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chapter 1

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ECON 1000
Sadia Mariam Malik

Chapter one Definition of Economics All economic questions arise because we want more than we can get. (wants are unlimited and resources are limited) Our inability to satisfy all our wants is called scarcity. Even rich people face scarcity Because we face scarcity, we must make choices . The choices we make depend on the incentives we face . An incentive is a reward that encourages an action or a penalty that discourages an action. 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. Economics is not only concerned with how to make money and get rich. Economics is to make right choice. But, because everyone's level is different, we cannot have equal distribution. Economics divides in to main parts: • Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. • Macroeconomics is the study of the performance of the national and global economies. Two Big Economic Questions What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. What? Agriculture accounts for less than 1 percent of total Canadian production, manufactured goods for 20 percent, and services for 80 percent. In China, agriculture accounts for 10 percent of total production, manufactured goods for 50 percent, and services for 40 percent. How? Goods and services are produced by using productive resources that economists call factors of production . Factors of production are grouped into four categories: • Land • Labour • Capital • Entrepreneurship The “gifts of nature” that we use to produce goods and services are land . (renewable or not renewable) The work time and work effort that people devote to producing goods and services is labour . The quality of labour depends on human capital , which is the knowledge and skill that people obtain from education, on-the-job training, and work experience. The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital . (financial capital is included) The human resource that organizes land, labour, and capital is entrepreneurship . a measure of the growth of human capital in Canada over the past few decades—the percentage of the population that has completed different levels of education. Economics explains these trends.(human capital is increasing) For Whom? Who gets the goods and services depends on the incomes that people earn. Land earns rent . Labour earns wages . Capital earns interest .(most influence) Entrepreneurship earns profit . You make choices that are in your self-interest —choices that you think are best for you. Choices that are best for society as a whole are said to be in the social interest . An outcome is in the social interest if it uses resources efficiently and distributes goods and services fairly. Q: Is it possible that when each one of us makes choices that are in our self-interest , it also turns out that these choices are also in the social interest ? A: most of the times, economics agents acting purely out of their own self interest also promote social interest through whatAdam Smith calls as the “Invisible Hand” Self-Interest and the Social Interest sometimes, a conflict/tension may occur between self interest and social interest. When finds the self interest against the social interest, the gov create laws to protect social interest. Five topics that generate discussion and that illustrate tension between self-interest and social interest are • Globalization (influence the people from the country) • The information-age economy • Global warming (we only care about our own self interest but not care about our next generation) • Natural resource depletion • Economic instability The Economic Way of Thinking Choices and Tradeoffs The economic way of thinking places scarcity and its implication, choice , at center stage. Every choice as a tradeoff— an exchange— giving up one thing to get something else. The classic tradeoff is “guns versus butter.” “Guns” and “butter” stand for any two objects of value. Scarcity requires choices and choices involve tradeoffs. What, How, and For Whom Tradeoffs The questions what, how, and for whom become sharper when we think in terms of tradeoffs. What Tradeoffs arise when people choose how to spend their incomes, when governments choose
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