Chapter One: Economics
- Scarcity – the inability to get everything we want
- Incentive – a reward that encourages an action or a penalty that discourages one.
- 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.
o Divided into two parts: Microeconomics and Macroeconomics
- Microeconomics – the study of choices that individuals and businesses make, the
way these choices interact in markets and the influence of governments. This is
more local. An example of a microeconomic question is ‘Why are people
downloading more movies? How would a tax on e-commerce affect Ebay?’
- Macroeconomics is the study of the performance of the national economy and the
global economy. This is more global. Some macroeconomic questions are: Why is the
Canadian unemployment rate so high? Can the Bank of Canada make our economy
expand by cutting interest rates?
- Goods and services are objects that people value and produce to satisfy human
- In Canada today, Agriculture accounts for 2% of total production, manufactured
goods account for 20%, and services are 78%.
o In China, agriculture is 10%, manufactured goods is 46% and services
account for 44% of total production.
- Goods and services are produced by using productive resources called factors of
- These factors of production are grouped into four categories:
o Capital (human or financial)
- Lands – the ‘gifts of nature’ that we use to produce goods and services
o In everyday language, this is called natural resources (oil, gas, etc)
- Labour – The work time and work effort that people devote to producing goods and
o The quality of labour depends on human capital: knowledge and skills 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
- Entrepreneurship is the human resource that organizes labour, land and capital
o Come up with ideas about how to produce, make business decisions, and
bear the risks that arise from these decisions
- People earn their incomes by selling the services of the factors of production they
o Land earns rent
o Labour earns wages
o Capital earns interest
o Entrepreneurship earns profit
- Labour is the factor of production that earns the most income - Wages and fringe benefits are around 70% of total income. Land, capital and
entrepreneurship earn the rest. These percentages have been remarkably constant
- Self interest – A choice that benefits you
- Social interest – a choice that leads to the outcome that is best for society as a whole.
This has two different dimensions: efficiency and equity (or fairness)
o Efficiency is achieved when the available resources are used to produce
goods and services at the lowest possible cost and quantities that give the
greatest possible value or benefit.
- Globalization means the expansion of international trade, borrowing and lending,
o In the self-interest of those consumers who buy low-cost goods and services
produced in other countries
o Also in the self interest of multinational forms that produce in low-cost
regions and sell in high-price regions.
- The information revolution is the technological change of the past 40 years
o Clearly served self-interest (cellphones and laptops for us, etc) as well as Bill
Gates, who saw Microsoft soar
- Climate change is a huge political issue today
o Must governments change the incentives we face so that our self interests
are also in the social interest (ie eliminating pollution?)
- The Great Moderation were the years between 1993 and 2007 that was a period of
remarkable economic stability
o The Canadian global economies were on a roll. Incomes in Canada increased
by 30% and in China they tripled.
- Six key ideas that define the economic way of thinking:
o A choice is a tradeoff
o People make rational choices by comparing benefits and costs
o Benefit is what you gain from something
o Cost is what you must give up to get something
o Most choices are “how much” choices are made at the margin
o Choices respond to incentives
- Trade off is an exchange, giving up something to get something else.
- Rational choice is a choice that compares co