Economic (Chp1)

Definition
 All economic questions arise because we want more than we can get.
 Our inability to satisfy all our wants is called scarcity.
 Because we face scarcity, we must make choices.
 The choices we make depend on the incentives we face.
 An incentive is a reward that encourages an action or a penalty that
discourages an action.
Economics is the social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with scarcity
and the incentives that influence and reconcile those choices
 Microeconomics
 Macroeconomics
Microeconomics
 Individual businesses
 Interact in markets
 Influence of government
 It is more concerned with how supply and demand interact in individual
markets for goods and services.
 Examples include consumer interests and actions or government taxation
policy on businesses
Macroeconomics
 National economies
 Global economies
 Examples include is the U.S wage growth going to increase? Productivity
increases or is the U.S. economy running on full employment (historically
low unemployment rates)

Scarcity- The inability to get everything we want, it is universal. What

individuals and society can get is limited by the productivity of resources
available. These resources are Land, Labour, Capital, and Entrepreneurship
Incentive is a reward that encourages an action or penalty that discourages one.
Examples include pricing (carbon pricing, retail pricing)
How do choices end up determining what, how, and for Whom?
 Goods and services are objects that people value and produce to satisfy
wants. Goods are physical objects like cell phones and automobiles and
services are tasks performed for people such as cell phone service and
auto repair service.
 Canada produces → 2% agricultural production, 20% manufactured
goods and78%service (retail, health care, education)
 China → 10% agricultural, 45% manufactured goods and 45 % service
The resources used to create goods and services are called factors of production.
 Land- physical and mental efforts of human beings. The quality of labor
depends on human capital, which is the knowledge and skill that people
obtain from education and work experience.
 Capital- the tools, and machinery used to produce goods and services.
 Entrepreneurship- people who organize land, labour and capital. They are
drivers of economic progress. They develop new ideas to reduce
production costs and also bear the financial risks that arise from these
decisions.

Climate Change- burning fossil fuels puts 28 billion tonnes or 4 tonnes per
person of carbon dioxide into the atmosphere each year. of all which comes
from the U.S, China, E.U., Russia and India.
Economic Instability- In 2008, the U.S banks were in financial trouble when the
subprime mortgages defaulted and securities holdings crashed. The bank's
shareholders were bailed out but the U.S mortgage holders were not.
At Issue- The protest against Market Capitalism Market capitalism is an
economic system in which individuals own land and capital and are free to buy
and sell capital. This leads to outlier outcomes (few) with extreme gains of
income.
Centrally Planned Socialism is an economic system in which the government
owns all the land and capital, directs workers to jobs and decides what and
whom to produce. This leads to less efficient distribution of resources because
self-interest and prices do to move production.
Mixed economy- is what most advanced FIrst world countries such as Canada,
E.U countries etc. There is a progressive tax code to redistribute wealth but
rules and regulations to protect workers, businesses, and institutions to cultivate
more market-based business practices.
Adam Smith
 Self interest of big corporations is maximum profits
 But the invisible hand leads production decisions made in pursuit of self
interest to intentionally promote the social interest. (lower prices, more
efficient use of resources)
 Governments can't regulate market outcomes
A Choice is a trade off because of scarcity we must make choices that are like
trade-offs. Since it is giving up something to get something else. Economist
view the choices that people make as rational. A rational choice is one that
compares cost and benefits and achieves the greatest benefit over the cost of the
person making the benefit. Only the wants of people making a choice are
relevant to determine its rationality.
The Goods and services produced depends on what people rationally choose to
buy.
Benefit: What you gainA benefit is something that brings you gain or pleasure
and is determined by what the person likes. For example certain type of genre of
music or movies vs classical. Economists measure benefit. Economists measure
benefit as the most that a person is willing to give up to get something.
Cost: Wat You Must Give Up
Opportunity Cost- cost of giving up the highest valued alternative. Examples
include attending university leads to a reduced or eliminated pay during the 4
years of attending school. Those reduced pay must be added to the tuition cost
to see if the student benefits from attending university over time (higher pay
check to offset the opportunity cost).
Marginal Benefit- the benefit that arises from an increase in an activity.
Examples include studying a extra day for test that boost up the marks.
Choice Respond to Incentives
The central idea of economics is that we can predict self-interested choice we
make by lookingat the incentives they face. Economist see incentives as the key
to reconciling self interest andsocial interest. People undertake those activities
for which marginal benefit exceeds marginalcost, and reject options for which
marginal cost exceeds marginal benefits.
Economist emphasize the crucial role that institutions play in influencing the
incentives that people face as they pursue their self interest.
Economics as Social Science
All economists seek to discover how the economic world works. In the pursuit
of this goal, economists distinguish between positive and normative statements
Positive Statements - A positive statement is what is currently believed about
how the world operates. A central task of an economist is to test positive
statements on how the economic world and weed what is wrong. Positive
statements can be checked. Economists are interested in positive statements
about cause and effect. To answer such questions, economist create economic
models. A model is tested by comparing its predictions with the facts.
Normative Statements- is about what ought to be. It depends on values and
cannot be tested. Government Policy Goals are normative statements.
How do economists try to disentangle cause and effect?
Look for natural experiments (situations in the ordinary course of economic life
where one factor of interest is different and others are equal or similar), conduct
statistical investigation to find correlations and perform economic experiments
by putting people in decision making situation and varying the influence of one
factor at a time to discover how they respond.