ECON 101 – Chapter #1
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. The subject is
divided into two parts: Microeconomics and Macroeconomics.
Microeconomics - is the study of the choices that individuals and businesses
make, the way these choices interact in markets, and the influences of
governments. Some examples are: Why are people buying more DVS’s and fewer
movie tickets? OR How would a tax on ecommerce affect eBay?
Two Big Questions in Economics
- How do choices end up determining what, how, and for whom goods and
services are produced?
- How can choices made in pursuit of self interest also promote the social
Goods and services are the objects that people value and produce to satisfy
What we produce changes over time. 65 years ago 20% of Canadians were in the
agricultural and farming sector. Today 70% of Canadians are in the service sector.
Goods and Services are produced by using the factors of production.
1. Land earns rent – The gifts of nature, what we use to produce goods and
services are called land. Basically natural resources.
2. Labour earns wages – The work-time and work-effort that people devote
to producing goods and services is called labour. Includes physical and
mental effort. Labour entails the Human capital. This is the knowledge,
skills, and on the job experience that people obtain from education and
work. Human capital expands.
3. Capital earns interest – The tools, machines, and buildings that business
use to produce goods and services. In everyday we talk about money
stocks, and bonds. There are called Financial Capital.
4. Entrepreneurship earns profit – human resources that puts: land, labour,
and capital into use to earn profit. Come up with new ideas on what and how to produce, they make business decisions and bear the risks that come
with these decisions
Who consumes the goods and services produced depends largely on the size of
the individuals income. A large income obviously allows a person to buy large
quantities of goods and services.
Note: The factor that earns the most income is Labour. Wages and fringe are
about 70% of total income.
- Distribution of income among individuals is extremely unequal. Example –
Mike Lazardis compared to servers at Tim Horton’s. The poorest 20% of the
population earn 5% of the total wealth and the richest 20% earn 50% of the
How can the pursuit of self-interest promote the social
Self-Interest: A choice is in your self-interest if you think that the choice is the
best available to you. Most choices are made in your own self-interest. We don’t
think too much how our choices affect other people. Economists go on the
assumption that human beings are selfish and act completely and
exclusively out of self-interest.
Social Interest: Self-interested choices promote 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 them equitably among people. Resources are being
used efficiently when goods and services are produced:
1. At the lowest possible cost.
2. In the quantities that will give the greatest possible benefit.
How can we organize our economic lives so that when each one of
us makes choices that are in our own self-inter