1 WHAT IS ECONOMICS?
The Big Pi ctur e
Where we are going:
After completing Chapter 1, the student will have a good sense for the range of questions that
economics addresses and will be on the path towards an economic way of thinking. The students
will begin to think of cost as a forgone alternative—an opportunity cost—and also about making
choices by balancing marginal costs and marginal benefits.
Chapter 2 reinforces the central themes of Chapter 1 by laying out a core economic model, the
production possibilities frontier (PPF), and using it to illustrate the concepts of tradeoff and
opportunity cost. Chapter 2 also provides a deeper explanation, again with a model, of the concepts
of marginal cost and marginal benefit, beginning with the concept of efficiency, and concluding
with a review of the source of the gains from specialization and exchange.
New in the N i n t h E d i t i o n
This chapter is streamlined and more quickly addresses basic economic thought. It is not one to
gloss over as it lays down an important foundation that can be drawn from as you move through
more specific applications later. This edition presents only four issues that juxtapose private interest
and social interest: globalization; the information-age economy; global warming; and economic
instability (and the potential end to the “Great Moderation. Students relate well to the section on
self-interest and social interest, which introduces issues of efficiency and fairness and is great for
class discussion. Economics in the News covers current issues including Facebook and Mark
Zuckerberg’s vision to have the Internet available to the whole world..
Copyright © 2016 Pearson Canada Inc.
,2 CHAPTE R 1
Lecture Notes
What Is Economics?
I. Definition of Economics
• Economic questions arise because we always want more than we can get, so we face scarcity, the inability
to satisfy all our wants. Everyone faces scarcity because no one can satisfy all of his or her wants.
• Scarcity forces us to make choices over the available alternative. The choices we make depend on
incentives, a reward that encourages a choice or a penalty that discourages a choice.
Bill Gates and Warren Buffet are among the wealthiest businessmen. Do they face scarcity? According to The Wall
Street Journal, both men are ardent bridge players, yet they have never won one of the many national bridge
tournaments they have entered as a team. They can easily afford the best bridge coaches in the world, but they don’t
allocate enough time to practicing as much as they would need to win. They face scarcity (of time) and must choose
how to spend their time.
Economics
• Economics is the social science that studies the choices that individuals, businesses, governments, and
entire societies make when they cope with scarcity and the incentives that influence and reconcile those
choices.
• Economists work to understand when the pursuit of self-interest advances the social interest
• Economics is divided into microeconomics and macroeconomics:
• Microeconomics is the study of the choices that individuals and businesses make, the way these
choices interact in markets, and the influence of governments.
• Macroeconomics is the study of the performance of the national economy and the global
economics.
On the first day do a “pop quiz.” Have your students write on paper the answer to “What is Economics?” Reassure
them that this is their opinion since it is the first day. You will find most of the answers focused around money
and/or business. Stress that Economics is a social science, a study of human behaviour given the scarcity problem.
All too often first-time students (especially business students) think that Economics is just about making money.
Certainly, the discipline can and does outline reasons why workers work longer hours to increase their wage
earnings, or why firms seek profit as their incentive. But Economics also explains why a terminally ill cancer patient
might opt for pain medication as opposed to continued chemotherapy/radiation, or why someone no longer in the
workforce wants to go to college and attain a Bachelor’s degree, in their sheer pleasure of learning and
understanding. Stressing the social part of our science now will help later when relating details to the overall bigger
picture (especially when time later in the semester seems scarce, no pun intended!).
The definition in the text: “Economics is the social science that studies the choices that individuals, businesses,
governments, and societies make as they cope with scarcity and the incentives that influence and reconcile these
choices,” is a modern language version of Lionel Robbins famous definition, “Economics is the science which
studies human behaviour as a relationship between ends and scarce means that have alternative uses.”
Other definitions include those of Keynes and Marshall:
John Maynard Keynes: “The theory of economics does not furnish a body of settled conclusions immediately
applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which
helps it possessors to draw correct conclusions.”
Copyright © 2016 Pearson Canada Inc.
, W HAT IS ECON OM ICS? 3
Alfred Marshall: “Economics is a study of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with the attainment and with the use of the material
requisites of wellbeing.”
II. Two Big Economic Questions
How do choices wind up determining what, how, and for whom goods and services are
produced?
What, How and For Whom?
• Goods and services are the objects that people value and produce to satisfy human wants. What we
produce changes over time—today we produce more DVDs and fewer video tapes than five years ago.
• Goods and services are produced using productive resources called factors of production. These are
land (the “gifts of nature”, natural resources), labour (the work time and work effort people devote to
production), capital (the tools, instruments, machines, buildings, and other constructions used to produce
goods and services), and entrepreneurship (the human resource that organizes labour, land, and capital).
• The quality of labour depends on human capital, which is the knowledge and skill that people obtain
from education, work experience, and on-the-job training.
• People earn their incomes by selling the services of the factors of production they own: Land earns rent,
labour earns wages, capital earns interest, and entrepreneurship earns profit.
Do Choices Made in the Pursuit of Self-Interest also Promote the Social Interest?
• You make a choice in your self-interest if you think that choice is the best one available for you.
• An outcome is in the social interest if it is best for society as a whole.
• Could it be possible that when each of us makes choices in our self-interest, these choices are in the social
interest?
The Two Big Economic Questions Don’t skip the questions. Open your students’ eyes to economic in the world
around them. Ask them to bring a newspaper to class and to identify headlines that deal with stories about What,
How, and For Whom. Use Economics in the News Today on your MyEconLab Web site for a current news item and
for an archive of past items (with questions). Pose questions but hold off on the answers letting them know that “we
can have a much more fruitful discussion when our toolbox is full.” Remind them that this course is about learning
simple economic models that provide tools to seek answers to complex issues.
Students (and others!) often take the answers to the what, how, and for whom questions for granted. For instance,
most of the time we do not bother to wonder “How does our economy determine how many light bulbs,
automobiles, and pizzas to produce?” (what), or “Why does harvesting wheat from a plot of land in India occur with
hundreds of labourers toiling with oxen pulling threshing machines, while in Canada, a single farmer listening to a
Garth Brooks CD and sitting in an air-conditioned cab of a $500,000 machine harvests the same quantity of wheat
from the same sized plot of land?” (how), or “Why is the annual income of an inspiring and effective grade school
teacher much less than that of an average major-league baseball player?” (for whom). Explaining the answers to
these types of questions and determining whether the answers are in the social interest is a major part of
microeconomics.
Figure 1.1 in the textbook “Trends in What We Produce” ties in nicely with Chapter 2’s discussion on the PPF.
Figure 1.1 also links the three questions of what, how, and for whom nicely to the component parts of those
Copyright © 2016 Pearson Canada Inc.
, 4 CHAPTE R 1
questions: goods and services, factors of production (land, labour, capital, entrepreneurship), and incomes that
factors of production earn (rent, wages, interest, and profit).
• We can examine whether the self-interested choices serve the social interest for a variety topics:
• Globalization: Buying an iPod allows workers overseas to earn a wage and provide for family
• Information-Age Monopolies: An absence of competition leads to prices far
above the cost of production
• Climate Change: Carbon dioxide emissions led to higher global temperatures and climate change
• Economic instability: Volatility and risk in financial markets leads to fewer loans and less lending
available
III. Economic Way of Thinking
Scarcity requires choices and choices create tradeoffs.
What is the difference between scarcity and poverty? Ask the students why they haven’t yet attained all of their
personal goals. One reason will be that they lack sufficient money. Ask them if they could attain all of their goals if
they were as rich as Bill Gates. They quickly realize that time is a big constraint—and the great leveler: we all have
only 24 hours in a day. They have stumbled on the fact that scarcity, which even Bill Gates faces, is not poverty.
A Choice is a Tradeoff
• A tradeoff is an exchange—giving up one thing to get another.
• Whatever choice you make, you could have chosen something else.
Virtually every choice that can be thought of involves a tradeoff. Presenting a few of the following as examples can
help your class better appreciate this key point:
• Consumption and savings: If someone decides to save more of his or her income, savings can be funneled
through the financial system to finance businesses new capital purchases. As a society, we trade off current
consumption for economic growth and higher future consumption.
• Education and training: A student remaining in school for another two years to complete a degree will
need to forgo a significant amount of leisure time. But by doing so, he or she will be better educated and
will be more productive. As a society, we trade off current production for greater future production.
• Research and development: Factory automation brings greater productivity in the future, but means
smaller current production. As a society, we trade off current production for greater future production.
Making a Rational Choice
• A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for
the person making the choice.
• But how do people choose rationally? Why do more people choose an iPod rather than a Zune? Why has
the Canadian government chosen to build a national highway system and not a national high-speed rail
system? The answers turn on comparing benefits and costs.
Benefit: What you Gain
• The benefit of something is the gain or pleasure that it brings and is determined by preferences—by
what a person likes and dislikes and the intensity of those feelings.
• Some benefits are large and easy to identify, such as the benefit that you get from being in school. Much of
that benefit is the additional goods and services that you will be able to enjoy with the boost to your earning
power when you graduate.
Copyright © 2016 Pearson Canada Inc.
The Big Pi ctur e
Where we are going:
After completing Chapter 1, the student will have a good sense for the range of questions that
economics addresses and will be on the path towards an economic way of thinking. The students
will begin to think of cost as a forgone alternative—an opportunity cost—and also about making
choices by balancing marginal costs and marginal benefits.
Chapter 2 reinforces the central themes of Chapter 1 by laying out a core economic model, the
production possibilities frontier (PPF), and using it to illustrate the concepts of tradeoff and
opportunity cost. Chapter 2 also provides a deeper explanation, again with a model, of the concepts
of marginal cost and marginal benefit, beginning with the concept of efficiency, and concluding
with a review of the source of the gains from specialization and exchange.
New in the N i n t h E d i t i o n
This chapter is streamlined and more quickly addresses basic economic thought. It is not one to
gloss over as it lays down an important foundation that can be drawn from as you move through
more specific applications later. This edition presents only four issues that juxtapose private interest
and social interest: globalization; the information-age economy; global warming; and economic
instability (and the potential end to the “Great Moderation. Students relate well to the section on
self-interest and social interest, which introduces issues of efficiency and fairness and is great for
class discussion. Economics in the News covers current issues including Facebook and Mark
Zuckerberg’s vision to have the Internet available to the whole world..
Copyright © 2016 Pearson Canada Inc.
,2 CHAPTE R 1
Lecture Notes
What Is Economics?
I. Definition of Economics
• Economic questions arise because we always want more than we can get, so we face scarcity, the inability
to satisfy all our wants. Everyone faces scarcity because no one can satisfy all of his or her wants.
• Scarcity forces us to make choices over the available alternative. The choices we make depend on
incentives, a reward that encourages a choice or a penalty that discourages a choice.
Bill Gates and Warren Buffet are among the wealthiest businessmen. Do they face scarcity? According to The Wall
Street Journal, both men are ardent bridge players, yet they have never won one of the many national bridge
tournaments they have entered as a team. They can easily afford the best bridge coaches in the world, but they don’t
allocate enough time to practicing as much as they would need to win. They face scarcity (of time) and must choose
how to spend their time.
Economics
• Economics is the social science that studies the choices that individuals, businesses, governments, and
entire societies make when they cope with scarcity and the incentives that influence and reconcile those
choices.
• Economists work to understand when the pursuit of self-interest advances the social interest
• Economics is divided into microeconomics and macroeconomics:
• Microeconomics is the study of the choices that individuals and businesses make, the way these
choices interact in markets, and the influence of governments.
• Macroeconomics is the study of the performance of the national economy and the global
economics.
On the first day do a “pop quiz.” Have your students write on paper the answer to “What is Economics?” Reassure
them that this is their opinion since it is the first day. You will find most of the answers focused around money
and/or business. Stress that Economics is a social science, a study of human behaviour given the scarcity problem.
All too often first-time students (especially business students) think that Economics is just about making money.
Certainly, the discipline can and does outline reasons why workers work longer hours to increase their wage
earnings, or why firms seek profit as their incentive. But Economics also explains why a terminally ill cancer patient
might opt for pain medication as opposed to continued chemotherapy/radiation, or why someone no longer in the
workforce wants to go to college and attain a Bachelor’s degree, in their sheer pleasure of learning and
understanding. Stressing the social part of our science now will help later when relating details to the overall bigger
picture (especially when time later in the semester seems scarce, no pun intended!).
The definition in the text: “Economics is the social science that studies the choices that individuals, businesses,
governments, and societies make as they cope with scarcity and the incentives that influence and reconcile these
choices,” is a modern language version of Lionel Robbins famous definition, “Economics is the science which
studies human behaviour as a relationship between ends and scarce means that have alternative uses.”
Other definitions include those of Keynes and Marshall:
John Maynard Keynes: “The theory of economics does not furnish a body of settled conclusions immediately
applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which
helps it possessors to draw correct conclusions.”
Copyright © 2016 Pearson Canada Inc.
, W HAT IS ECON OM ICS? 3
Alfred Marshall: “Economics is a study of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with the attainment and with the use of the material
requisites of wellbeing.”
II. Two Big Economic Questions
How do choices wind up determining what, how, and for whom goods and services are
produced?
What, How and For Whom?
• Goods and services are the objects that people value and produce to satisfy human wants. What we
produce changes over time—today we produce more DVDs and fewer video tapes than five years ago.
• Goods and services are produced using productive resources called factors of production. These are
land (the “gifts of nature”, natural resources), labour (the work time and work effort people devote to
production), capital (the tools, instruments, machines, buildings, and other constructions used to produce
goods and services), and entrepreneurship (the human resource that organizes labour, land, and capital).
• The quality of labour depends on human capital, which is the knowledge and skill that people obtain
from education, work experience, and on-the-job training.
• People earn their incomes by selling the services of the factors of production they own: Land earns rent,
labour earns wages, capital earns interest, and entrepreneurship earns profit.
Do Choices Made in the Pursuit of Self-Interest also Promote the Social Interest?
• You make a choice in your self-interest if you think that choice is the best one available for you.
• An outcome is in the social interest if it is best for society as a whole.
• Could it be possible that when each of us makes choices in our self-interest, these choices are in the social
interest?
The Two Big Economic Questions Don’t skip the questions. Open your students’ eyes to economic in the world
around them. Ask them to bring a newspaper to class and to identify headlines that deal with stories about What,
How, and For Whom. Use Economics in the News Today on your MyEconLab Web site for a current news item and
for an archive of past items (with questions). Pose questions but hold off on the answers letting them know that “we
can have a much more fruitful discussion when our toolbox is full.” Remind them that this course is about learning
simple economic models that provide tools to seek answers to complex issues.
Students (and others!) often take the answers to the what, how, and for whom questions for granted. For instance,
most of the time we do not bother to wonder “How does our economy determine how many light bulbs,
automobiles, and pizzas to produce?” (what), or “Why does harvesting wheat from a plot of land in India occur with
hundreds of labourers toiling with oxen pulling threshing machines, while in Canada, a single farmer listening to a
Garth Brooks CD and sitting in an air-conditioned cab of a $500,000 machine harvests the same quantity of wheat
from the same sized plot of land?” (how), or “Why is the annual income of an inspiring and effective grade school
teacher much less than that of an average major-league baseball player?” (for whom). Explaining the answers to
these types of questions and determining whether the answers are in the social interest is a major part of
microeconomics.
Figure 1.1 in the textbook “Trends in What We Produce” ties in nicely with Chapter 2’s discussion on the PPF.
Figure 1.1 also links the three questions of what, how, and for whom nicely to the component parts of those
Copyright © 2016 Pearson Canada Inc.
, 4 CHAPTE R 1
questions: goods and services, factors of production (land, labour, capital, entrepreneurship), and incomes that
factors of production earn (rent, wages, interest, and profit).
• We can examine whether the self-interested choices serve the social interest for a variety topics:
• Globalization: Buying an iPod allows workers overseas to earn a wage and provide for family
• Information-Age Monopolies: An absence of competition leads to prices far
above the cost of production
• Climate Change: Carbon dioxide emissions led to higher global temperatures and climate change
• Economic instability: Volatility and risk in financial markets leads to fewer loans and less lending
available
III. Economic Way of Thinking
Scarcity requires choices and choices create tradeoffs.
What is the difference between scarcity and poverty? Ask the students why they haven’t yet attained all of their
personal goals. One reason will be that they lack sufficient money. Ask them if they could attain all of their goals if
they were as rich as Bill Gates. They quickly realize that time is a big constraint—and the great leveler: we all have
only 24 hours in a day. They have stumbled on the fact that scarcity, which even Bill Gates faces, is not poverty.
A Choice is a Tradeoff
• A tradeoff is an exchange—giving up one thing to get another.
• Whatever choice you make, you could have chosen something else.
Virtually every choice that can be thought of involves a tradeoff. Presenting a few of the following as examples can
help your class better appreciate this key point:
• Consumption and savings: If someone decides to save more of his or her income, savings can be funneled
through the financial system to finance businesses new capital purchases. As a society, we trade off current
consumption for economic growth and higher future consumption.
• Education and training: A student remaining in school for another two years to complete a degree will
need to forgo a significant amount of leisure time. But by doing so, he or she will be better educated and
will be more productive. As a society, we trade off current production for greater future production.
• Research and development: Factory automation brings greater productivity in the future, but means
smaller current production. As a society, we trade off current production for greater future production.
Making a Rational Choice
• A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for
the person making the choice.
• But how do people choose rationally? Why do more people choose an iPod rather than a Zune? Why has
the Canadian government chosen to build a national highway system and not a national high-speed rail
system? The answers turn on comparing benefits and costs.
Benefit: What you Gain
• The benefit of something is the gain or pleasure that it brings and is determined by preferences—by
what a person likes and dislikes and the intensity of those feelings.
• Some benefits are large and easy to identify, such as the benefit that you get from being in school. Much of
that benefit is the additional goods and services that you will be able to enjoy with the boost to your earning
power when you graduate.
Copyright © 2016 Pearson Canada Inc.
