Chapter 1 – What is Economics?
Scarcity – the inability to satisfy all our wants
Since we face scarcity we must choose between the choices we have
Incentive – a reward that encourages an action or a penalty that discourages one
Economics – 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
 Microeconomics – the study of the choices individuals and businesses make, the way these
choices interact in markets, and the influence of governments
 Macroeconomics – the study of the performance of the national economy and the global
economy
Goods and services – the objects that people value and produce to satisfy human wants
 Goods – physical objects
 Services – tasks performed for people
What? – what is produced changes over time
How? – produced by using productive resources “factors of production”
 Land “the gift of nature” – what we use to produce goods and services the natural resources ;
land itself, minerals, oil, gas, coal, water, air, forests, and fish
 Labour – the work time and work effort that people devote to producing goods and services
(includes physical and mental efforts)
o The quality of labour depends on human capital – the knowledge and skill the people
obtain from education, on-the-job training, and the work experience
 Capital – the tools, instruments, machines, buildings, and other construction that businesses use
to produce goods and services
o Financial capital such as money, bonds, and stocks enable businesses to gain funds to
buy capital but are not considered capital since they are not a productive resource
 Entrepreneurship – the human resource that organizes land, capital, and labour
o They come up with new ideas about what and how to produce, make business
decisions, and bear the risks that arise from these decisions
For Whom? – who consumes the goods and services that are produced depends on incomes that people
earn. They earn income by selling factors or production they own
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Land earns rent
Labour earns wages
Capital earns interest
Entrepreneurship earns profit
Self-interest – a choice that is the best one available for you
Social-interest – a choice that leads to an outcome that is the best for society as a whole – an outcome
that uses resources efficiently and distributes goods and services equitable (or fairly) among individuals
 Resources used efficiently when goods and services are produced at the lowest possible cost
and in the quantities that give the greatest possible benefit
Conflict between social and self interest
 Globalization – the expansion of international trade, borrowing, and lending, and investment
 The information-age economy – information revolution was the technological change of the
1990s and 2000s
 Global warming –effects on climate change
 Natural resource depletion – tropical rainforests and ocean fish stocks are disappearing quickly;
when we buy products that destroy natural resources and kill wild fish stocks
 Economic instability – a period of financial stress
Whatever choice you make, you could have chosen something else.
Tradeoff – an exchange – giving up one thing to get something else
Guns Versus Butter – the classic tradeoff between “Guns” and “butter” which stand for any pair of
goods; if we want more of one thing, we must give up something else to get it: to get more “guns” we
must give up some “butter”
What tradeoffs – what goods and services are produced depends on choices made by each one of us, by
our government, and by the businesses that produce the things we buy. Each of these choices involves a
tradeoff
 How we spend our income on movie ticket or coffee
 The federal government chooses to spend our tax dollars on national defence than educational
programs
 Nike (businesses) allocates resources to designing and marketing an new golf ball but cuts back
on running shoes
How Tradeoffs – how they produce the goods and services we buy depends on choices
 Tim Hortons opens a store with automated production line and closes the traditional kitchen
For Whom Tradeoffs – for whom depends on distribution of buying power
 Buying power can be redistributed (transferred from one person to another) by:
o Voluntary payments
 Choose to contribute to United Nations’ famine relief fund
o Theft
 Vote to increase the resources for catching thieves and enforcing law
o Taxes and benefits organized by the government
 Vote for taxes and social programs that redistribute buying power from the rich
to the poor
 Big tradeoff – the tradeoff between equality and efficiency
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If everyone gets an equal share than production might not be as efficient as it should be
but if everyone gets a share based on efficiency then it might not be as equal as it
should
As a society, we trade off current consumption for economic growth and higher future consumption. We
also trade of current consumption and leisure time for economic growth and higher future
consumption. A tradeoff of current production for greater future production.
Opportunity cost “what we give up is the cost of what we get” – the highest valued alternative that we
must give up to get it.
To make a decision, you compare the benefit of a little bit more study time with its cost – you make your
choice at the margin
 Marginal benefit – the benefit that arises from an increase in activity
 Marginal cost – the cost of an increase in an activity
o If the marginal benefit exceeds the marginal cost, you choose the option
o If the marginal cost exceeds the marginal benefit, you do not choose it
Positive statements are:
 What is , the way the world operates
 Might be right or wrong
 Can be tested by checking it against facts
Normative statements are:
 What ought to be
 Depend on values that cannot be tested
 You may agree or disagree, an opinion
To test positive statements, we use the economic model.
Economic model – a description of some aspect of the economic world that includes only those features
that are needed for the purpose at hand
 Created by comparing its predictions with the facts
Natural experiment – a situation that arises in the ordinary course of economic life in which the one
factor of interest is different and the other things are equal (or similar)
 Canada has a higher unemployment rate than U.S but yet they are similar
Statistical investigation looks at correlation – a tendency for the values of two variables to move
together (either in the same direction or in opposite directions) in a predictable and related way.
 Lung cancer and smoking
Economic experiment – puts people in a decision-making situation and varies the influence of one factor
at a time to discover how they respond.
Personal economic policy – all these questions involve a marginal benefit and marginal cost
Business economic policy – involve the evaluation of a marginal benefit and marginal cost; some might
require broader investigation of the interactions of individuals and firms
Government policy – involve the evaluation of a marginal benefit and marginal cost and an investigation
of interactions of individuals and businesses