Introduction to Economics: Key Concepts and Questions

What Is Economics?

Definition and Scope of Economics

Economics is a social science that examines how individuals, businesses, governments, and societies make choices to cope with scarcity and the incentives that influence and reconcile those choices.

• Scarcity: The fundamental economic problem of having limited resources to satisfy unlimited wants.

• Choices: Because resources are scarce, individuals and societies must make decisions about how to allocate them.

• Incentives: Rewards or penalties that influence the choices people make.

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 might be: "Why are people buying more e-books and fewer hard copy books?" A macroeconomic question might be: "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 people value and produce to satisfy wants.

• What? The composition of output varies 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%.

• How? Goods and services are produced using factors of production:

  • Land: Natural resources used in production.

  • Labour: Human effort, including both physical and mental work. The quality of labour depends on human capital (education, training, experience).

  • Capital: Tools, machinery, 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 income:

  • Land earns rent

  • Labour earns wages

  • Capital earns interest

  • Entrepreneurship earns profit

Self-Interest vs. Social Interest

Economics also explores whether individual choices made in self-interest align with the broader social interest.

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

• Social interest: Choices that are best for society as a whole, often evaluated in terms of efficiency (no one can be made better off without making someone else worse off) and equity (fairness).

Major issues illustrating the tension between self-interest and social interest include:

• Globalization

• Information-age monopolies

• Climate change

• The gender pay gap

The Economic Way of Thinking

Key Ideas

Economists use a specific framework to analyze choices:

• A choice is a tradeoff: Scarcity forces people to choose between alternatives.

• Rational choices: People compare benefits and costs to make decisions that maximize their benefit over cost.

• 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: Choices respond to changes in incentives, which can be positive (rewards) or negative (penalties).

Example: The opportunity cost of attending a concert includes both the money spent on the ticket and the value of alternative activities forgone.

Marginal Benefit and Marginal Cost:

• 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 decision: Increase the activity if marginal benefit exceeds marginal cost.

Economics as a Social Science and Policy Tool

Positive vs. Normative Statements

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

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

Economic Models and Methods

• Economists develop economic models—simplified representations of reality to explain and predict economic phenomena.

• Models are tested by comparing predictions with real-world data.

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

Economist as Policy Adviser

• Economics provides tools for advising governments, businesses, and individuals.

• Policy advice blends positive analysis (what is) with normative goals (what ought to be).

• For a given goal, economics helps evaluate alternative solutions by comparing marginal benefits and marginal costs.

Careers in Economics

Jobs and Skills for Economics Majors

Economics graduates have diverse career opportunities in private firms, government, and international organizations. Common roles include:

• Economist (with further graduate study)

• Market research analyst

• Financial analyst

• Budget analyst

Job Growth: Employment for economists and related analysts is expected to grow, with market research analysts seeing the highest growth rate.

Earnings: Salaries vary by job and qualification level. Economists with a PhD can expect higher earnings, while analysts typically earn above the national average.

Key Skills:

• Critical-thinking skills: Ability to clarify and solve problems using logic.

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

• Math skills: Use of mathematics and statistics to analyze data.

• Writing skills: Ability to present ideas and reasoning in clear written reports.

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

Diversity, Equity, and Inclusion in Economics

The economics profession faces challenges in diversity and representation, particularly for women and minorities. Efforts to improve diversity are ongoing and are seen as essential for both fairness and the quality of economic research and policy advice.

• Underrepresentation is measured by comparing the share of degrees awarded to women and minorities to their share in the population.

• Understanding the reasons for underrepresentation is complex and involves examining incentives and choices.

• Greater diversity is expected to improve the profession and the economy as a whole.