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Chapter 1

Chapter 1 - What is Economics.docx

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University of Waterloo
ECON 101
Eva Lau

Econ 101 – Chapter 1: What is Economics? Definition of Economics - All economic questions arise from scarcity inability to satisfy all our needs is scarcity - Scarcity forces us to choose, choices influenced by incentives: reward that encourages an action, or penalty that discourages - Economics is the social science that studies the choices that everyone and everything makes as they cope with scarcity - Microeconomics: study of choices individuals and businesses make, how the choices interact in markets, and influence of governments (Why are people buying more DVDs than movie tickets?) - Macroeconomics: study of performance of national and global economy Two Big Economic Questions - How do choices end up determining what, how and for whom goods and services are produced? - Good and services produced by using productive resources  called factors of production  four categories are land, labour, capital, and entrepreneurship - Land is natural resources - Labour is work time and work effect people devote to producing goods and services  quality of labour depends on human capital which is knowledge and skill people obtain from education, on-the-job training, and work experience - Capital is the tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services  Money, stocks, and bonds are financial capital, but not used to produce goods and services, thus not productive resources - Entrepreneurship is human resource that organizes labour, land, and capital - People earn incomes by selling services of factors of production they own  Land = rent, labour = wages, capital = interest, entrepreneurship = profit  income decides who consumes goods and services that are produced - When do choices made in the pursuit of self-interest also promote social interest? - Choice is in self-interest if one believes it is the best for them  most choices are in self-interest  order pizza because hungry, not so pizza guy gets income - Self-interest choice promote the social interest if they cause an outcome that is best for society  outcome that uses resources efficiently and distributes goods and services fairly - Resources used efficiently when goods and services produced 1) at lowest cost 2) in quantities that give most benefit - Globalization means expansion of international trade, borrowing and lending, and investment - Brings production and job opportunities for Asian workers, destroys many North American jobs  workers in manufacturing industries must learn new skills, or take lower paid service jobs, or retire earlier The Economic Way of Thi
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