the dialectic: one phenomenon (a thesis) works against another (the antithesis) to produce something wholly new (the synthesis). Thus the feudal system (the thesis) of the Middle Ages encountered the force of the market system (the antithesis) of the mercantilistic era, and their inevitable clash produced an entirely new system, CAPITALISM (the synthesis).

Rational behavior in the business sector implies that firms direct their efforts toward maximizing profits. To do this they must, first, be responsive to the demands of the household sector for goods and services and, second, combine the labor and material resources they employ in such a way as to minimize their production costs. This is the essence of efficient production. To the extent that it is accomplished, it will yield the largest possible output of goods and services with a minimum expenditure of resources.

In a capitalistic economy, which Marx viewed as a transitory stage in the historical evolution of society, the antagonistic classes are the bourgeoisie and the proletariat. The essential feature of the mode of production under capitalism is that ownership of the means of production (that is, capital and land) is vested in the bourgeoisie, while the work is performed by the proletariat. The relationship between them determines the mode of production, and hence, the whole society. The only form of property that workers own is their labor power. Because the means of production needed to exploit the laborers' productive capabilities are owned by the capitalist class, workers have no choice but to sell their labor power to the capitalist class at the going competitive wage rate. The exchange relationship between the worker and the employer, however, requires the worker to labor the entire working day, which is ty

Some common words found in the essay are:
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