Lesson1A

What is Economics?

Economics is framed as the science (or study) of choice.
It asks whether it is a science, an art, or something in between; debates about prediction, understanding, truth, and whether it’s a dismal science.
The material asks: Is economics about prediction, understanding, or truth? Is it an art? Is it dismal? The answer leans toward a nuanced view and acknowledges questions raised (Exhibit #1).

Pricing strategies that increase firm profits.
Make-vs-buy decisions: should a firm produce in-house or purchase from outside vendors?
Tax incidence: can a firm pass on a tax, and how do taxes affect firm behavior?
Industry/regulation topics: impact of airline deregulation.
Environmental policy: what is the right amount of air pollution?
Labor and pay equity: do women get paid less than men? Why?
Demography and household behavior: why do families have fewer children than in the past?
These questions involve individuals and organizations in ordinary business life; they are not restricted to narrow business or social policy questions (Exhibit #2).

The questions are not all about business narrowly defined; nor all about social policy.
They all involve the question of CHOICE in one way or another.
Economics is the science (or study) of choice.
Whose choice? Mine, yours, ours—anyone's—humans often modeled as homo economicus (the typical human) (Exhibit #3).

Above all, choice means scarcity.
We face unlimited options, constrained by limited means.
Definition (Lionel Robbins):
- "Economics is the study of the allocation of scarce means to alternative uses." ext{Economics} o ext{allocation of scarce means to alternatives}
What are the options/uses/ends? Examples: read a book, buy a car, make love, make war, visit a sick person, have fun at a party, buy new clothes, … the sky is the limit; the wish list is infinite.
What are the means? Time, money, and stuff (labor, capital, land, knowledge, …) with a limited instrument list.
Therefore: INCENTIVES MATTER! (Exhibit #4)

Individuals respond rationally to the incentives they face – to benefits and costs (not only monetary) they perceive.
Rationality here means purposeful action aimed at achieving chosen objectives.
Acting rationally does not guarantee correct actions; mistakes can occur, especially with incomplete or imperfect information.
If we know someone’s objective and what they perceive as the means to that objective, we can understand their actions—even if the outcome is mistaken or suboptimal.

Choice is complex because:
- People are different.
- We exist in time, facing uncertainty.
- We don’t always know how decision processes work.
The goal is not to predict every actual choice, but to understand typical choices and use that understanding to analyze social situations. (Exhibit #5)

Ends: objectives individuals aim to achieve.
Means: resources like knowledge, money, production inputs, etc. (often summarized as resources).
All individuals act to survive and to improve their lives in some way.
They try to maximize their utility: U – a subjective measure of value or satisfaction.
- Utility can be described as happiness, enjoyment, contentment, flourishing, etc.
- Utility is subjective: individuals subjectively evaluate the objectives they desire.
- In economics, utility is a way to quantify the value people place on outcomes. (Exhibit #7)

Things people want → Economic goods: goods that are scarce.
Must goods: do they have a positive price?
Are positively priced items economic goods? (Generally yes, if they are scarce and traded in markets.)
Free goods have a zero price and are not scarce.
Scarcity Value: the value of having to choose among limited resources.
Opportunity Cost: what you give up when you engage in any activity; measured as the value of your next best activity (the activity you would have chosen if you didn’t choose the first activity).
- Example: the opportunity cost of going to college.
These concepts are summarized or exemplified in Exhibit #9.
Important nuance: economic analysis focuses on choices under scarcity, not on absolute abundance; value and trade-offs matter because resources are limited while wants are unlimited.

Economics = study of choice under scarcity.
All meaningful questions involve choice, incentives, and trade-offs.
Ends (objectives) vs. Means (resources) drive decisions.
Utility is a subjective measure of value, guiding choices.
Incentives, information, time, and uncertainty shape decision-making.
Opportunity cost links every choice to the forgone alternative.
Exhibits referenced (Exhibit #1, #2, #3, #4, #5, #7, #9) indicate supportive material illustrating these concepts.