What is Economics? Understanding our changing world

Chapter 1

Economics

social science that studies choices that individuals,

businesses, governments, and entire societies make as they cope

with scarcity and the incentives that influence and reconcile those

choices.

Microeconomics

study of the choices that individuals and businesses make.

Macroeconomics

study of the performance of the national economy and the global economy.

Two Big Economic Questions

What, How, and For Whom?

When Is the Pursuit of Self-Interest in the Social Interest?

What?

Goods and services

How?

Factors of production

• Land

• Labour

• Capital

• Entrepreneurship

For Whom?

Income

• Rent (land)

• Wages (labour)

• Interest (capital)

• Profit (entrepreneurship)

Efficiency

A situation where the only way to make someone better off is to make someone else worse off (you have maxed out all possibilities). / Benefit outweighs cost

Improving Efficiency

Making someone better off without hurting anyone else

Decreasing Efficiency

Making someone worse off without helping anyone else (pure waste/worsening).

Fairness

Too much inequality is unfair - but how much is too much ? / Equity

Social interest issues:

1. Globalisation

2. Information Revolution

3. Climate change

4. Financial instability

5. Unemployment

6. Water, power and food shortages

Globalisation

The expansion of international trade, borrowing and lending, and investment.

Information-age rnonopolies

Technological change of the past forty years

Climate change

Carbon emissions

6 key ideas that define the economic

1. 1. A choice is a trade-off

2. 2. People make rational choices by comparing benefits and costs.

3. 3. Benefit is what you gain from something.

4. 4. Cost is what you must give up to get something.

5. 5. Most choices are choices made at the margin

6. 6. Choices respond to incentives.

Trade-off

Giving up one thing to get something else

Rational choice

One that compares costs and benefits and achieves the greatest benefit cost for the person making the choice.

Benefit

The gain or pleasure that something brings and is determined by preferences - by what a person likes and dislikes and the intensity of those feelings.

Opportunity cost

The highest- valued alternative that must be given up to get something else.

Marginal benefit

The benefit that arises from an increase in an activity

Marginal cost

The opportunity cost of an increase in an activity

Positive statement:

what is - can be tested

Normative statements

what ought to be - cannot be tested

Economic models

A description of some aspect of economic world that includes only those features that are needed for the purpose at hand.

A model is tested by

Comparing its predictions with the facts.

Economics is also used in

policy advice

How is economics used as a policy tool?

It is a toolkit for advising governments and businesses and for making decisions.

Ceteris paribus Assumption

”If all other relevant things remain the same”

Cause and effect

Statistical relationships do not always reflect meaningful economic relationships