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WHAT IS
ECONOMICS?
© 2003 Pearson Education Canada Inc.
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CHAPTER
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Objectives
•After studying this chapter, you will be able
to:
– Define economics and distinguish between
microeconomics and macroeconomics
– Explain how economists go about their work as
social scientists
– Explain the ideas that define the economic way of
thinking
– Explain the three big questions of microeconomics
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Definition of Economics
•Scarcity
–All economic questions arise because we are
unable to satisfy all our wants.
–Our inability to satisfy all our wants is called
scarcity.
–Economics is the social science that studies the
choices that we make as we cope with scarcity and
the institutions that have evolved to influence and
reconcile our choices.
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A Definition of Economics
• Economics is the study of how individuals
and societies choose to use the scarce
resources that nature and previous
generations have provided.
• Economics is the study of how scarce
resources are allocated among conflicting
demands.
Economics: A Social Science
•Social science
–The task of economic science is to discover
positive statements that are consistent with what we
observe in the world and that enable us to
understand how the economic world works.
–This task is large and breaks into three steps:
 Observation and measurement
 Model building
 Testing models
–Economic Theory
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Economics: A Social Science
•Obstacles and Pitfalls in Economics
–Economists cannot easily do experiments.
–To isolate the effect of interest, economists use the
logical device called ceteris paribus, or “other
things being equal.”
–Economists try to isolate cause-and-effect
relationship by changing only one variable at a time,
holding all other relevant factors unchanged.
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1. To Learn a Way of Thinking...
• Three Fundamental Concepts of Economic
Thinking
– Opportunity Cost
– Marginalism
– Information, Incentives, and Market
Coordinations
Opportunity Costs
• The opportunity cost of something is that
which we give up when we make that
choice or decision.
• The implication is that all decisions involve
trade-offs.
• “There’s no such thing as a free lunch!!”
Question to Consider
• What is the opportunity cost of your
attending university?
• Include all forgone options in your
consideration.
•Margins and Incentives
–People make choices at the margin, which means
that they evaluate the consequences of making
incremental changes in the use of their resources.
–The benefit from pursuing an incremental increase
in an activity is its marginal benefit.
–The opportunity cost of pursuing an incremental
increase in an activity is its marginal cost.
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2. Understanding Society
• Present and past economic decisions have
an enormous influence on the character of
life in a society.
• The state of our physical environment, the
level of material well-being, and the nature
and number of jobs are all products of the
economic system.
The Scope of Economics
•Microeconomics
–Microeconomics is the study of choices made by
individuals and businesses, the way these choices
interact, and the influence that governments exert on
them.
•Macroeconomics
–Macroeconomics is the study of the effects on the
national and global economy of the choices that
individuals, businesses, and governments make.
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The Scope of Economics
EXAMPLES OF MICROECONOMIC & MACROECONOMIC CONCERNS
Microeconomics
Production
Prices
Income
Employment
Production/Output in
Individual Industries and
Businesses
Price of Individual
Goods and Services
Distribution of Income
and Wealth
Employment by
Individual Businesses &
Industries
Price of medical care
Price of gasoline
Food prices
Apartment rents
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
How much steel
How many offices
How many cars
National
Production/Output
Macroeconomics
Total Industrial Output
Gross Domestic Product
Growth of Output
Aggregate Price Level National Income
Consumer prices
Producer Prices
Rate of Inflation
Jobs in the steel industry
Number of employees in
a firm
Number of accountants
Employment and
Unemployment in the
Total wages and salaries Economy
Total corporate profits
Total number of jobs
Unemployment rate
Three Big Microeconomic
Questions
–Goods and services are the objects that people
value and produce to satisfy wants.
–Microeconomics seeks to understand what
determines:
– What goods and services are produced
– How goods and services are produced
– For whom goods and services are produced
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Three Big Microeconomic
Questions
•What Goods and
Services are Produced?
–Figure 1.1 shows the
major items produced in
the Canadian economy
today.
–It emphasizes the
dominant place of services
in our economy.
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Three Big Microeconomic
Questions
–Figure 1.2 shows the
trends in what the
Canadian economy has
produced over the past 50
years.
–It shows the decline of
agriculture, mining,
construction, and
manufacturing, and the
expansion of services.
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Three Big Microeconomic
Questions
–The facts about what we
produce raise the deeper
question:
–What determines the
quantities of houses and
apartments, DVD players,
and corn that we produce?
–Microeconomics provides
some answers to these
questions.
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Three Big Microeconomic
Questions
•How are Goods and Services Produced?
–Factors of production are the resources that
businesses use to produce goods and services.
–They are grouped into four categories:
 Land
 Labour
 Capital
 Entrepreneurship
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Three Big Microeconomic
Questions
–The “gifts of nature” that we use to produce goods
and services are land.
–The work time and effort that people devote to
producing goods and services is labour.
–The quality of labour depends on human capital,
which is the knowledge and skill that people obtain
from education, on-the-job training, and work
experience.
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Three Big Microeconomic
Questions
–The tools, instruments, machines, buildings, and
other constructions that are used to produce goods
and services are called capital.
–The human resource that organizes land, labour,
and capital is entrepreneurship.
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Three Big Microeconomic
Questions
–Figure 1.3 shows a measure of
the growth of human capital in
Canada over the last twenty
five years—the percentage of
the population that has
completed different levels of
education.
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Three Big Microeconomic
Questions
–The facts about how we
produce raise the deeper
question:
–What determines the
quantities of capital,
labour, and other
resources that get used to
produce goods and
services?
–Microeconomics
provides some answers to
this question.
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Three Big Microeconomic
Questions
•For Whom are Goods and Services
Produced?
–Who gets the goods and services depends on the
incomes that people earn.
– Land earns rent.
– Labour earns wages.
– Capital earns interest.
– Entrepreneurship earns profit.
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Three Big Microeconomic
Questions
–Figure 1.4 shows the
distribution of income in
Canada.
–The poorest 20 percent
earn only 4 percent of
total income while the
richest 20 percent earn 46
percent of total income.
–
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Three Big Microeconomic
Questions
–The facts about for whom
raise the deeper question:
–What determines earnings
and the distribution of
income that in turn
determine who gets the
goods and services
produced?
–Microeconomics provides
some answers to this
question.
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