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Chapter1
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1.1
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Scarcity: Our inability to satisfy all our wants is
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Economics: social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with
scarcity, all the things that influence those choices, and the arrangements
that coordinate them.
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Microeconomics: the study of the choices that individuals and businesses
make and the way these choices interact and are influenced by
governments.
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Macroeconomics: the study of the aggregate (or total) effects on the
national economy and the global economy of the choices that individuals,
businesses, and governments make
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Goods: objects that satisfy wants
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Services: actions that satisfy wants
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Self-interest: Choices that are the best for the individual who makes them
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social interest: Choices that are the best for society as a whole
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Six ideas define the economic way of thinking:
1.2
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A choice is a tradeoff
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Cost is what you must give up to get something.
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Benefit is what you gain from something.
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People make rational choices by comparing benefits and costs.
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Most choices are “how much” choices made at the margin.
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Choices respond to incentives.
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Tradeoff: an exchange—giving up one thing to get something else.
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Opportunity cost: something is the best thing you must give up to get it
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Benefit: the gain or pleasure that it brings, measured by what you are
willing to give up to get it
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Rational choice: uses the available resources to best achieve the
objective of the person making the choice.
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Margin: comparing the relevant alternatives systematically and
incrementally.
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marginal cost: The opportunity cost of a one-unit increase in an activity.
The marginal cost of something is what you must give up to get one
additional unit of it
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marginal cost: The opportunity cost of a one-unit increase in an activity.
The marginal cost of something is what you must give up to get one
additional unit of it
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Incentive: a reward or a penalty—a “carrot” or a “stick”—that encourages
or discourages an action.
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1.3
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Incentive: a reward or a penalty—a “carrot” or a “stick”—that encourages
or discourages an action
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1 Summary
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Key Points
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1.1 Define economics and explain the kinds of questions that
economists try to answer.
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Economics is the social science that studies the choices
that we make as we cope with scarcity and the incentives
that influence and reconcile our choices.
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Microeconomics is the study of individual choices and
interactions, and macroeconomics is the study of the
national economy and global economy.
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The first big question of economics is: How do the choices
that people make end up determining what, how, and for
whom goods and services are produced?
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The second big question is: When do choices made in the
pursuit of self-interest also promote the social interest?
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1.2 Explain the ideas that define the economic way of thinking.
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Six ideas define the economic way of thinking:
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A choice is a tradeoff.
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Cost is what you must give up to get something.
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Benefit is what you gain when you get something
(measured by what you are willing to give up to get
it).
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People make rational choices by comparing
benefits and costs.
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A “how much” choice is made on the margin by
comparing marginal benefit and marginal cost.
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Choices respond to incentives.
1.3 Explain how economics is useful as a life skill.
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Economics is a tool for personal, business, and
government decisions.
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Economists use the scientific method to try to understand how the
economic world works. They create economic models and test
them using natural experiments, statistical investigations, and
laboratory experiments.
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Economics and the economic way of thinking are foundations on
which to build critical thinking skills
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