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

What Is Economics?

Introduction to Economics

Economics is the social science that studies how individuals, businesses, governments, and societies make choices to cope with scarcity and the incentives that influence and reconcile those choices. The field is divided into two main branches: microeconomics and macroeconomics.

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

• Choices: Decisions made because of scarcity.

• Incentives: Rewards or penalties that influence choices.

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

• Example (Microeconomics): Why are people buying more e-books and fewer hard copy books?

• Example (Macroeconomics): Why does the unemployment rate in Canada fluctuate?

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 self-interest also promote the social interest?

What?

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

• Production patterns differ by country (e.g., Canada: 2% agriculture, 28% manufacturing, 70% services; Ethiopia: 35% agriculture, 21% manufacturing, 44% services).

How?

• Goods and services are produced using factors of production:

  • Land: Natural resources used in production.

  • Labour: Human effort in production; quality depends on human capital (education, training, experience).

  • Capital: Tools, machines, buildings, and other constructions used in production.

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

For Whom?

• Distribution depends on incomes earned:

  • 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.

• Social interest: Choices that are best for society as a whole.

• Social interest has two dimensions: efficiency (no one can be made 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.

Examples of Key Issues

• Globalization: Expansion of international trade and investment; benefits consumers and multinational firms but may harm low-wage workers and less competitive firms.

• Information-age monopolies: Technological advances have benefited consumers and entrepreneurs but raise questions about social benefit.

• Climate change: Economic activity contributes to carbon emissions; individual choices may not align with the social interest.

• Economic instability: Example: 2008 financial crisis—banks' self-interested choices led to instability, raising questions about social interest.

The Economic Way of Thinking

Six Key Ideas

1. A choice is a tradeoff: Choosing one thing means giving up something else.

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

3. Benefit: What you gain from something, determined by preferences.

4. Cost: What you must give up to get something; the opportunity cost is the highest-valued alternative forgone.

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

6. Choices respond to incentives.

Tradeoffs and Rational Choice

• Every choice involves a tradeoff—an exchange between alternatives.

• A rational choice is one that achieves the greatest benefit over cost for the decision-maker.

• Rationality is based on the individual's preferences and available information.

Benefit and Cost

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

• Cost: The opportunity cost of an action is the value of the next best alternative forgone.

• Opportunity cost has two components: what you can't buy and what you can't do with your time.

Marginal Analysis

• Most decisions are not all-or-nothing but involve marginal choices—how much more or less to do.

• Marginal benefit: The additional benefit from a small increase in an activity.

• Marginal cost: The additional cost from a small increase in an activity.

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

Incentives

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

• Incentives are central to predicting behavior and reconciling self-interest with social interest.

Economics as a Social Science and Policy Tool

Positive vs. Normative Statements

• Positive statements: Describe what is and can be tested against facts.

• Normative statements: Express opinions about what ought to be and cannot be tested.

Economic Models and Testing

• Economists use economic models—simplified descriptions of reality—to understand and predict economic phenomena.

• Models are tested by comparing predictions with facts, 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, but cannot determine goals (normative part).

Economists in the Economy

Careers and Skills

• Economics majors can pursue careers 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 higher growth rates for market research analysts and financial analysts.

• Key skills for economics jobs:

  • Critical-thinking skills

  • Analytical skills

  • Math skills

  • Writing skills

  • Oral communication skills

Diversity, Equity, and Inclusion in Economics

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

• Efforts are ongoing to improve diversity, which is seen as both fairer and more efficient for the profession and the economy.

Key Terms and Concepts

• Scarcity: Limited resources versus unlimited wants.

• Opportunity Cost: The value of the next best alternative forgone.

• Marginal Benefit: Additional benefit from one more unit of an activity.

• Marginal Cost: Additional cost from one more unit of an activity.

• Efficiency: No one can be made better off without making someone else worse off.

• Equity: Fairness in the distribution of resources.

• Incentive: A reward or penalty that motivates behavior.

Sample Table: Factors of Production and Their Incomes

Factor of Production	Definition	Income Earned
Land	Natural resources used in production	Rent
Labour	Human effort in production	Wages
Capital	Tools, machines, buildings	Interest
Entrepreneurship	Organization of other factors	Profit

Key Equations

• Opportunity Cost:

$\text{Opportunity Cost of Activity A} = \text{Value of Next Best Alternative Forgone}$

• Marginal Analysis:

$\text{If } MB > MC, \text{ increase the activity}$ $\text{If } MB < MC, \text{ decrease the activity}$

Additional info: This summary expands on the provided slides and notes, adding definitions, examples, and context for clarity and completeness.