What Is Economics?
Definition of Economics
- All economic questions arise because we want more than we can get
- Our inability to satisfy all our wants is called scarcity
- An incentive is a reward that encourages 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
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
Two Big Economic Questions
- How do choices end up determining what, how, and for whom goods and services
- When do choices made in the pursuit of self-interest also promote the social interest?
What, How, and For Whom?
- Goods and services are objects that people value and produce to satisfy human
- What determines the products?
- Factors of production: productive resources grouped into land, labour, capital,
- Land: gift of nature used to produce goods and services – natural
- Labour: work time and work effor that people devote to producing
goods and services
- Human Capital: quality of labour depends on the knowledge and skill
that people obtain from education, on-the-job training, and work experience;
the tools, instruments, machines, buildings, and other items that businesses
now use to produce goods and services are called capital
- Entrepreneurship: the human resource that organizes labour, land, and
capital is called entrepreneurship
- How do the quanties of factors of production that get used to produce the many
different goods and services get determined?
- Who gets the goods and services that are produced depends on the incomes that
- Different ways to earn income: land earns rent, labour earns wages, capital earns
interest, and entrepreneurship earns profit
- Labour earns the most income When Is the Pursuit of Self-Interest in the Social Interest?
- Choices made in self-interest are choices that are best for person making them
- Choices that are best for society as a whole are social interest
Central Planning Versus the Market
- Antithesis of central planning is the market economy in which resources are
privately owned and people are free to trade in markets at prices that are determined
by market forces
- China began to transform its economy in 1978 – China began developing markets
and private enterprise
- Germany’s economic problem – socialism in form of extraordinary high wages and
benefits as well as rigid employment regulations that make it hard for firms to fire