Chapter 1: What is Economics
Economics: 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.
(Parkin & Robin, 2022)
1) Scarcity - Inability to satisfy all our wants
2) Choices - Due to scarcity, choices must occur
3) Incentives - Reward that encourages an actions or penalty that discourages and action
Microeconomics: Study of choices that individuals and businesses make and how they interact/influence in
markets and government.
Macroeconomics: Study of the performance of the national and global economies.
Two Big Economic Questions:
1) How do choices end up determining what, how, and for whom goods and services are produced?
2) When do choices made in the pursuit of self- interest also promote social interest?
Goods and services - objects that people value and produce to satisfy human wants and needs (Parkin &
Robin, 2022)
- They can vary depending on the country and time period
Ex. Canada 2% in agriculture vs. China 8% respectively, 28% in manufactured and 41% manufactured goods
HOW? Produced by using resources known as factors of production.
Land - Gift of nature (Earns rent)
Labour - Time and work etfort that people devote to producing goods and services (Earns wages)
Quality of labour depends on human capital - based on knowledge and skills from education, training and
Capital - Tools, instruments, machines, buildings, and other objects used to produce goods and services
Entrepreneurship - Human resources to organize land, labour and capital (Earns profit)
,WHOM? - Depends on the incomes that people earn for goods and services
Self Interest may lead to Social Interest based on choices
Based on the quantity, factors of production, and benefits of goods & services
Self Interest: Choices that are in your self - interest based on choices that you think are best for you
Social Interest: Choices that are best for society as a whole, based on efficiency and equity
Ex. Which one is best for social interest and self-interest if the PROF lives by the school?
1) Walk 30 mins to work <- Social interest, better for the environment, and society
2) Bike 15 mins to work
3) Car (Drive) 5 mins to work <- Self-interest, faster, convenient
Economic Way of Thinking:
1) A choice is a tradeotf: giving up one thing to get something
else
2) People make rational choices by comparing benefits and
costs
3) Benefit is what you gain from something
4) Cost is what you must give up to get something
5) Most choices are “ how-much” choices made at the margin
6) Choices respond to incentives
Choice is a tradeotf: places scarcity and implications, choice, at central stage (Parkin & Robin 2022)
● Ex. Either spending allowance money on a new jacket or a new pair of shoes
Rational Choice: compares cost and benefits and achieves the greatest benefit over cost for person making
choice
● The wants of a person drive the rationality of a choice
● Answers the question of what goods and services will be produced (answer: whatever people
rationally choose to buy)
Benefit: gain or pleasure that it brings and is determined by preferences
● Preferences: what a person likes and dislikes and intensity of those feelings
Cost: something that you have to give up on
Opportunity cost: the highest valued alternative that must be given up to get something
, Example:
1) The things you can’t atford to buy if you purchase the AC/DC tickets
2) The things you can’t do with your time if you go to the concert
Marginal Benefit: To make a choice at the margin - evaluate the consequences of making incremental
changes, benefit from pursuing an incremental increase in an activity
● Measured by the amount that a person is willing to pay for an additional unit of good or service
(additional benefit of buying one more unit of the good or service)
Marginal Cost: The opportunity cost of pursuing an incremental increase in an activity
Marginal benefit > Marginal cost
Your rational choice is to do more of that activity
● △ in marginal cost or change in marginal benefit △ the incentives that we face and leads us to change our
choice
● Central idea of economics is that we can predict how choices will change by looking at △ by looking at
changes in incentives (Parkin & Robin 2022)
Positive Statements (what is) Normative Statements (what ought to be)
● Can be tested by checking it against the ● Depends on values and cannot be tested,
facts, might be right or wrong can agree or disagree with it
● Ex. One Minute Maid apple juice box ● Ex. Apple juice is better than orange juice.
contains 21g of sugar.
Economic Models
● Description of some aspect of the economic world that includes only those features that are needed
for the purpose at hand
● Tested by comparing its predictions with the facts (Parkin & Robin 2022)
● Economists test economic models using natural experiments, statistical investigations and economic
experiments
, Chapter 1: Appendix
Graphs:
● Reveals a relations, by representing a quantity as a distance
● Zero point is origin
○ Vertical line is y-axis
○ Horizontal line is x-axis
Scatter Diagram:
● Plots the value of one variable against the value of another variable for a number of ditferent values
of each variable
● Relationship between two variables
Variables that Move in the Variable that Move in Variable that have a Variable that are
SAME Direction OPPOSITE Direction MAXIMUM or a MINIMUM UNRELATED
Economics: 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.
(Parkin & Robin, 2022)
1) Scarcity - Inability to satisfy all our wants
2) Choices - Due to scarcity, choices must occur
3) Incentives - Reward that encourages an actions or penalty that discourages and action
Microeconomics: Study of choices that individuals and businesses make and how they interact/influence in
markets and government.
Macroeconomics: Study of the performance of the national and global economies.
Two Big Economic Questions:
1) How do choices end up determining what, how, and for whom goods and services are produced?
2) When do choices made in the pursuit of self- interest also promote social interest?
Goods and services - objects that people value and produce to satisfy human wants and needs (Parkin &
Robin, 2022)
- They can vary depending on the country and time period
Ex. Canada 2% in agriculture vs. China 8% respectively, 28% in manufactured and 41% manufactured goods
HOW? Produced by using resources known as factors of production.
Land - Gift of nature (Earns rent)
Labour - Time and work etfort that people devote to producing goods and services (Earns wages)
Quality of labour depends on human capital - based on knowledge and skills from education, training and
Capital - Tools, instruments, machines, buildings, and other objects used to produce goods and services
Entrepreneurship - Human resources to organize land, labour and capital (Earns profit)
,WHOM? - Depends on the incomes that people earn for goods and services
Self Interest may lead to Social Interest based on choices
Based on the quantity, factors of production, and benefits of goods & services
Self Interest: Choices that are in your self - interest based on choices that you think are best for you
Social Interest: Choices that are best for society as a whole, based on efficiency and equity
Ex. Which one is best for social interest and self-interest if the PROF lives by the school?
1) Walk 30 mins to work <- Social interest, better for the environment, and society
2) Bike 15 mins to work
3) Car (Drive) 5 mins to work <- Self-interest, faster, convenient
Economic Way of Thinking:
1) A choice is a tradeotf: giving up one thing to get something
else
2) People make rational choices by comparing benefits and
costs
3) Benefit is what you gain from something
4) Cost is what you must give up to get something
5) Most choices are “ how-much” choices made at the margin
6) Choices respond to incentives
Choice is a tradeotf: places scarcity and implications, choice, at central stage (Parkin & Robin 2022)
● Ex. Either spending allowance money on a new jacket or a new pair of shoes
Rational Choice: compares cost and benefits and achieves the greatest benefit over cost for person making
choice
● The wants of a person drive the rationality of a choice
● Answers the question of what goods and services will be produced (answer: whatever people
rationally choose to buy)
Benefit: gain or pleasure that it brings and is determined by preferences
● Preferences: what a person likes and dislikes and intensity of those feelings
Cost: something that you have to give up on
Opportunity cost: the highest valued alternative that must be given up to get something
, Example:
1) The things you can’t atford to buy if you purchase the AC/DC tickets
2) The things you can’t do with your time if you go to the concert
Marginal Benefit: To make a choice at the margin - evaluate the consequences of making incremental
changes, benefit from pursuing an incremental increase in an activity
● Measured by the amount that a person is willing to pay for an additional unit of good or service
(additional benefit of buying one more unit of the good or service)
Marginal Cost: The opportunity cost of pursuing an incremental increase in an activity
Marginal benefit > Marginal cost
Your rational choice is to do more of that activity
● △ in marginal cost or change in marginal benefit △ the incentives that we face and leads us to change our
choice
● Central idea of economics is that we can predict how choices will change by looking at △ by looking at
changes in incentives (Parkin & Robin 2022)
Positive Statements (what is) Normative Statements (what ought to be)
● Can be tested by checking it against the ● Depends on values and cannot be tested,
facts, might be right or wrong can agree or disagree with it
● Ex. One Minute Maid apple juice box ● Ex. Apple juice is better than orange juice.
contains 21g of sugar.
Economic Models
● Description of some aspect of the economic world that includes only those features that are needed
for the purpose at hand
● Tested by comparing its predictions with the facts (Parkin & Robin 2022)
● Economists test economic models using natural experiments, statistical investigations and economic
experiments
, Chapter 1: Appendix
Graphs:
● Reveals a relations, by representing a quantity as a distance
● Zero point is origin
○ Vertical line is y-axis
○ Horizontal line is x-axis
Scatter Diagram:
● Plots the value of one variable against the value of another variable for a number of ditferent values
of each variable
● Relationship between two variables
Variables that Move in the Variable that Move in Variable that have a Variable that are
SAME Direction OPPOSITE Direction MAXIMUM or a MINIMUM UNRELATED
