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Chapter 1

Chapter 1- What is Economics?

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ECON 101
Emanuel Carvalho

Chapter 1: What is Economics? Scarcity: Our inability to satisfy all our wants  Since faced with scarcity, we must choose among available alternatives 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 1. Microeconomics 2. Macroeconomics Microeconomics: The study of the choices that 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 What, How, and for Whom? Goods and services: The objects that people value and produce to satisfy human wants  Goods: Physical objects  Services: Tasks performed for people What: Decrease in farming and manufacturing due to increase in services How: Goods and services are produced by using productive resources that economists call factors of production  Land  Labour  Capital  Entrepreneurship Land: “gifts of nature”  Natural resources (minerals, oil, gas, coal, water, air, forests, and fish)  Land surface and water resources are renewable and some of our mineral resources can be recycled  Resources used to create energy are non-renewable Labour: Work time and work effort that people devote to producing goods and services  Includes the physical and mental efforts of all the people who work on farms and construction sites and in factories, shops and offices  Quantity depend on human capital: Human capital: The knowledge and skill that people obtain from education, on-the-job training, and work experience Capital: The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services  Financial capital = money  Financial capital enables businesses to borrow the funds that they use to buy physical capital  Because it is not used to produce goods and services, it is not a productive resource Entrepreneurship: The human resource that organizes labour, land, and capital  New ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions For Whom?  Depends on the incomes that people earn  People earn their incomes by selling the services of the factors of production they own:  Land earns rent  Labour earns wages  Capital earns interest  Entrepreneurship earns profit  Labour earns the most income  Know how income is shared among the factors of production doesn’t tell us how it is shared among individuals Distribution of income among individuals is extremely unequal How Can the Pursuit of Self-Interest Promote the Social Interest? Self-interest: If you think that choice is the best one available for you  Come into contact with thousands of other people who produce and deliver the goods and services that you decide to buy or who buy the things that you sell  These people have made their own choices (what to produce and how to produce it, who to hire or whom to work for) Social Interest: Self-interested choices promote the social interest if they lead to an outcome that is the best for society as a whole  An outcome that uses resources efficiently and distributes goods and services equitably (or fairly) among individuals  Resources are used efficiently when goods and services are produced 1. At the lowest possible cost 2. In quantities that give the greatest possible benefit Self-Interest and Social Interest 1. Globalization 2. The information-age economy 3. Global warming 4. Natural resource depletion 5. Economic instability Globalization: The expansion of international trade, borrowing and lending, and investment  Workers across the manufacturing industries must learn new skills, or take lower-paid service jobs, or retire earlier than planned The Information-Age Economy: The technological change of the 1990s and 2000s has been called the Information Revolution  Technology became cheaper and faster where it was affordable to people from self-interest Global Warming: Huge political issue today effecting climate change  Making a self-interest choice to use gas and electricity means you leave a carbon footprint Natural Resource Depletion: Resources which no one owns and everyone is free to take what they want, as a result they are disappearing quickly free  Each one of us makes self-interest economic choices to buy products that destroy natural resources and kill wild fish stocks Economic Instability: Banks’ choices to lend and people’s choices to borrow were made in self-interest  Past 20 years = remarkable economic stability called Great Moderation Choices and Tradeoffs  When we make choices, we select from the available alternatives Tradeoff: Exchange-giving up one thing to get something else Guns Versus Butter (stand for any pair of goods):  Hard fact of life: 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, How, and for Whom Tradeoffs What Tradeoffs: Depends on the choices made by each one of us, by our government, and by the businesses that produce the things we buy How Tradeoffs: How businesses produce the goods and services we buy depend on their choices (e.g. Trades off labour for capital) For Whom Tradeoffs: Depends on the distribution of buying power  Buying power can be redistributed-transferred from one person to another in three ways 1. Voluntary payments 2. Theft 3. Taxes and benefits organized by the government  Redistribution brings tradeoffs Big tradeoff: The tradeoff between equality and efficiency  Taxing the rich and making transfers to the poor brings greater economic equality  Taxing production activities such as running a business, working hard, and developing a more productive technology discourages these activities Taxing productive activities means producing less  A more equal distribution means there is less to share Choices Bring Change  What, how, and for whom changes overtime  The quantity and range of goods and services available today is much greater than it was a generation ago  But the quantity of economic life (rate of improvement) does not depend purple on nature and on luck  Depends on many of the choices made by each one of us, by governments, and by businesses  Choices includes tradeoffs 1. One choice is how much of our income to consume and how much to save  Business save to buy new physical capital to increase production 2. A second choice is how much effort to devote to education and training  More educated and highly skilled = more productive and able to produce more goods and services  Trade off leisure today for a high future income 3. A third choice is how much effort to devote to research and the development of new products and production methods  A tradeoff of current production for greater future production Opportunity Cost Opportunity cost: The highest valued alternative that we must give up to get it Choosing at the Margin Margin: When a choice is changed by a small amount or by a little at a time, the choice is made at the margin Marginal benefit: The benefit that arises from an increase in an activity Marginal cost: The cost of an increase in an activity To make decision, compare marginal cost with its marginal benefit. If the marginal cost exceeds the marginal benefit, you do not study the extra night Responding to Incentives When we make choices, we respond to incentives
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