Econ 1000 chapter 1
Our inability to get everything we want is called scarcity it is universal
Unlimited Wants and Limited Resources ÞScarcity ÞEconomic Problem Þ Need
to study economics
what you afford to buy is limited by your income and by the prices you must pay and
time is limited by the fact the day has 24 hours
what governments can afford is limited by the taxes they collect but taxes lower peoples
what society can get is limited by the productive resources available. The resources are
the gifts of nature, human labor and ingenuity and all the previously produced tools and
we can’t get everything we want so we must make choices
your choices have to be consistent with others. When someone decides to sell a laptop
and you are buying it.
Incentives reconcile choices
An incentive is a reward that encourages an action and a penalty discourages one
If a price of a laptop is too high more will be offered on sale than people would want to
buy and if a price is too low fewer will be on sale than people would want to buy
The choices that these agents make depends upon incentives that they face.
Econ is the social science that studies the choices of individuals, businesses, governments
and the entire societies make as they cope with scarcity and the incentives that cope and
reconcile those choices
Econ has 2 parts
Microeconomics which is the choice individuals and businesses make, the way these
choices interact with the market and the influence on governments
Macroeconomics which is performance of the national economy and the global economy
Goods and services are objects that people want which and produce to satisfy human
wants. Goods are physical objects like cellphones and cars. Services are performed for
people like catering and salons What we produce varies across countries and changes over time take for example fashion
in californa where it is always summer so the production or imports of winter jackets are
a lot less than the rest of the states and over time fashion changes and trends so what is on
trend right now is gold chain and what is out is disco pants so the gold chains will be
produced a lot more than disco pants
How: goods and services are produced by using production resources that economists call
factors of production which are grouped into 4 categories
Land: the gifts of nature (natural resources) that we use to produce goods and services.
Some resources like land and water and some minerals can be used again and there are
some resources like that are non renewable which means it can be used once
Labour: the work time and work effort that people devote to produce goods and services.
Labour includes mental and physical efforts. The quality of labour depends on human
capital which is the knowledge and skill that people learn from school, work etc.
Capital: the tools, instruments, machines buildings and other constructions that
businesses use to produce goods and services
Stocks, bonds and money is called financial capital. It plays an important role in enabling
businesses to borrow the funds they use to buy physical capitals. But because financial
capital is not used to produce goods and services it is not a productive resource.
Entrepreneurship is the human resource that organizes labour, land and capital
Entrepreneurs come up with new ideas about how to produce, make business decisions
and bear the risks the come with those decisions
WHOM: who consumes the goods and services that are produced depends on the
incomes of those consumers. The more of an income you have the more options you can
choose from and the less income you have the less options you have to choose from.
People earn their income by selling their services of the factors of production they own
Land earns rent
Labour earns wages
Entrepreneurship earns profit
Capital earns rental rate (Financial capital earns interest).
Labour earns the most income and the other factors share the rest
Distribution among income is unequal
We can get a good sense of who consumes the goods and services produced my looking
the % of the total income earned by different groups of people Self interest: a choice in your self interest is if that choice is best available for you. most
of the choices you make are in your self interest.
You don’t think too much about your choice affecting others. When you order pizza its
because you are hungry you don’t always think that you are paying someone’s income
and if the delivery man shows up its not he’s not thinking of your self interest but of his
hoping he will get a good tip
Social interest: a choice is a social interest if it leads to an outcome that is best for the
society as a whole. The social interest has two dimensions: efficiency and equity
Efficiency is achieved when available resources are used to produce goods and services at
the lowest price possible and the quantities that give the greatest possible value or benefit
Equity or fairness varies because economists and others have different views on what is
fair, therefore it is a debate
An outcome is in the social interest if it uses resources efficiently and distributes
goods and services fairly
Globalization means expansion of international trade, borrowing and lending and
investment. Globalization is in the self interest of consumers who buy low priced goods
and services produced in other countries. And it is the self interest of the multinational
firms that produce in low cost areas and sell in high priced areas. But globalization is not
in the self interest of labour.
The information age economy: The technological change of the past 40 years is called the
information revolution. This revolution worked with my self interest it gave me a phone,
Climate change: this is already a huge issue globally, on an everyday bases you make a
self interest choice to use electricity and gasoline you use carbon emissions
Economic instability is the years if 1993 and 2007 were years of remarkable stability its
been called the great moderation. But in august 2007 a period of financial stress started.
The banks took peoples deposits and got more funds by borrowing from each other firms.
Banks use the funds to make loans which was self interest so this no social interest.
Economists take human nature as given and view people as acting in their selfinterest.
Selfinterested actions are not necessarily selfish actions.
But if human nature is given and people pursue selfinterest, how can the social interest
Economists answer by emphasizing the role of institutions in creating incentives that
compel individuals to behave in the social interest.
What are Institutions? Formal and informal rules and laws that define the incentive structure in the society and
govern the behaviour of individuals and the governments.
Some ways to gauge the quality of institutions:
Political Institutions: Democracy, accountability, human rights, freedoms (religious,
economic and political)
Economic Institutions: Enforcement of property rights and contracts, the conduct of
government’s monetary and fiscal policy
Others: Control of Corruption, Rule of Law and Order
Economists way of thinking
A choice is a trade off
People make rational choices by comparing benefits and costs
Benefits is what you gain from something
Cost is what you give up to get something
Most of the choice are how much choices made at the margin
Choices respond to incentives
When we make a choice we select from a available alt
A trade off is an exchange giving up one thing to get another (it’s a choice)
What Tradeoffs arise when people choose how to spend their incomes, when
governments choose how to spend their tax revenues, and when businesses choose what
How Tradeoffs arise when businesses choose among alternative production technologies.
For Whom Tradeoffs arise when choices change the distribution of buying power across
Government redistribution of income from the rich to the poor creates the big tradeoff—
the tradeoff between equality and efficiency.
Economists view choices that people make as rational. A rational choice it one that
compares cost and benefit and it achieves the greatest benefit over cost for the person
making the choice
Only wants of a person making a choice is relevant to determine its rationally
Rationality choices are made when the benefits and costs are compared
When people make choices, economists assume that they typically engage in rational
behavior which means that they carefully weigh the costs and benefits of each action with
the goal of maximizing their net economic benefit. The point where this goal is achieved
is called the optimal point. The benefit of something is the gain or pleasure that it brings and it is determined by
preferences which is by what a person likes and dislikes and the intensity of these feeling
There are large benefits like school and a small benefit like a slice of pizza
Economists measure benefits as the most that a person is willing to give up to get
The opportunity cost of something is the highest value alt that must be given up to get it
Opportunity cost has two components like the things you cant afford with your time and
the things you cant do with your time. For example you are choosing to give up all the
nice things you can afford for tuition fees and also school its up most of your time so you
giving up your time to study than being with your friends. This example is all or nothing
because you either go to school or you don’t. most causes are not like this, they are how
If you have lots of things to do you plan your day accordingly you must decide how
many mins you are willing to spend on each activity.to make this d