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Chapter 1

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University of Waterloo
ECON 101
Corey Van De Waal

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 product (gasoline) 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 can get. • 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  Macroeconomics • Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. Example: • Macroeconomics is the study of the performance of the national and global economies. Example: Two Big Economic Questions Two big questions summarize the scope of economics: • How do choices end up determining what, how, and for whom 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. What? 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. How? 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 capital.  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. For Whom? 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 interest.  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  Globalization  The trend towards a global economy, less trade barriers.  Increased world output but domestic production is somewhat reduced.  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)  Global warming  Can we reduce carbon emissions at a self interest level until it makes a difference regarding social interests  Natural resource
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