Chapter 1: What is Economics?

Definition of Economics

  • All economic questions arise because we want more than we can get.
  • Scarcity: our inability to satisfy all our wants.
  • Because we face scarcity, we must make choices.
  • The choices we make depend on the incentives we face.
  • Incentive: a reward that encourages an action or a penalty that discourages an action.

Economics: Microeconomics vs Macroeconomics

  • 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.
  • Main parts:
    • Microeconomics
    • Macroeconomics

Microeconomics vs Macroeconomics (definitions and examples)

  • Microeconomics: study of choices that individuals and businesses make, how those choices interact in markets, and the influence of governments.
  • Example: Why are people buying more e-books and fewer hard copy books?
  • Macroeconomics: study of the performance of the national and global economies.
  • Example: Why does the unemployment rate in Canada fluctuate?

Two Big Economic Questions (Overview)

  • Two big questions summarize the scope of economics:
    • How do choices end up determining what, how, and for whom goods and services get produced?
    • When do choices made in pursuit of self-interest also promote the social interest?

What, How, and For Whom? (What do we produce, how do we produce it, and for whom?)

  • Goods and services are the objects that people value and produce to satisfy human wants.
  • What determines these patterns of production? How do choices end up determining the quantity of each item produced in Canada and around the world?
  • Production shares (Canada vs Ethiopia):
    • Canada: agriculture 2%, manufactured goods 28%, services 70%
    • Ethiopia: agriculture 35%, manufactured goods 21%, services 44%
  • Figure 1.1 shows these numbers for Canada, Ethiopia, and also China.

How Goods and Services are Produced (Factors of Production)

  • Goods and services are produced by using productive resources called factors of production.
  • Factors of production are grouped into four categories:
    • Land
    • Labour
    • Capital
    • Entrepreneurship
  • Details:
    • Land: the gifts of nature used to produce goods and services.
    • Labour: work time and effort of people producing goods and services.
    • Human capital: the knowledge and skill that people obtain from education, on‑the‑job training, and work experience.
    • Capital: the tools, instruments, machines, buildings, and other constructions used to produce goods and services.
    • Entrepreneurship: the human resource that organizes land, labour, and capital.
  • Figure 1.2 shows the growth of human capital in Canada over the last century via education levels; economics explains these trends.

For Whom? (Distributing Goods and Services)

  • 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

Do Choices Made in Self-Interest Also Promote the Social Interest?

  • Everyday, 35.4 million Canadians and 7.2 billion people in other countries make economic choices that determine What, How, and For Whom goods and services are produced.
  • Questions to evaluate social outcomes:
    • Do we produce the right things in the right quantities?
    • Do we use our factors of production in the best way?
    • Do the goods and services go to those who benefit most from them?

Self-Interest vs Social Interest: Two Dimensions

  • Self-Interest: you make choices that are in your own best interest.
  • Social Interest: choices that are best for society as a whole.
  • Two dimensions of social interest:
    • Efficiency
    • Equity

Efficiency and Social Interest

  • Resource use is efficient if it is not possible to make someone better off without making someone else worse off.
  • Equity: fairness; economists have a variety of views about what is fair.
  • The idea that the social interest requires “fair shares” is deeply held, but what is fair?

Four Tensions Illustrating Self-Interest vs Social Interest

  • Globalization
  • Information-age monopolies
  • Climate change
  • The gender pay gap

Globalization

  • Globalization means the expansion of international trade, borrowing and lending, and investment.
  • In the self-interest of consumers (low-cost imports) and multinational firms (production in low-cost regions, selling in high-price regions).
  • Questions: Is globalization in the self-interest of low-wage workers in other countries and Canadian firms that can’t compete with low-cost imports? Is globalization in the social interest?

Climate Change

  • Climate change is a political issue today; leaders seek proposals to lower carbon emissions.
  • Burning fossil fuels to generate electricity and power transport emits about
    • ext{CO}_2 ext{ emissions} \
      = 28 ext{ billion tonnes per year} .
    • Per person: $$ rac{28 ext{ billion tonnes}}{7.2 ext{ billion people}} \