Chapter One – What is economics?
You are studying economics at a time of extraordinary change. Your life will be shaped by the challenges
you face and the opportunities that you create. But to face those challenges and seize the opportunities
they present, you must understand the powerful forces at play. The economics that you’re about to
learn will become your most reliable guide.
Definition of Economics
We want more than we can get. Our inability to get everything we want 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.
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 in to main parts: Microeconomics and Macroeconomics
Microeconomics is the study of choices that individuals and businesses make, the way those choices
interact in markets, and the influence of governments. An example of a microeconomic question is: Why
are people buying more e-books and fewer hard copy books?
Macroeconomics is the study of the performance of the national and global economies. An example of a
macroeconomic question is: Why is the unemployment rate in Canada so high?
Two big economic questions
Two big questions summarize the scope of economics:
1. How do choices end up determining what, how, and for whom goods and services get
2. When do choices made in the pursuit of self-interest also promote the social interest?
What, How, and For Whom?
What - Goods and services are the objects that people value and produce to satisfy human wants. In
Canada, agriculture accounts for 2 percent of total production, manufactured goods for 20 percent, and
services for 78 percent. In China, agriculture accounts for 11 percent, manufactured goods for 49
percent, and services for 40 percent. How - Goods and services are produced by using productive resources that economists call factors of
production. There are four factors of production: Land, Labour, Capital and Entrepreneurship. The “gifts
of nature” that we use to produce goods and services are land. 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. The tools, instruments, machines, buildings, and other constructions that businesses
use to produce goods and services are capital. The human resource that organizes land, labour, and
capital is entrepreneurship.
For whom - Who gets the goods and services depends on the incomes that people earn. Land earns rent,
labour earns wages, capital earns interest and entrepreneurship earns profit. A choice is in your self-
interest if you think that choice is the best one available for you. A choice is in the social-interest if it