Chapter 1 Notes
What is Economics?
Economical questions arise because we want more than we can get
What we can get, is limited by time, income earned and prices must pay.
Productive resources: gifts of nature, human labour and ingenuity, tools and
equipment. These resources limit what we can get as a society.
Scarcity: the inability to satisfy our wants
Choices we make depend on the incentives faced
Incentives: reward that encourages an action or penalty that discourages
Economics: The social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with
scarcity and incentives that influence and reconcile choices
The good- the information age and all the benefits that it brings
The bad- terrorism
The ugly- the 2009 financial meltdown
Another reason: Economics sometimes yields surprising answers
Ex: When a government spends more to combat a recession the defecit
might in the end become smaller
Suicide terrorists tend to be relatively rich, not poor
Economics is a way of thinking
It is not restricted to markets or business
Your inability to satisfy all our wants is called 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 or a penalty that discourages an
Can be price (price of beer falls, you want to buy more) or non-price
(possibility of jail if you try to steal the beer)
Economic Way of Thinking
Assumes people are rational (Their goal may be irrational but the person
himself is rational) Person chooses the best method to achieve their goals Choose subject to a constraint (What you want, and what stops you from
Markets or some other mechanism provides incentives that make their
choices consistent (Mainly supply and demand)
Budget Line constraint choice (look up in textbook)
Guns and Butter concept
Production Possibility frontier
What if we are inside the curve?
Resources are wasted (ex: when there is unemployment)
This is inefficient because if we are inside the curve, it means we could have
had more butter with no fewer guns and vice versa
Two main parts of econ:
Microeconomics: The study of choices that individuals and businesses make,
the way these choices interact in markets, and the influence of
Ex: Why buy more DVDs and fewer movie tickets
Macroeconomics: The study of performance of the national economy and the
global economy of the choices that individuals, businesses and governments
Ex: Why the inflation in Canada started to increase in 2008.
Two questions that summarize economics:
How do choices end up determining what, how and for whom goods and
services are produced?
How can choices made in the pursuit of self-interest also promote the social
What, How, and For Whom?
Goods and services: Are the objects that people value and produce to satisfy
human wants. Ex of goods: physical objects
Ex of services: Tasks and performances
What we produce changes over time
65 years ago, more farmers. Now it has decreased. More manufacturing and
construction, now it has decreased. This means an increase in services.
Today more than 75% of Canadians have service jobs
Goods and services are produced by using productive resources called
factors of production:
In econ, considered minerals, oil, gas, coal, water, air, forests and fish
work time and effort that people devote to produce goods and services
Can be physical and mental effort
Human capital: quality of labour. The knowledge and skill people obtain from
education, job training and work experience.
92% of Canadians have completed high school and 62% have
Capital: The tools, instruments, machines, buildings, and other constructions
that businesses use to produce goods and services
Financial capital: Stocks, bonds, and money. An important part in enabling a
business to buy physical capital. It is not used to produce goods and
services; Therefore, not a productive resource
Entrepreneurship- The human resources that organizes labour, land, and
capital. Entrepreneurs make business decisions and take risks that arise
from the decisions made. Who consumes the goods and services that are produced depends on the
incomes that people earn. People earn money by selling services of the
factors of production:
Land earns rent
Labour earns wages
Capital earns interest
Entrepreneurship earns profit
Wages and fringe benefits are around 70% of the total income
People earn livings off of experiences but not always equal. The rich earn 10
times what the poor earn
How can the Pursuit of Self Interest promote the social interest?
One makes a choice based on their self interest (what decision is the best for
When decisions are made based on self interest, one comes into contact with
those who give one services and goods based on self interest.
Ex: One buys pizza for delivery because they are hungry. Delivery guy
delivers pizza because he is earning income.
Self interested choices promote social interest that leads to an equal and
best outcome for society as whole
Social Interest- an outcome that used resources efficiently and distributes
goods and services equitably among individuals.
Resources are used efficiently when goods and services are produced
at the lowest possible cost
In the quantities that give the greatest possible benefit
The big question is how to make choices that are based on self interest that
also benefits the social interest at a whole.
Globalization- The expansion of international trade, borrowing, ad lending
Information-Age Economy- Technology change of the 1990s and 2000s
Global Warming- Refer to pg. 6
Natural Resouce Depletion- refer to pg.7