CHAPTER 1: What is Economics
Scarcity and Choice.
o Resources are limited, wants are unlimited (time, income and
price are constraints to our wants)
o When faced with scarcity one has to make a choice
o Choices are dependant on incentives
What is Economics?
o Is the social science that studies the choices individuals,
businesses, governments, and entire societies make as they
cope with scarcity and the incentives that influence and
reconcile those choices
Two main branches of Economics – Microeconomics & Macroeconomics.
o Microeconomics – the study of choices that individuals and
business make, the way those choices interact in markets and
the influence of government
Example: looking at a certain market for a certain
o Macro – the study of the performance of the national economy
and the global economy.
Inflation in Canada
Two Big Economic Questions
o (i) What, How and For Whom to produce
What to produce and how much
How to produce
For whom to produce
o (ii) Can Self Interest promote Social Interest
The Economic Way of Thinking
• Choices and Tradeoffs
• Choices bring changes
• Opportunity cost • Choosing at the margin
• Responding to incentives
Economics: A Social Science and Policy Tool
Economics as Social Science
• Positive and Normative Statements
• Unscrambling Cause and Effect
• Economic Model
Economics as Policy Tool
• Personal economic policy
• Business economic policy
• Government economic policy Scarcity and Choice:
• All economic questions arise because we want more than we
• Our 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 an action or a penalty that
discourages an action.
What is Economics?
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.
In other words,
Economics is the study of how society manages its scarce resources, including
• how people decide how much to work, save,
and spend, and what to buy
• how firms decide how much to produce,
how many workers to hire
• how society decides how to divide its resources between
national defense, consumer goods, protecting the
environment, and other needs
Economics divides in to two main parts:
• Microeconomics is the study of choices that individuals and businesses
make, the way those choices interact in markets, and the influence of
Example: • Macroeconomics is the study of the performance of the national and
Two Big Economic Questions
Two big questions summarize the scope of economics:
• How do choices end up determining what, how, and for
goods and services get produced?
• When do choices made in the pursuit of self-interest also
promote the social interest?
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.
Figure 1.1 shows the trends in what the Canadian economy has produced
over the past 60 years. It shows the decline of agriculture, mining,
construction, and manufacturing, and the expansion of services. The facts about what we produce raise the deeper question: What determines
the quantities of timber, coal, automobiles, new homes, cable TV service, and
dental service that we produce?
Economics provides some answers to these questions.
Goods and services are produced by using productive resources that economists
call factors of production.
Factors of production are grouped into four categories:
Land - The “gifts of nature” that we use to produce goods and services are
land. (natural resources)
Labour - 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.
Capital - The tools, instruments, machines, buildings, and other
constructions that businesses use to produce goods and services are
Entrepreneurship - The human resource that organizes land, labour, and
capital is entrepreneurship. Figure 1.2 shows 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.
Who gets the goods and services depends on the incomes that people earn.
Land earns rent.
Labour earns wages.
Capital earns interest.
Entrepreneurship earns profit.
When is the Pursuit of Self-Interest in the Social Interest?
Every day, 32 million Canadians and 6.7 billion people in other countries
make economic choices that result in What, How, and For Whom goods
and services are produced.
Do we produce the right things in the right quantities?
Do we use our factors of production in the best way?
Do the goods and services go to those who benefit most from them?
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
Resources are used more efficiently
An outcome is in the social interest if it uses resources efficiently and
distributes goods and services fairly.
The Big Question
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?
Self-Interest in the Social Interest Five topics that generate discussion and that illustrate tension between self-
interest and social interests are
The trend towards a global economy, less trade
Increased world output but domestic production is
MNC self interest in cheaper goods/ more profit or
social by making jobs
The information-age economy
Competition for profit (self interest) or to provide easier
working for consumers (social interest)
Can we reduce carbon emissions at a self interest level
until it makes a difference regarding social interests