Chapter 1: What Is Economics? (Microeconomics: Canada in the Global Environment)

Definition of Economics

Scarcity and Choice

Economics is the study of how individuals and societies allocate limited resources to satisfy unlimited wants. The fundamental problem of scarcity forces people to make choices, and these choices are influenced by incentives.

• Scarcity: The condition that arises because wants exceed the ability of resources to satisfy them.

• Choice: The act of selecting among alternatives due to scarcity.

• Incentive: A reward or penalty that motivates or discourages an action.

Economics is the social science that studies the choices individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Microeconomics vs. Macroeconomics

• Microeconomics: The study of choices made by individuals and businesses, how these choices interact in markets, and the influence of governments. Example: Why are people buying more e-books and fewer hard copy books?

• Macroeconomics: The study of the performance of the national and global economies. Example: Why does the unemployment rate in Canada fluctuate?

The Two Big Economic Questions

What, How, and For Whom?

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 the pursuit of self-interest also promote the social interest?

What?

• Goods and services: Objects and actions that people value and produce to satisfy wants.

• Production patterns differ by country. Example: In Canada, agriculture is 2% of production, manufactured goods 28%, and services 70%. In Ethiopia, agriculture is 35%, manufactured goods 21%, and services 44%.

How?

• Goods and services are produced using factors of production:

  • Land: Natural resources ('gifts of nature').

  • Labour: Human effort, including work time and work effort. The quality of labour depends on human capital (knowledge and skills from education and experience).

  • Capital: Tools, machines, buildings, and other constructions used to produce goods and services.

  • Entrepreneurship: The human resource that organizes land, labour, and capital.

For Whom?

• Distribution depends on the incomes people earn from supplying factors of production:

  • Land earns rent.

  • Labour earns wages.

  • Capital earns interest.

  • Entrepreneurship earns profit.

Self-Interest vs. Social Interest

• Self-interest: Choices that are best for the individual making them.

• Social interest: Choices that are best for society as a whole, involving efficiency (resources used so that it is not possible to make someone better off without making someone else worse off) and equity (fairness).

Key issues illustrating the tension between self-interest and social interest include globalization, information-age monopolies, climate change, and the gender pay gap.

Key Ideas in the Economic Way of Thinking

Tradeoffs and Opportunity Cost

• Tradeoff: Giving up one thing to get something else.

• Opportunity cost: The highest-valued alternative that must be given up to get something. Example: The opportunity cost of attending a concert includes both the money spent and the alternative uses of your time.

Rational Choices and Marginal Analysis

• Rational choice: A choice that uses the available resources to best achieve the objective of the person making the choice, by comparing benefits and costs.

• Benefit: The gain or pleasure from something, determined by preferences.

• Marginal benefit: The benefit from pursuing an incremental increase in an activity.

• Marginal cost: The opportunity cost of pursuing an incremental increase in an activity.

• People make decisions at the margin: do more of an activity if marginal benefit exceeds marginal cost.

Incentives

• Choices respond to incentives, which are changes in marginal cost or marginal benefit.

• Economists predict changes in behavior by analyzing changes in incentives.

Economics as a Social Science and Policy Tool

Positive vs. Normative Statements

• Positive statements: Statements about what is; can be tested against facts.

• Normative statements: Statements about what ought to be; express opinions and cannot be tested.

Economic Models and Testing

• Economists create and test economic models—simplified descriptions of reality focusing on essential features.

• Models are tested by comparing predictions with facts, using natural experiments, statistical investigations, and economic experiments.

Economist as Policy Adviser

• Economics provides a toolkit for advising governments, businesses, and individuals.

• Policy advice blends positive analysis (what is) with normative goals (what ought to be), using marginal analysis to evaluate alternatives.

Careers and Skills in Economics

Jobs for Economics Majors

• Economics graduates work as economists, market research analysts, financial analysts, and budget analysts in private firms, government, and international organizations.

• Job growth is expected in these fields, with market research analysts projected to grow the fastest.

• Economists with advanced degrees (PhD) can expect higher earnings.

Skills Needed for Economics Jobs

• Critical-thinking skills: Clarifying and solving problems using logic.

• Analytical skills: Using economic tools to examine data and reach logical conclusions.

• Math skills: Applying mathematics and statistics to analyze data.

• Writing skills: Presenting ideas and reasoning in clear written reports.

• Oral communication skills: Explaining ideas and conclusions to non-economists.

Diversity, Equity, and Inclusion in Economics

• Economics has lower representation of women and minorities compared to other STEM fields.

• Efforts to improve diversity include research into causes of underrepresentation and initiatives by central banks and professional organizations.

• Greater diversity is expected to improve the quality and efficiency of economic research and policy advice.