Essay on WHat is Economics

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Ch. 1 What is Economics?

Definition of Economics
Scarcity – inability to satisfy all our wants
So we must choose among the available alternatives based on an incentive: reward that encourages an action or a penalty that discourages one
Economics – social science that studies the choices that people and companies make as they balance scarcity and incentives
Microeconomics – study of the choices that individuals/businesses make
Macroeconomics – study of the performance of the national/global economy

Two Big Economic Questions
Goods and services – objects that people value and produce to satisfy human wants
Factors of production
1. Land – natural resources; land, oil, minerals, gas, coal, water, etc.
2. Labour – work time/effort people devote to producing goods/services
Quality depends on human capital: knowledge/skill people have
3. Capital – tools, instruments, machines, buildings, etc. used to produce goods/services
4. Entrepreneurship – human resource that organizes land, labour, capital
People earn their incomes using those factors: Land (rent), labour (wages), capital (interest), entrepreneurship (profit)
Labour earns the most income
You make choices that are in your self-interest; the best choice for you
If your self-interest choice is also best for society, it is a social-interest
Globalization – expansion of international trade, borrowing and lending, and investment
Who is globalization good to? Should we limit globalization?
The information-age economy – technological change in the 1990s and 2000s
Is Microsoft serving the social interest?
Global Warming
Your self-interested choices may be hurting the environment; government provides incentives to advance the social interest
Natural Resource Depletion
Your self-interested choices may be damaging the social interest
Economic Instability
Banks and people make self-interested choices that may not promote social interest

The Economic Way of Thinking
Choices and Tradeoffs
Tradeoff – giving up on thing to get something else
Guns vs. Butter: If we want more of one thing, we must give up something else to get it
What, How, and For Whom Tradeoffs
What tradeoff: individuals, businesses, and government decide what goods/services are produced through our choices
How tradeoff: how goods and services are produced depends on a business’ choices
For whom tradeoff: for whom products are produced depends on the distribution of buying power
Buying power can be redistributed (transferred from one person to another) by voluntary payments, theft, or through taxes and benefits
Big tradeoff – tradeoff between equality and efficiency: a more equal distribution means there is less to share
Choices Bring Change
We have more goods/services available today than we did before
Quality of economic life depends on our choices; involves tradeoffs
One choice is how much of our income we consume and how much we save: as a society, we trade off current consumption for economic growth and future consumption
Another choice is how much effort we devote to education and training: as a society, we trade off current consumption and leisure time for economic growth and higher future consumption
Third choice is how much effort we devote to research and development of new products/production methods: tradeoff between current production for greater future production
Opportunity Cost
Highest-valued alternative that we must give up to get something else
What you gave up to get what you have now
Choosing at the Margin
Marginal benefit – benefit that arises from an increase in an activity
Marginal cost – cost of an increase in an activity; what you give up
You evaluate marginal benefits and costs and choose the action
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