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Chapter

Textbook Summery


Department
Economics
Course Code
ECON 1021A/B
Professor
Jeannie Gillmore

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Chapter 1
What is Economics?
Definition of Economics
All economic questions arise because we want more than we can get.
Scarcity is our inability to satisfy all our wants.
Faced with scarcity we must make choices.
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.
Economics divides into Microeconomics and Macroeconomics.
Microeconomics is the study of the choices that individuals and businesses make, the way these
choices interact in markets, and the influence of governments.
Macroeconomics is the study of the performance of the national economy and the global
economy.
Two Big Economic Questions
The two big questions of economics are:
1. How do choices end up determining what, how, and for whom goods and services are
produced?
2. When do choices made in the pursuit of self-interest also promote the social interest?
The objects that people value and produce to satisfy human wants are called goods and
services.
Study figure 1.1 on p. 3 of your textbook to determine if Canada is a service economy or a goods
economy.
Factors of production are the resources that businesses use to produce goods and services.
Factors of production are grouped into four categories: land, labour, capital, and
entrepreneurship.
1. The “gifts of nature” that we use to produce goods and services are called land.
2. The work time and work effort that people devote to producing goods and services is
called 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.
3. The tools, instruments, machines, buildings, and other constructions that businesses
now use to produce goods and services are called capital.
4. The human resource that organizes labour, land, and capital is called entrepreneurship.
To earn an income, people sell the services of the factors of production they own.
1. Land earns rent.
2. Labour earns wages.

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3. Capital earns interest.
4. Entrepreneurship earns profit.
When we make choices about “what”, “how”, and “for whom” goods and services are produced,
we make the choices in the self-interest or the social interest.
Choices made in the self-interest are choices that are best for the person making them.
Choices that are the best for society as a whole are said to be in the social interest.
The Economic Way of Thinking
Because we face scarcity, we must make choices.
Every choice you make is a tradeoff.
A tradeoff is an exchangegiving up one thing to get something else.
People make rational choices by comparing benefits and costs.
Benefit is what you gain from something. Cost is what you must give up to get something
Opportunity cost is the highest-valued alternative that we give up to get something.
All tradeoffs involve an opportunity cost.
When we make choices we make them at the marginwe compare the benefit of a little bit
more of something with its cost.
The benefit that arises from an increase in an activity is called marginal benefit.
The cost of an increase in an activity is called marginal cost.
Our choices respond to incentives. An incentive is an inducement to take a particular action. An
incentive can be a benefit or a cost.
Economics: A Social Science
Economists distinguish between two types of statements: what is and what ought to be
Statements about what is are called positive statements and they might be right or wrong. A
positive statement can be tested by checking it against the facts.
States about what ought to be are called normative statements. These statements depend on
values and cannot be tested.

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Chapter 1 Appendix
Graphics in Economics
Graphing Data
Making a graph:
o The horizontal line is the x-axis.
o The vertical line is the y-axis.
o The intersection of the x-axis and the y-axis is the origin.
A scatter diagram plots the value of one variable against the value of another variable.
Graphs Used in Economic Models
Variables that move in the same direction
o A relationship between two variables that move in the same direction is called a
positive relationship or a direct relationship.
o A relationship shown by a straight line is called a linear relationship.
Variables that move in opposite directions
o A relationship between variables that move in opposite directions is called a negative
relationship or an inverse relationship.
Variables that have a maximum or a minimum
o A relationship that has a maximum slopes upward as it rises to its maximum point, is flat
at its maximum, and then slopes downward.
o A relationship that has a minimum slopes downward as it falls to its minimum point, is
flat at its minimum, and then slopes upward.
Variables that are unrelated
o Variables that are unrelated are shown on a graph as either a horizontal line or a vertical
line.
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