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
Two Big Economic Questions
What, How, and For Whom?
Goods and services are the objects that people value and produce to satisfy human wants.
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.
Goods and services are produced by using productive resources that economists call factors of
Factors of production are grouped into four categories:
The “gifts of nature” that we use to produce goods and services are land . (renewable or not
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)
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
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
• 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
• 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