Ch 1 - What is Economics?

Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices

  • Two parts: microeconomics, macroeconomics

Scarcity: inability to satisfy all our wants 

Choices: choices we must make depending on the scarcity we face. They also depend on the incentives we face 

An incentive is a reward that encourages an action or a penalty that discourages an action 

  • If price increases, more will be offered for sale, less will be interested to buy 

Microeconomics: is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments 

Macroeconomics: the study of performance a=of the national and global economies 

Two big economic questions: 

  1. How do choices end up determining What, How, and For Whom goods and services get produced?
  2. When do choices made in pursuit of self interest also promote social interest?

Goods and services: the objects that people value and produce to satisfy human wants 

  1. Factors of productions (falls under how): goods and services are produced by using productive resources. 

  • They are grouped into four categories: land, labour, capital, entrepreneurship 

  • Land: gifts of nature that we use to produce goods and services 

  • Labour: Work time and work effort that people devote to producing goods and services 

  • Human capital: quality of labour, which is the knowledge and skill that people obtain from education, on the job training, and work experience 

  • Capital: tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services 

  • Entrepreneurship: human resources that organises land, labour, and capital

  1. For whom?

  • Who gets the goods and services depends on the incomes that people earn

  • Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit 

  • Self interest: choices made in self-interest are those that you think are best for you

  • Social interest: choices that are best for society as a whole are said to be in social-interest

  • Social interest has two dimensions: efficiency, equity 

  • Efficient social interest: resource use is efficient if it is not possible to make someone better off without making someone else worse off 

  • Equity and social interest: equity is fairness, but economists have a variety of views about what is fair 

  • Four topics that generate discussion and that illustrate tensions between self-interest and social interest are: 

  • Globalisation

  • The information-age monopolies

  • Climate change 

  • Economic instability 

  • Globalisation: the expansion of international trade, borrowing and lending, and investment

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  • Key ideas define the economic way of thinking:

  • A choice is a tradeoff (choose to gain something on the expense of something else)

  • People make rational choices by comparing benefits and costs 

  • Benefit is what you gain from something. The benefit of something is the gain or pleasure that it brings and is determined by preferences. Preferences are what a person likes and dislikes and the intensity of those feelings   

  • Cost is what you give up to get something (opportunity cost)

  • Choices respond to incentives 

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  • A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. One the wants of the person making a choice are relevant to determine its rationality. 

  • Margins: the benefit of allocating resources compared to the cost

  • The evaluation of the consequences of making incremental changes in the use of your time 

  • Marginal benefit (MB): benefit from pursuing an incremental increase in activity 

  • Marginal Cost (MC): the opportunity cost of pursuing an incremental increase in an activity

  • It's more important to measure marginal benefit and marginal cost

  • If marginal benefit > than marginal cost then we find it appealing (we are gaining more than we are losing)

  • If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity 

  • If benefits > cost, people will do more of that activity

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Economists distinguish between two types of statements: 

  1. Positive statement: can be tested by checking it against facts. It describes the current situation. Can be right or wrong 
  2. Negative statement: expresses an opinion and cannot be tested. It says what it should be 

  • The economic science discovers positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works 

  • The economic model: a description of some aspects of the economic world that includes only those features that are needed for the purpose at hand 

    \n If economists have a goal, they will provide a method of evaluating alternative solutions and comparing marginal benefits and marginal costs