1 WHAT IS ECONOMICS?
V
V V
TheV BigV Picture
V
Where V we V are V going: V
AfterVcompletingVChapterV1,VtheVstudentVwillVhaveVaVgoodVsenseVforVtheVrangeVofVquestio
nsVthatVeconomicsVaddressesVandVwillVbeVonVtheVpathVtowardsVanVeconomicVwayVofVthinki
ng.VTheVstudentsVwillVbeginVtoVthinkVofVcostVasVaVforgoneValternative—
anVopportunityVcost—
andValsoVaboutVmakingVchoicesVbyVbalancingVmarginalVcostsVandVmarginalVbenefits.
ChapterV2VreinforcesVtheVcentralVthemesVofVChapterV1VbyVlayingVoutVaVcoreVeconomicVmo
del,VtheVproductionVpossibilitiesVfrontierV(PPF),VandVusingVitVtoVillustrateVtheVconceptsVofV
tradeoffVandVopportunityVcost.VChapterV2ValsoVprovidesVaVdeeperVexplanation,VagainVwithVa
Vmodel,VofVtheVconceptsVofVmarginalVcostVandVmarginalVbenefit,VbeginningVwithVtheVconce
ptVofVefficiency,VandVconcludingVwithVaVreviewVofVtheVsourceVofVtheVgainsVfromVspecializ
ationVandVexchange.
N e wV inV th e V N i n t h V E d i t i o n V
ThisVchapterVisVstreamlinedVandVmoreVquicklyVaddressesVbasicVeconomicVthought.VItVisVnot
VoneVtoVglossVoverVasVitVlaysVdownVanVimportantVfoundationVthatVcanVbeVdrawnVfromVasV
youVmoveVthroughVmoreVspecificVapplicationsVlater.VThisVeditionVpresentsVonlyVfourVissuesV
thatVjuxtaposeVprivateVinterestVandVsocialVinterest:Vglobalization;VtheVinformation-
ageVeconomy;VglobalVwarming;VandVeconomicVinstabilityV(andVtheVpotentialVendVtoVtheV“Gr
eatVModeration.VStudentsVrelateVwellVtoVtheVsectionVonVself-
interestVandVsocialVinterest,VwhichVintroducesVissuesVofVefficiencyVandVfairnessVandVisVgreat
VforVclassVdiscussion.VEconomicsVinVtheVNewsVcoversVcurrentVissuesVincludingVFacebookVan
dVMarkVZuckerberg’sVvisionVtoVhaveVtheVInternetVavailableVtoVtheVwholeVworld..
CopyrightV©V2016VPearsonVCanada
VInc.
,2 CHAPTE R V
1
LectureV NotesV
WhatVIsVEconomics?
I. DefinitionVofVEconomics
• EconomicVquestionsVariseVbecauseVweValwaysVwantVmoreVthanVweVcanVget,VsoVweVfaceVscarcity,
VtheVinabilityVtoVsatisfyVallVourVwants.VEveryoneVfacesVscarcityVbecauseVnoVoneVcanVsatisfyVallVof
VhisVorVherVwants.
• ScarcityVforcesVusVtoVmakeVchoicesVoverVtheVavailableValternative.VTheVchoicesVweVmakeVdependVon
incentives,VaVrewardVthatVencouragesVaVchoiceVorVaVpenaltyVthatVdiscouragesVaVchoice.
BillVGatesVandVWarrenVBuffetVareVamongVtheVwealthiestVbusinessmen.VDoVtheyVfaceVscarcity?VAccordingVt
oVTheVWallVStreetVJournal,VbothVmenVareVardentVbridgeVplayers,VyetVtheyVhaveVneverVwonVoneVofVtheVma
nyVnationalVbridgeVtournamentsVtheyVhaveVenteredVasVaVteam.VTheyVcanVeasilyVaffordVtheVbestVbridgeVcoa
chesVinVtheVworld,VbutVtheyVdon’tVallocateVenoughVtimeVtoVpracticingVasVmuchVasVtheyVwouldVneedVtoVwi
n.VTheyVfaceVscarcityV(ofVtime)VandVmustVchooseVhowVtoVspendVtheirVtime.
Economics
• EconomicsVisVtheVsocialVscienceVthatVstudiesVtheVchoicesVthatVindividuals,Vbusinesses,Vgovern
ments,VandVentireVsocietiesVmakeVwhenVtheyVcopeVwithVscarcityVandVtheVincentivesVthatVinfluen
ceVandVreconcileVthoseVchoices.
• EconomistsVworkVtoVunderstandVwhenVtheVpursuitVofVself-interestVadvancesVtheVsocialVinterest
• EconomicsVisVdividedVintoVmicroeconomicsVandVmacroeconomics:
• MicroeconomicsVisVtheVstudyVofVtheVchoicesVthatVindividualsVandVbusinessesVmake,VtheV
wayVtheseVchoicesVinteractVinVmarkets,VandVtheVinfluenceVofVgovernments.
• MacroeconomicsVisVtheVstudyVofVtheVperformanceVofVtheVnationalVeconomyVandVt
heVglobalVeconomics.
OnVtheVfirstVdayVdoVaV“popVquiz.”VHaveVyourVstudentsVwriteVonVpaperVtheVanswerVtoV“WhatVisVEconomi
cs?”VReassureVthemVthatVthisVisVtheirVopinionVsinceVitVisVtheVfirstVday.VYouVwillVfindVmostVofVtheVanswe
rsVfocusedVaroundVmoneyVand/orVbusiness.VStressVthatVEconomicsVisVaVsocialVscience,VaVstudyVofVhumanV
behaviourVgivenVtheVscarcityVproblem.VAllVtooVoftenVfirst-
timeVstudentsV(especiallyVbusinessVstudents)VthinkVthatVEconomicsVisVjustVaboutVmakingVmoney.
Certainly,VtheVdisciplineVcanVandVdoesVoutlineVreasonsVwhyVworkersVworkVlongerVhoursVtoVincreaseVtheirV
wageVearnings,VorVwhyVfirmsVseekVprofitVasVtheirVincentive.VButVEconomicsValsoVexplainsVwhyVaVterminall
yVillVcancerVpatientVmightVoptVforVpainVmedicationVasVopposedVtoVcontinuedVchemotherapy/radiation,VorVw
hyVsomeoneVnoVlongerVinVtheVworkforceVwantsVtoVgoVtoVcollegeVandVattainVaVBachelor’sVdegree,VinVtheir
VsheerVpleasureVofVlearningVandVunderstanding.VStressingVtheVsocialVpartVofVourVscienceVnowVwillVhelpVlat
erVwhenVrelatingVdetailsVtoVtheVoverallVbiggerVpictureV(especiallyVwhenVtimeVlaterVinVtheVsemesterVseemsV
scarce,VnoVpunVintended!).
TheVdefinitionVinVtheVtext:V“EconomicsVisVtheVsocialVscienceVthatVstudiesVtheVchoicesVthatVindividuals,Vb
usinesses,Vgovernments,VandVsocietiesVmakeVasVtheyVcopeVwithVscarcityVandVtheVincentivesVthatVinfluenceV
andVreconcileVtheseVchoices,”VisVaVmodernVlanguageVversionVofVLionelVRobbinsVfamousVdefinition,V“Econ
omicsVisVtheVscienceVwhichVstudiesVhumanVbehaviourVasVaVrelationshipVbetweenVendsVandVscarceVmeansVt
hatVhaveValternativeVuses.”
OtherVdefinitionsVincludeVthoseVofVKeynesVandVMarshall:
JohnVMaynardVKeynes:V“TheVtheoryVofVeconomicsVdoesVnotVfurnishVaVbodyVofVsettledVconclusionsVi
mmediatelyVapplicableVtoVpolicy.VItVisVaVmethodVratherVthanVaVdoctrine,VanVapparatusVofVtheVmind,VaVtec
hniqueVofVthinking,VwhichVhelpsVitVpossessorsVtoVdrawVcorrectVconclusions.”
CopyrightV©V2016VPearsonVCanada
VInc.
, WHATV ISV ECONVOMVIC 3
S?V
AlfredVMarshall:V“EconomicsVisVaVstudyVofVmankindVinVtheVordinaryVbusinessVofVlife;VitVexamine
sVthatVpartVofVindividualVandVsocialVactionVwhichVisVmostVcloselyVconnectedVwithVtheVattainmentVandV
withVtheVuseVofVtheVmaterialVrequisitesVofVwellbeing.”
II. TwoVBigVEconomicVQuestions
HowVdoVchoicesVwindVupVdeterminingVwhat,Vhow,VandVforVwhomVgoodsVandVservicesVareVp
roduced?
What,VHowVandVForVWhom?
• GoodsVandVservicesVareVtheVobjectsVthatVpeopleVvalueVandVproduceVtoVsatisfyVhumanVwant
s.VWhatVweVproduceVchangesVoverVtime—
todayVweVproduceVmoreVDVDsVandVfewerVvideoVtapesVthanVfiveVyearsVago.
• GoodsVandVservicesVareVproducedVusingVproductiveVresourcesVcalledVfactorsVofVproduction.VThe
seVareVlandV(theV“giftsVofVnature”,VnaturalVresources),VlabourV(theVworkVtimeVandVworkVeffortVp
eopleVdevoteVtoVproduction),VcapitalV(theVtools,Vinstruments,Vmachines,Vbuildings,VandVotherVconst
ructionsVusedVtoVproduceVgoodsVandVservices),VandVentrepreneurshipV(theVhumanVresourceVthatV
organizesVlabour,Vland,VandVcapital).
• TheVqualityVofVlabourVdependsVonVhumanVcapital,VwhichVisVtheVknowledgeVandVskillVthatVp
eopleVobtainVfromVeducation,VworkVexperience,VandVon-the-jobVtraining.
• PeopleVearnVtheirVincomesVbyVsellingVtheVservicesVofVtheVfactorsVofVproductionVtheyVown:VLand
VearnsVrent,VlabourVearnsVwages,VcapitalVearnsVinterest,VandVentrepreneurshipVearnsVprofit.
DoVChoicesVMadeVinVtheVPursuitVofVSelf-InterestValsoVPromoteVtheVSocialVInterest?
• YouVmakeVaVchoiceVinVyourVself-interestVifVyouVthinkVthatVchoiceVisVtheVbestVoneVavailableVforVyou.
• AnVoutcomeVisVinVtheVsocialVinterestVifVitVisVbestVforVsocietyVasVaVwhole.
• CouldVitVbeVpossibleVthatVwhenVeachVofVusVmakesVchoicesVinVourVself-
interest,VtheseVchoicesVareVinVtheVsocialVinterest?
TheVTwoVBigVEconomicVQuestionsV Don’tVskipVtheVquestions.VOpenVyourVstudents’VeyesVtoVeconomicVinVth
eVworldVaroundVthem.VAskVthemVtoVbringVaVnewspaperVtoVclassVandVtoVidentifyVheadlinesVthatVdealVwith
VstoriesVaboutVWhat,VHow,VandVForVWhom.VUseVEconomicsVinVtheVNewsVTodayVonVyourVMyEconLabVWeb
VsiteVforVaVcurrentVnewsVitemVandVforVanVarchiveVofVpastVitemsV(withVquestions).VPoseVquestionsVbutVhol
dVoffVonVtheVanswersVlettingVthemVknowVthatV“weVcanVhaveVaVmuchVmoreVfruitfulVdiscussionVwhenVourV
toolboxVisVfull.”VRemindVthemVthatVthisVcourseVisVaboutVlearningVsimpleVeconomicVmodelsVthatVprovideVt
oolsVtoVseekVanswersVtoVcomplexVissues.
StudentsV(andVothers!)VoftenVtakeVtheVanswersVtoVtheVwhat,Vhow,VandVforVwhomVquestionsVforVgranted.VF
orVinstance,VmostVofVtheVtimeVweVdoVnotVbotherVtoVwonderV“HowVdoesVourVeconomyVdetermineVhowVma
nyVlightVbulbs,Vautomobiles,VandVpizzasVtoVproduce?”V(what),VorV“WhyVdoesVharvestingVwheatVfromVaVplo
tVofVlandVinVIndiaVoccurVwithVhundredsVofVlabourersVtoilingVwithVoxenVpullingVthreshingVmachines,Vwhile
VinVCanada,VaVsingleVfarmerVlisteningVtoVaVGarthVBrooksVCDVandVsittingVinVanVair-
conditionedVcabVofVaV$500,000VmachineVharvestsVtheVsameVquantityVofVwheatVfromVtheVsameVsizedVplotV
ofVland?”V(how),VorV“WhyVisVtheVannualVincomeVofVanVinspiringVandVeffectiveVgradeVschoolVteacherVmuc
hVlessVthanVthatVofVanVaverageVmajor-
leagueVbaseballVplayer?”V(forVwhom).VExplainingVtheVanswersVtoVtheseVtypesVofVquestionsVandVdetermining
VwhetherVtheVanswersVareVinVtheVsocialVinterestVisVaVmajorVpartVofVmicroeconomics.
FigureV1.1VinVtheVtextbookV“TrendsVinVWhatVWeVProduce”VtiesVinVnicelyVwithVChapterV2’sVdiscussionVonVt
heVPPF.
FigureV1.1ValsoVlinksVtheVthreeVquestionsVofVwhat,Vhow,VandVforVwhomVnicelyVtoVtheVcomponentVpartsVofVt
hose
CopyrightV©V2016VPearsonVCanada
VInc.
, 4 CHAPTE R V
1
questions:VgoodsVandVservices,VfactorsVofVproductionV(land,Vlabour,Vcapital,Ventrepreneurship),VandVincomes
VthatVfactorsVofVproductionVearnV(rent,Vwages,Vinterest,VandVprofit).
• WeVcanVexamineVwhetherVtheVself-interestedVchoicesVserveVtheVsocialVinterestVforVaVvarietyVtopics:
• Globalization:VBuyingVanViPodVallowsVworkersVoverseasVtoVearnVaVwageVandVprovideVforVfamily
• Information-
AgeVMonopolies:VAnV absenceVofVcompetitionVleadsVtoVpricesVfarVaboveVth
eVcostVofVproduction
• ClimateVChange:VCarbonVdioxideVemissionsVledVtoVhigherVglobalVtemperaturesVandVclimateVchange
• EconomicVinstability:VVolatilityVandVriskVinVfinancialVmarketsVleadsVtoVfewerVloansVandVle
ssVlendingVavailable
III. EconomicVWayVofVThinking
ScarcityVrequiresVchoicesVandVchoicesVcreateVtradeoffs.
WhatVisVtheVdifferenceVbetweenVscarcityVandVpoverty?VAskVtheVstudentsVwhyVtheyVhaven’tVyetVattainedVallV
ofVtheirVpersonalVgoals.VOneVreasonVwillVbeVthatVtheyVlackVsufficientVmoney.VAskVthemVifVtheyVcouldVatta
inVallVofVtheirVgoalsVifVtheyVwereVasVrichVasVBillVGates.VTheyVquicklyVrealizeVthatVtimeVisVaVbigVconstrai
nt—
andVtheVgreatVleveler:VweVallVhaveVonlyV24VhoursVinVaVday.VTheyVhaveVstumbledVonVtheVfactVthatVscarcit
y,VwhichVevenVBillVGatesVfaces,VisVnotVpoverty.
AVChoiceVisVaVTradeoff
• AVtradeoffVisVanVexchange—givingVupVoneVthingVtoVgetVanother.
• WhateverVchoiceVyouVmake,VyouVcouldVhaveVchosenVsomethingVelse.
VirtuallyVeveryVchoiceVthatVcanVbeVthoughtVofVinvolvesVaVtradeoff.VPresentingVaVfewVofVtheVfollowingVas
VexamplesVcanVhelpVyourVclassVbetterVappreciateVthisVkeyVpoint:
• ConsumptionVandVsavings:VIfVsomeoneVdecidesVtoVsaveVmoreVofVhisVorVherVincome,VsavingsVcan
VbeVfunneledVthroughVtheVfinancialVsystemVtoVfinanceVbusinessesVnewVcapitalVpurchases.VAsVaVsoc
iety,VweVtradeVoffVcurrentVconsumptionVforVeconomicVgrowthVandVhigherVfutureVconsumption.
• EducationVandVtraining:VAVstudentVremainingVinVschoolVforVanotherVtwoVyearsVtoVcompleteVa
VdegreeVwillVneedVtoVforgoVaVsignificantVamountVofVleisureVtime.VButVbyVdoingVso,VheVorVshe
VwillVbeVbetterVeducatedVandVwillVbeVmoreVproductive.VAsVaVsociety,VweVtradeVoffVcurrentVpro
ductionVforVgreaterVfutureVproduction.
• ResearchVandVdevelopment:VFactoryVautomationVbringsVgreaterVproductivityVinVtheVfuture,Vb
utVmeansVsmallerVcurrentVproduction.VAsVaVsociety,VweVtradeVoffVcurrentVproductionVforVgreat
erVfutureVproduction.
MakingVaVRationalVChoice
• AVrationalVchoiceVisVoneVthatVcomparesVcostsVandVbenefitsVandVachievesVtheVgreatestVbenefitV
overVcostVforVtheVpersonVmakingVtheVchoice.
• ButVhowVdoVpeopleVchooseVrationally?VWhyVdoVmoreVpeopleVchooseVanViPodVratherVthanVaVZu
ne?VWhyVhasVtheVCanadianVgovernmentVchosenVtoVbuildVaVnationalVhighwayVsystemVandVnotVa
VnationalVhigh-speedVrailVsystem?VTheVanswersVturnVonVcomparingVbenefitsVandVcosts.
Benefit:VWhatVyouVGain
• TheVbenefitVofVsomethingVisVtheVgainVorVpleasureVthatVitVbringsVandVisVdeterminedVbyVprefe
rences—byVwhatVaVpersonVlikesVandVdislikesVandVtheVintensityVofVthoseVfeelings.
• SomeVbenefitsVareVlargeVandVeasyVtoVidentify,VsuchVasVtheVbenefitVthatVyouVgetVfromVbeingVinVsc
hool.VMuchVofVthatVbenefitVisVtheVadditionalVgoodsVandVservicesVthatVyouVwillVbeVableVtoVenjoyV
withVtheVboostVtoVyourVearningVpowerVwhenVyouVgraduate.
CopyrightV©V2016VPearsonVCanada
VInc.
V
V V
TheV BigV Picture
V
Where V we V are V going: V
AfterVcompletingVChapterV1,VtheVstudentVwillVhaveVaVgoodVsenseVforVtheVrangeVofVquestio
nsVthatVeconomicsVaddressesVandVwillVbeVonVtheVpathVtowardsVanVeconomicVwayVofVthinki
ng.VTheVstudentsVwillVbeginVtoVthinkVofVcostVasVaVforgoneValternative—
anVopportunityVcost—
andValsoVaboutVmakingVchoicesVbyVbalancingVmarginalVcostsVandVmarginalVbenefits.
ChapterV2VreinforcesVtheVcentralVthemesVofVChapterV1VbyVlayingVoutVaVcoreVeconomicVmo
del,VtheVproductionVpossibilitiesVfrontierV(PPF),VandVusingVitVtoVillustrateVtheVconceptsVofV
tradeoffVandVopportunityVcost.VChapterV2ValsoVprovidesVaVdeeperVexplanation,VagainVwithVa
Vmodel,VofVtheVconceptsVofVmarginalVcostVandVmarginalVbenefit,VbeginningVwithVtheVconce
ptVofVefficiency,VandVconcludingVwithVaVreviewVofVtheVsourceVofVtheVgainsVfromVspecializ
ationVandVexchange.
N e wV inV th e V N i n t h V E d i t i o n V
ThisVchapterVisVstreamlinedVandVmoreVquicklyVaddressesVbasicVeconomicVthought.VItVisVnot
VoneVtoVglossVoverVasVitVlaysVdownVanVimportantVfoundationVthatVcanVbeVdrawnVfromVasV
youVmoveVthroughVmoreVspecificVapplicationsVlater.VThisVeditionVpresentsVonlyVfourVissuesV
thatVjuxtaposeVprivateVinterestVandVsocialVinterest:Vglobalization;VtheVinformation-
ageVeconomy;VglobalVwarming;VandVeconomicVinstabilityV(andVtheVpotentialVendVtoVtheV“Gr
eatVModeration.VStudentsVrelateVwellVtoVtheVsectionVonVself-
interestVandVsocialVinterest,VwhichVintroducesVissuesVofVefficiencyVandVfairnessVandVisVgreat
VforVclassVdiscussion.VEconomicsVinVtheVNewsVcoversVcurrentVissuesVincludingVFacebookVan
dVMarkVZuckerberg’sVvisionVtoVhaveVtheVInternetVavailableVtoVtheVwholeVworld..
CopyrightV©V2016VPearsonVCanada
VInc.
,2 CHAPTE R V
1
LectureV NotesV
WhatVIsVEconomics?
I. DefinitionVofVEconomics
• EconomicVquestionsVariseVbecauseVweValwaysVwantVmoreVthanVweVcanVget,VsoVweVfaceVscarcity,
VtheVinabilityVtoVsatisfyVallVourVwants.VEveryoneVfacesVscarcityVbecauseVnoVoneVcanVsatisfyVallVof
VhisVorVherVwants.
• ScarcityVforcesVusVtoVmakeVchoicesVoverVtheVavailableValternative.VTheVchoicesVweVmakeVdependVon
incentives,VaVrewardVthatVencouragesVaVchoiceVorVaVpenaltyVthatVdiscouragesVaVchoice.
BillVGatesVandVWarrenVBuffetVareVamongVtheVwealthiestVbusinessmen.VDoVtheyVfaceVscarcity?VAccordingVt
oVTheVWallVStreetVJournal,VbothVmenVareVardentVbridgeVplayers,VyetVtheyVhaveVneverVwonVoneVofVtheVma
nyVnationalVbridgeVtournamentsVtheyVhaveVenteredVasVaVteam.VTheyVcanVeasilyVaffordVtheVbestVbridgeVcoa
chesVinVtheVworld,VbutVtheyVdon’tVallocateVenoughVtimeVtoVpracticingVasVmuchVasVtheyVwouldVneedVtoVwi
n.VTheyVfaceVscarcityV(ofVtime)VandVmustVchooseVhowVtoVspendVtheirVtime.
Economics
• EconomicsVisVtheVsocialVscienceVthatVstudiesVtheVchoicesVthatVindividuals,Vbusinesses,Vgovern
ments,VandVentireVsocietiesVmakeVwhenVtheyVcopeVwithVscarcityVandVtheVincentivesVthatVinfluen
ceVandVreconcileVthoseVchoices.
• EconomistsVworkVtoVunderstandVwhenVtheVpursuitVofVself-interestVadvancesVtheVsocialVinterest
• EconomicsVisVdividedVintoVmicroeconomicsVandVmacroeconomics:
• MicroeconomicsVisVtheVstudyVofVtheVchoicesVthatVindividualsVandVbusinessesVmake,VtheV
wayVtheseVchoicesVinteractVinVmarkets,VandVtheVinfluenceVofVgovernments.
• MacroeconomicsVisVtheVstudyVofVtheVperformanceVofVtheVnationalVeconomyVandVt
heVglobalVeconomics.
OnVtheVfirstVdayVdoVaV“popVquiz.”VHaveVyourVstudentsVwriteVonVpaperVtheVanswerVtoV“WhatVisVEconomi
cs?”VReassureVthemVthatVthisVisVtheirVopinionVsinceVitVisVtheVfirstVday.VYouVwillVfindVmostVofVtheVanswe
rsVfocusedVaroundVmoneyVand/orVbusiness.VStressVthatVEconomicsVisVaVsocialVscience,VaVstudyVofVhumanV
behaviourVgivenVtheVscarcityVproblem.VAllVtooVoftenVfirst-
timeVstudentsV(especiallyVbusinessVstudents)VthinkVthatVEconomicsVisVjustVaboutVmakingVmoney.
Certainly,VtheVdisciplineVcanVandVdoesVoutlineVreasonsVwhyVworkersVworkVlongerVhoursVtoVincreaseVtheirV
wageVearnings,VorVwhyVfirmsVseekVprofitVasVtheirVincentive.VButVEconomicsValsoVexplainsVwhyVaVterminall
yVillVcancerVpatientVmightVoptVforVpainVmedicationVasVopposedVtoVcontinuedVchemotherapy/radiation,VorVw
hyVsomeoneVnoVlongerVinVtheVworkforceVwantsVtoVgoVtoVcollegeVandVattainVaVBachelor’sVdegree,VinVtheir
VsheerVpleasureVofVlearningVandVunderstanding.VStressingVtheVsocialVpartVofVourVscienceVnowVwillVhelpVlat
erVwhenVrelatingVdetailsVtoVtheVoverallVbiggerVpictureV(especiallyVwhenVtimeVlaterVinVtheVsemesterVseemsV
scarce,VnoVpunVintended!).
TheVdefinitionVinVtheVtext:V“EconomicsVisVtheVsocialVscienceVthatVstudiesVtheVchoicesVthatVindividuals,Vb
usinesses,Vgovernments,VandVsocietiesVmakeVasVtheyVcopeVwithVscarcityVandVtheVincentivesVthatVinfluenceV
andVreconcileVtheseVchoices,”VisVaVmodernVlanguageVversionVofVLionelVRobbinsVfamousVdefinition,V“Econ
omicsVisVtheVscienceVwhichVstudiesVhumanVbehaviourVasVaVrelationshipVbetweenVendsVandVscarceVmeansVt
hatVhaveValternativeVuses.”
OtherVdefinitionsVincludeVthoseVofVKeynesVandVMarshall:
JohnVMaynardVKeynes:V“TheVtheoryVofVeconomicsVdoesVnotVfurnishVaVbodyVofVsettledVconclusionsVi
mmediatelyVapplicableVtoVpolicy.VItVisVaVmethodVratherVthanVaVdoctrine,VanVapparatusVofVtheVmind,VaVtec
hniqueVofVthinking,VwhichVhelpsVitVpossessorsVtoVdrawVcorrectVconclusions.”
CopyrightV©V2016VPearsonVCanada
VInc.
, WHATV ISV ECONVOMVIC 3
S?V
AlfredVMarshall:V“EconomicsVisVaVstudyVofVmankindVinVtheVordinaryVbusinessVofVlife;VitVexamine
sVthatVpartVofVindividualVandVsocialVactionVwhichVisVmostVcloselyVconnectedVwithVtheVattainmentVandV
withVtheVuseVofVtheVmaterialVrequisitesVofVwellbeing.”
II. TwoVBigVEconomicVQuestions
HowVdoVchoicesVwindVupVdeterminingVwhat,Vhow,VandVforVwhomVgoodsVandVservicesVareVp
roduced?
What,VHowVandVForVWhom?
• GoodsVandVservicesVareVtheVobjectsVthatVpeopleVvalueVandVproduceVtoVsatisfyVhumanVwant
s.VWhatVweVproduceVchangesVoverVtime—
todayVweVproduceVmoreVDVDsVandVfewerVvideoVtapesVthanVfiveVyearsVago.
• GoodsVandVservicesVareVproducedVusingVproductiveVresourcesVcalledVfactorsVofVproduction.VThe
seVareVlandV(theV“giftsVofVnature”,VnaturalVresources),VlabourV(theVworkVtimeVandVworkVeffortVp
eopleVdevoteVtoVproduction),VcapitalV(theVtools,Vinstruments,Vmachines,Vbuildings,VandVotherVconst
ructionsVusedVtoVproduceVgoodsVandVservices),VandVentrepreneurshipV(theVhumanVresourceVthatV
organizesVlabour,Vland,VandVcapital).
• TheVqualityVofVlabourVdependsVonVhumanVcapital,VwhichVisVtheVknowledgeVandVskillVthatVp
eopleVobtainVfromVeducation,VworkVexperience,VandVon-the-jobVtraining.
• PeopleVearnVtheirVincomesVbyVsellingVtheVservicesVofVtheVfactorsVofVproductionVtheyVown:VLand
VearnsVrent,VlabourVearnsVwages,VcapitalVearnsVinterest,VandVentrepreneurshipVearnsVprofit.
DoVChoicesVMadeVinVtheVPursuitVofVSelf-InterestValsoVPromoteVtheVSocialVInterest?
• YouVmakeVaVchoiceVinVyourVself-interestVifVyouVthinkVthatVchoiceVisVtheVbestVoneVavailableVforVyou.
• AnVoutcomeVisVinVtheVsocialVinterestVifVitVisVbestVforVsocietyVasVaVwhole.
• CouldVitVbeVpossibleVthatVwhenVeachVofVusVmakesVchoicesVinVourVself-
interest,VtheseVchoicesVareVinVtheVsocialVinterest?
TheVTwoVBigVEconomicVQuestionsV Don’tVskipVtheVquestions.VOpenVyourVstudents’VeyesVtoVeconomicVinVth
eVworldVaroundVthem.VAskVthemVtoVbringVaVnewspaperVtoVclassVandVtoVidentifyVheadlinesVthatVdealVwith
VstoriesVaboutVWhat,VHow,VandVForVWhom.VUseVEconomicsVinVtheVNewsVTodayVonVyourVMyEconLabVWeb
VsiteVforVaVcurrentVnewsVitemVandVforVanVarchiveVofVpastVitemsV(withVquestions).VPoseVquestionsVbutVhol
dVoffVonVtheVanswersVlettingVthemVknowVthatV“weVcanVhaveVaVmuchVmoreVfruitfulVdiscussionVwhenVourV
toolboxVisVfull.”VRemindVthemVthatVthisVcourseVisVaboutVlearningVsimpleVeconomicVmodelsVthatVprovideVt
oolsVtoVseekVanswersVtoVcomplexVissues.
StudentsV(andVothers!)VoftenVtakeVtheVanswersVtoVtheVwhat,Vhow,VandVforVwhomVquestionsVforVgranted.VF
orVinstance,VmostVofVtheVtimeVweVdoVnotVbotherVtoVwonderV“HowVdoesVourVeconomyVdetermineVhowVma
nyVlightVbulbs,Vautomobiles,VandVpizzasVtoVproduce?”V(what),VorV“WhyVdoesVharvestingVwheatVfromVaVplo
tVofVlandVinVIndiaVoccurVwithVhundredsVofVlabourersVtoilingVwithVoxenVpullingVthreshingVmachines,Vwhile
VinVCanada,VaVsingleVfarmerVlisteningVtoVaVGarthVBrooksVCDVandVsittingVinVanVair-
conditionedVcabVofVaV$500,000VmachineVharvestsVtheVsameVquantityVofVwheatVfromVtheVsameVsizedVplotV
ofVland?”V(how),VorV“WhyVisVtheVannualVincomeVofVanVinspiringVandVeffectiveVgradeVschoolVteacherVmuc
hVlessVthanVthatVofVanVaverageVmajor-
leagueVbaseballVplayer?”V(forVwhom).VExplainingVtheVanswersVtoVtheseVtypesVofVquestionsVandVdetermining
VwhetherVtheVanswersVareVinVtheVsocialVinterestVisVaVmajorVpartVofVmicroeconomics.
FigureV1.1VinVtheVtextbookV“TrendsVinVWhatVWeVProduce”VtiesVinVnicelyVwithVChapterV2’sVdiscussionVonVt
heVPPF.
FigureV1.1ValsoVlinksVtheVthreeVquestionsVofVwhat,Vhow,VandVforVwhomVnicelyVtoVtheVcomponentVpartsVofVt
hose
CopyrightV©V2016VPearsonVCanada
VInc.
, 4 CHAPTE R V
1
questions:VgoodsVandVservices,VfactorsVofVproductionV(land,Vlabour,Vcapital,Ventrepreneurship),VandVincomes
VthatVfactorsVofVproductionVearnV(rent,Vwages,Vinterest,VandVprofit).
• WeVcanVexamineVwhetherVtheVself-interestedVchoicesVserveVtheVsocialVinterestVforVaVvarietyVtopics:
• Globalization:VBuyingVanViPodVallowsVworkersVoverseasVtoVearnVaVwageVandVprovideVforVfamily
• Information-
AgeVMonopolies:VAnV absenceVofVcompetitionVleadsVtoVpricesVfarVaboveVth
eVcostVofVproduction
• ClimateVChange:VCarbonVdioxideVemissionsVledVtoVhigherVglobalVtemperaturesVandVclimateVchange
• EconomicVinstability:VVolatilityVandVriskVinVfinancialVmarketsVleadsVtoVfewerVloansVandVle
ssVlendingVavailable
III. EconomicVWayVofVThinking
ScarcityVrequiresVchoicesVandVchoicesVcreateVtradeoffs.
WhatVisVtheVdifferenceVbetweenVscarcityVandVpoverty?VAskVtheVstudentsVwhyVtheyVhaven’tVyetVattainedVallV
ofVtheirVpersonalVgoals.VOneVreasonVwillVbeVthatVtheyVlackVsufficientVmoney.VAskVthemVifVtheyVcouldVatta
inVallVofVtheirVgoalsVifVtheyVwereVasVrichVasVBillVGates.VTheyVquicklyVrealizeVthatVtimeVisVaVbigVconstrai
nt—
andVtheVgreatVleveler:VweVallVhaveVonlyV24VhoursVinVaVday.VTheyVhaveVstumbledVonVtheVfactVthatVscarcit
y,VwhichVevenVBillVGatesVfaces,VisVnotVpoverty.
AVChoiceVisVaVTradeoff
• AVtradeoffVisVanVexchange—givingVupVoneVthingVtoVgetVanother.
• WhateverVchoiceVyouVmake,VyouVcouldVhaveVchosenVsomethingVelse.
VirtuallyVeveryVchoiceVthatVcanVbeVthoughtVofVinvolvesVaVtradeoff.VPresentingVaVfewVofVtheVfollowingVas
VexamplesVcanVhelpVyourVclassVbetterVappreciateVthisVkeyVpoint:
• ConsumptionVandVsavings:VIfVsomeoneVdecidesVtoVsaveVmoreVofVhisVorVherVincome,VsavingsVcan
VbeVfunneledVthroughVtheVfinancialVsystemVtoVfinanceVbusinessesVnewVcapitalVpurchases.VAsVaVsoc
iety,VweVtradeVoffVcurrentVconsumptionVforVeconomicVgrowthVandVhigherVfutureVconsumption.
• EducationVandVtraining:VAVstudentVremainingVinVschoolVforVanotherVtwoVyearsVtoVcompleteVa
VdegreeVwillVneedVtoVforgoVaVsignificantVamountVofVleisureVtime.VButVbyVdoingVso,VheVorVshe
VwillVbeVbetterVeducatedVandVwillVbeVmoreVproductive.VAsVaVsociety,VweVtradeVoffVcurrentVpro
ductionVforVgreaterVfutureVproduction.
• ResearchVandVdevelopment:VFactoryVautomationVbringsVgreaterVproductivityVinVtheVfuture,Vb
utVmeansVsmallerVcurrentVproduction.VAsVaVsociety,VweVtradeVoffVcurrentVproductionVforVgreat
erVfutureVproduction.
MakingVaVRationalVChoice
• AVrationalVchoiceVisVoneVthatVcomparesVcostsVandVbenefitsVandVachievesVtheVgreatestVbenefitV
overVcostVforVtheVpersonVmakingVtheVchoice.
• ButVhowVdoVpeopleVchooseVrationally?VWhyVdoVmoreVpeopleVchooseVanViPodVratherVthanVaVZu
ne?VWhyVhasVtheVCanadianVgovernmentVchosenVtoVbuildVaVnationalVhighwayVsystemVandVnotVa
VnationalVhigh-speedVrailVsystem?VTheVanswersVturnVonVcomparingVbenefitsVandVcosts.
Benefit:VWhatVyouVGain
• TheVbenefitVofVsomethingVisVtheVgainVorVpleasureVthatVitVbringsVandVisVdeterminedVbyVprefe
rences—byVwhatVaVpersonVlikesVandVdislikesVandVtheVintensityVofVthoseVfeelings.
• SomeVbenefitsVareVlargeVandVeasyVtoVidentify,VsuchVasVtheVbenefitVthatVyouVgetVfromVbeingVinVsc
hool.VMuchVofVthatVbenefitVisVtheVadditionalVgoodsVandVservicesVthatVyouVwillVbeVableVtoVenjoyV
withVtheVboostVtoVyourVearningVpowerVwhenVyouVgraduate.
CopyrightV©V2016VPearsonVCanada
VInc.
