Principles of Economics
Chapter 1 What is Economics?
A Definition of Economics
Economics is the 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.
Our inability to get everything we want is called scarcity. You cannot get
everything because of a lack of money or time.
Incentives reconcile choices. An incentive is a reward that encourages, or a
penalty that discourages an action.
Economics can be divided in micro- 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 economy.
Two Big Economic Questions
What, how and for whom?
Goods and Services are the objects that people value and produce to satisfy
wants.
Goods and services get produced by using productive resources that economists
call factors of production. Factors of production are grouped in 4 categories:
Land = natural resources (water, air, sunshine).
Labour = the work time and effort that people devote to producing goods
and services.
Capital = machines, buildings, tools, instruments etc.
Entrepreneurship = the human resource that organises labour, land, and
capital.
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.
People earn their incomes by selling the services of the factors of production they
own:
1. Land earns rent.
2. Labour earns wages.
3. Capital earns interest.
4. Entrepreneurship earns profit.
Does the pursuit of self-interest unintentionally promote the social
interest?
A choice is 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 leads to an outcome that is the best for
society as a whole.
Resource use is efficient if it is not possible to make someone better off without
making someone else worse off.
, The Economic Way of Thinking
We’re going to look at 6 key ideas that define the economic way of thinking.
These ideas are:
A choice is a trade-of.
People make rational choices by comparing benefits and costs.
Benefit is what you gain from something.
Cost is what you must give up to get something.
Most choices are ‘how-much’ choices made at the margin.
Choices respond to incentives.
A trade-off is an exchange – giving up one thing to get something else.
A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
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.
The opportunity cost of something is the highest valued alternative that must
be given up to get it. You can only do 1 thing because of a lack of time or money.
To make a decision, you compare the benefit with its cost – you make your choice
at the margin. The benefit that arises from an increase in an activity is called
marginal benefit. The opportunity cost of an increase in an activity is called
marginal cost.
An economic model is a description of some aspect of the economic world that
includes only those features that are needed for the purpose at hand.
Appendix Chapter 1
The origin in a graph is the zero-point of both axes.
A scatter diagram plots the value of one variable against the value of another
variable for a number of different values of each variable. Such a graph reveals
whether a relationship exists between two variables and describes their
relationship.
A relationship in which two variables move in the same direction is called a
positive relationship or a direct relationship. A relationship shown by a
straight line is called a linear relationship.
Chapter 1 What is Economics?
A Definition of Economics
Economics is the 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.
Our inability to get everything we want is called scarcity. You cannot get
everything because of a lack of money or time.
Incentives reconcile choices. An incentive is a reward that encourages, or a
penalty that discourages an action.
Economics can be divided in micro- 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 economy.
Two Big Economic Questions
What, how and for whom?
Goods and Services are the objects that people value and produce to satisfy
wants.
Goods and services get produced by using productive resources that economists
call factors of production. Factors of production are grouped in 4 categories:
Land = natural resources (water, air, sunshine).
Labour = the work time and effort that people devote to producing goods
and services.
Capital = machines, buildings, tools, instruments etc.
Entrepreneurship = the human resource that organises labour, land, and
capital.
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.
People earn their incomes by selling the services of the factors of production they
own:
1. Land earns rent.
2. Labour earns wages.
3. Capital earns interest.
4. Entrepreneurship earns profit.
Does the pursuit of self-interest unintentionally promote the social
interest?
A choice is 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 leads to an outcome that is the best for
society as a whole.
Resource use is efficient if it is not possible to make someone better off without
making someone else worse off.
, The Economic Way of Thinking
We’re going to look at 6 key ideas that define the economic way of thinking.
These ideas are:
A choice is a trade-of.
People make rational choices by comparing benefits and costs.
Benefit is what you gain from something.
Cost is what you must give up to get something.
Most choices are ‘how-much’ choices made at the margin.
Choices respond to incentives.
A trade-off is an exchange – giving up one thing to get something else.
A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
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.
The opportunity cost of something is the highest valued alternative that must
be given up to get it. You can only do 1 thing because of a lack of time or money.
To make a decision, you compare the benefit with its cost – you make your choice
at the margin. The benefit that arises from an increase in an activity is called
marginal benefit. The opportunity cost of an increase in an activity is called
marginal cost.
An economic model is a description of some aspect of the economic world that
includes only those features that are needed for the purpose at hand.
Appendix Chapter 1
The origin in a graph is the zero-point of both axes.
A scatter diagram plots the value of one variable against the value of another
variable for a number of different values of each variable. Such a graph reveals
whether a relationship exists between two variables and describes their
relationship.
A relationship in which two variables move in the same direction is called a
positive relationship or a direct relationship. A relationship shown by a
straight line is called a linear relationship.
