Introduction to Economics: Key Concepts and Questions

What Is Economics?

Definition and Scope of Economics

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.

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

• Choices: Decisions made because of scarcity; every choice involves a tradeoff.

• Incentives: Rewards or penalties that influence choices.

Economics is divided into two main branches:

• Microeconomics: The study of choices made by individuals and businesses, how these choices interact in markets, and the influence of governments.

• Macroeconomics: The study of the performance of national and global economies.

Example: A microeconomic question: Why are people buying more e-books and fewer hard copy books? A macroeconomic question: 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?

• Goods and Services: Objects and actions that satisfy human wants.

• Production Patterns: Vary by country. For 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%.

Factors of Production

Goods and services are produced using resources called factors of production, grouped into four categories:

• Land: Natural resources used to produce goods and services.

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

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

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

Income Distribution: The way income is distributed depends on the factor of production:

• Land earns rent

• Labour earns wages

• Capital earns interest

• Entrepreneurship earns profit

Self-Interest vs. Social Interest

Choices are often made in self-interest (what is best for the individual), but economics also considers the social interest (what is best for society as a whole).

• Efficiency: Resource use is efficient if it is not possible to make someone better off without making someone else worse off.

• Equity: Fairness in the distribution of resources and outcomes.

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

The Economic Way of Thinking

Key Ideas

Economists use several key ideas to analyze choices:

• Tradeoffs: Every choice involves giving up something to get something else.

• Rational Choices: Choices that compare benefits and costs to achieve the greatest net benefit for the decision-maker.

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

• Cost: What must be given up to get something; specifically, the opportunity cost is the highest-valued alternative forgone.

• Marginal Analysis: Most choices are "how-much" decisions made at the margin, comparing marginal benefit and marginal cost.

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

Formula:

• Opportunity Cost: $\text{Opportunity Cost of X} = \text{Value of the best alternative forgone to get X}$

• Marginal Analysis: Choose an activity as long as $\text{Marginal Benefit} \geq \text{Marginal Cost}$

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 models to understand the economic world. Models are simplified representations focusing on essential features.

• Models are tested by comparing predictions with facts.

• Methods include natural experiments, statistical investigations, and economic experiments.

Economist as Policy Adviser

Economics provides a toolkit for advising governments, businesses, and individuals. While economics cannot resolve normative (value-based) questions, it helps evaluate alternative solutions by comparing marginal benefits and costs.

Careers in Economics

Jobs and Skills for Economics Majors

Economics graduates can pursue careers in academia, private firms, government, and international organizations. Common roles include:

• Market research analyst

• Financial analyst

• Budget analyst

• Economist (with advanced degrees)

Skills valued by employers:

• Critical-thinking skills

• Analytical skills

• Math skills

• Writing skills

• Oral communication skills

Job Outlook: Employment for economists and analysts is expected to grow, with higher earnings for those with advanced degrees.

Diversity, Equity, and Inclusion in Economics

There is underrepresentation of women and minorities in economics. Efforts to improve diversity are ongoing, as a more inclusive profession is believed to enhance research quality and economic policy.

Factor of Production	Income Earned
Land	Rent
Labour	Wages
Capital	Interest
Entrepreneurship	Profit