What is Economics?

Definition and Scope of Economics

Economics is the social science that studies the choices individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Economics is divided into two main branches: Microeconomics and Macroeconomics.

• Scarcity: Our inability to satisfy all our wants due to limited resources.

• Choice: Because of scarcity, we must make choices about how to allocate resources.

• Incentives: Rewards or penalties that influence choices.

Microeconomics focuses on the choices of individuals and businesses, market interactions, and government influence. Macroeconomics studies the performance of national and global economies.

Examples of Microeconomic Questions: Why are people streaming more movies? Would a tax on online shopping affect Amazon?

Examples of Macroeconomic Questions: Why does the unemployment rate fluctuate? Can the Federal Reserve lower unemployment by keeping interest rates low?

The Two Big Economic Questions

Economics seeks to answer two fundamental questions:

1. How do choices determine what, how, and for whom goods and services are produced?

2. When do choices made in self-interest also promote the social interest?

What, How, and For Whom?

• Goods and Services: Objects people value and produce to satisfy wants.

• Production Patterns: Vary by country and income level (e.g., agriculture, industry, services).

How?

Goods and services are produced using factors of production:

• Land: Natural resources

• Labor: Human effort (quality depends on human capital)

• Capital: Tools, machines, buildings

• Entrepreneurship: Organizes land, labor, and capital

For Whom?

Distribution depends on income earned from factors of production:

• Land earns rent

• Labor earns wages

• Capital earns interest

• Entrepreneurship earns profit

Self-Interest vs. Social Interest

• Self-interest: Choices best for the individual

• Social interest: Choices best for society as a whole (involves efficiency and fair shares)

Major topics illustrating the tension between self-interest and social interest include globalization, information-age monopolies, climate change, and the Covid pandemic.

The Economic Way of Thinking

Six Key Ideas

1. A choice is a tradeoff.

2. People make rational choices by comparing benefits and costs.

3. Benefit is what you gain from something.

4. Cost is what you must give up to get something.

5. Most choices are "how-much" choices made at the margin.

6. Choices respond to incentives.

Tradeoffs and Opportunity Cost

• Tradeoff: Giving up one thing to get another.

• Opportunity cost: The highest-valued alternative forgone.

Marginal Analysis

• Marginal benefit: The additional benefit from one more unit.

• Marginal cost: The additional cost from one more unit.

• Rational choice: If marginal benefit > marginal cost, do more of the activity.

Incentives

• Changes in marginal cost or benefit alter incentives and thus choices.

Economics as a Social Science and Policy Tool

Positive vs. Normative Statements

• Positive statement: Can be tested against facts.

• Normative statement: Expresses an opinion; cannot be tested.

Economic Models and Testing

• Models simplify reality to focus on essential relationships.

• Tested using natural experiments, statistical investigations, and economic experiments.

Economist as Policy Adviser

• Economics provides tools for evaluating policy alternatives by comparing marginal benefits and costs.

Jobs and Skills in Economics

Careers for Economics Majors

• Economists (private firms, government, international organizations)

• Market research analysts

• Financial analysts

• Budget analysts

Job Growth and Earnings

• Economist jobs (PhD): +14% growth (2019-2029)

• Budget analysts: +3% growth

• Financial analysts: +5% growth

• Market research analysts: +18% growth

• Median economist salary: $105,100/year

• Market research analyst: $55,000/year

• Financial analyst: $82,000/year

Skills Needed

• Critical-thinking skills

• Analytical skills

• Math skills

• Writing skills

• Oral communication skills

Diversity in Economics

The economics profession seeks to attract more women and minorities at all levels, as shown by trends in degree attainment.

Appendix: Graphs in Economics

Graphing Data

Graphs are essential tools in economics for visualizing relationships between variables. The most common graph is the two-variable graph, with the x-axis (horizontal) and y-axis (vertical) meeting at the origin.

Scatter Diagrams

A scatter diagram plots one variable against another for multiple observations, revealing relationships or patterns.

Types of Relationships in Graphs

• Positive (Direct) Relationship: Variables move in the same direction; shown by an upward-sloping line.

• Negative (Inverse) Relationship: Variables move in opposite directions; shown by a downward-sloping line.

• Maximum/Minimum: Relationship changes direction at a peak or trough.

• No Relationship: Variables are unrelated; points are scattered randomly.

Slope of a Relationship

• Slope: Measures the rate of change between two variables.

• Formula:

• For straight lines, the slope is constant; for curves, the slope varies at different points.

Graphing More Than Two Variables

When more than two variables are involved, economists use the ceteris paribus assumption (holding other variables constant) to analyze the relationship between two variables.

Additional info: This summary covers the foundational concepts of microeconomics, including the definition of economics, the economic problem, the role of incentives, and the use of graphs and models in economic analysis. It also introduces the types of jobs available to economics majors and the skills required for success in the field.