BackIntroduction to Economics: Core Concepts and Scope
Study Guide - Smart Notes
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What is Economics?
Definition of Economics
Economics is a social science that studies the choices made by individuals, firms, and societies as they confront scarcity. Scarcity refers to our inability to satisfy all our wants due to limited resources.
Scarcity: The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.
Unlimited wants but limited resources: Individuals and societies must make choices about how to allocate resources efficiently.
The Economic Way of Thinking
Rational Choice and Tradeoffs
Scarcity forces individuals and societies to make choices, which always involve tradeoffs. Rational choices are made by comparing the expected benefits and costs of each alternative.
Tradeoff: Choosing one option means giving up another.
Benefit: What you gain from a choice.
Cost: What you must give up to get something.
Marginal Analysis: Most choices are "how-much" decisions made at the margin, comparing marginal benefit (MB) and marginal cost (MC).
Incentives: Choices respond to incentives, which are rewards or penalties that motivate behavior.
Opportunity Cost: The highest-valued alternative that must be given up to get something else.
Example: If you spend time studying economics instead of working a part-time job, the opportunity cost is the wage you would have earned.
Two Parts of Economics
Microeconomics vs. Macroeconomics
Economics is divided into two main branches: microeconomics and macroeconomics.
Microeconomics: Studies choices made by individuals and firms, and how these choices influence markets and government policies.
Macroeconomics: Examines the performance of the national or global economy, focusing on aggregate indicators such as GDP, inflation, and unemployment.
Variable | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|
GDP Growth Rate (%) | 1.9 | -5 | 6 | 3.5 |
Inflation Rate (%) | 1.9 | 0.7 | 3.4 | 2.4 |
Unemployment Rate (%) | 5.7 | 9.5 | 7.5 | 5.7 |
Additional info: Table above summarizes annual performance of core macroeconomic variables in Canada.
Scope of Economics
Fundamental Questions
Economics seeks to answer two big questions:
How do choices determine what, how, and for whom to produce?
Do choices made in pursuit of self-interest also promote the social interest?
What to Produce?
Allocation of Resources
Societies must decide which goods and services to produce, and in what quantities. This decision is reflected in the composition of GDP.
Industry | % Contribution to GDP (Canada, Q2 2025) |
|---|---|
Agriculture, forestry | 1.7 |
Utilities | 2.0 |
Mining, quarrying, oil | 5.2 |
Construction | 7.3 |
Manufacturing | 8.8 |
Transportation and other services | 4.5 |
Retail trade | 5.2 |
Wholesale trade | 5.3 |
Educational services | 5.6 |
Professional, scientific, and technical | 7.2 |
Public administration | 7.4 |
Finance and insurance | 7.5 |
Health care and social assistance | 8.1 |
Real estate and rental | 10.1 |
Example: The largest share of Canada's GDP in Q2 2025 comes from real estate and rental services, followed by manufacturing and health care.
Additional info:
Further topics such as "How to produce?" and "For whom to produce?" are typically covered in introductory economics and relate to the allocation of resources among factors of production and income distribution among households.
