Chapter 1: Big Ideas

introduction

What is Economics? Economics is a way of thinking and can help explain businesses, government policies, careers, families, and almost every aspect of your life.

“Economy” comes from a Greek word that means “one who manages a household”

Households too need to make choices like “who will make dinner”, “who cleans” and “what to watch on TV”. Like households, societies must do the same. Who will care for the sick, who will get the land, who gets to drive a sports car, and who takes the bus?

Scarcity: the problem of unlimited human wants in a world of limited resources.

So here are the big ideas in economics:

Big Idea #1: There are always trade-offs.

i.e. If you say yes to something you are saying no to something else. There is a saying that “Nothing in life is ever free” Some sort of resource is always being used, whether it be money or time. If a student studies math for an hour, they are given up the chance to go party, work a job, or even study another class.

Governments face the same issues. Think of governments greenlighting new pharmaceutical drugs like vaccines. Most people want to have the drugs as safe as possible, however, they also want them as fast as possible. So should the government lessen the restrictions on making sure the medicine is safe so that it may be produced faster,

Big Idea #2: The true cost of something is the opportunity cost.

What could you have done or bought instead with your time and resources?

Opportunity Cost: what you give up for an item.

A good example is university and working. If you chose to work for a year or two before going to school, you are paying with the time that could’ve been spent earning your degree. But, if you go to school, you give up the chance to be working and making money. One is inherently better than the other, but both are giving up something.

Big Idea #3: thinking on the margin.

usually an “either-or” or “how much/many” question. i.e. “will hiring one more employee help or hinder the company?”

marginal benefit: the benefit from making a choice.

marginal cost: the cost of making a decision.

another example would be “how much should I study for this one class over the other?”. Alternatively, instead of studying a class or another, you are also choosing to do that over something else like shopping, making food, or watching tv.

How do you make the “how much” choice? Most people would do it a little at a time, by deciding how much to study what subject for the next hour and then reassessing each hour. But whatever you chose, the benefit most likely outweighs the cost. We assume people are rational, which means they will choose the option that means they get closer to their objective. In other words, they weigh the benefits and costs.

Big Idea #4: People usually respond to incentives.

Whether it be positive or negative. i.e. love, money, fines, jail.

Incentive: something that motivates people.

Prices are an essential incentive.

Since people are rational, they will respond to incentives.

If a dentist’s earnings rise, and a doctor’s fall, we expect more people to go to school for dentistry than medicine.

Economists are sceptical to influence anything without using an incentive. If you ask a company to lower pollution, it is likely they will not unless given an incentive.

Big Idea #5: trade can make everyone better off.

trading brings more variety to goods and more specialization to labour

If you isolated yourself and tried to live self-sufficiently it would be challenging. It is easier if everyone specializes in something and then trades.

Specialization: a division of tasks that end with trade.

When trading, people can get a wider variety of things for a lower cost.

If it works for individuals, it also works for countries. However, it’s not like sports when there is a winner and a loser. If there is a winner, then there can also be another winner.

Big Idea #6: markets are usually a good way to organize economic activity.

The government doesn’t control the market (prices, quantity, etc.) the free market does that.

market: resources are allocated by many businesses

organizing economic activity: determining what to produce, who produces it, how much to produce, and who gets to consume it.

the basic idea is that when people do what is best for themselves, they do what is best for society.

prices are the invisible guide that directs the economy (“the invisible hand” coined by Adam Smith)

Big Idea #7: Governments can help when markets don’t work well.

When self-interest and social interest don’t align. The government can step in and change incentives or place taxes.

Sometimes self-interest does not align with social interest. Like if a company has higher incentives to pollute, or fishermen to fish, wiping out the fish stock. So the government will change the incentives with laws, regulations, or subsidies.

Subsidies: a grant of money to a business to get the outcome you desire.

Another crucial role that the government plays, is to maintain laws and regulations. The invisible hand will not work if no one is doing things the same way. A landlord will not rent an apartment if they think the tenant will not pay.

The last role the government plays is to help promote equity in society. The invisible hand will not make sure everyone gets what they need, so the government will step in.