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Chapter 1 Lecture Notes

1) Scarcity arises because human wants exceed limited resources, forcing choices about what to produce. Economics studies how individuals and societies cope with scarcity. 2) Economics can be divided into microeconomics, which studies individual and business choices, and macroeconomics, which studies aggregate effects on national and global economies. 3) A key question is whether choices made in self-interest also promote social interests, such as in cases of globalization, technology development, and responses to climate change.

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Ayesha Tabassum
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106 views17 pages

Chapter 1 Lecture Notes

1) Scarcity arises because human wants exceed limited resources, forcing choices about what to produce. Economics studies how individuals and societies cope with scarcity. 2) Economics can be divided into microeconomics, which studies individual and business choices, and macroeconomics, which studies aggregate effects on national and global economies. 3) A key question is whether choices made in self-interest also promote social interests, such as in cases of globalization, technology development, and responses to climate change.

Uploaded by

Ayesha Tabassum
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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1.

1 DEFINITION AND QUESTIONS

All economic questions and problems arise because


human wants exceed the resources available to satisfy
them.
Scarcity
Scarcity is the condition that arises because wants
exceeds the ability of resources to satisfy them.

Faced with scarcity, we must make choices—we must


choose among the available alternatives.

The choices we make depend on the incentives we face.

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

Economics Defined
Economics is the social science that studies the choices
that individuals, businesses, governments, and entire
societies make as they cope with scarcity, the incentives
that influence those choices, and the arrangements that
coordinate them.

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

Economics divides into two parts:


Microeconomics: The study of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the global
economy of the choices that individuals, businesses,
and governments make.

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS
Two big economic questions:
• How do choices determine what, how, and for
whom goods and services get produced?
• When do choices made in self-interest also
promote the social interest?

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

What, How, and For Whom?


Goods and services are the objects (goods) and
actions (services) that people value and produce to
satisfy human wants.
What goods and services get produced and in what
quantities?
How are goods and services produced?
For Whom are the various goods and services
produced?

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

Can the Pursuit of Self-Interest Be in the


Social Interest?
The choices that are best for the individual who
makes them are choices made in the pursuit of
self-interest.
The choices that are best for society as a whole are
choices made in the social interest.

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

Can choices made in self-interest also serve the


social interest?
Let’s illustrate with four topics:

1 Globalization
Globalization—the expansion of international trade
and the production of components and services by
firms in other countries—has been going on for
centuries.

© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

But in recent years, its pace accelerated.


Microchips, satellites, and fiber-optic cables have
lowered the cost of communication.
This explosion of communication has globalized
production decisions.
For example, Nike produces shoes in Malaysia; Toyota
produces cars in the United States.
Globalization is in the interest of the owners of
multinational firms that profit, but is it in the social
interest?
© 2015 Pearson
1.1 DEFINITION AND QUESTIONS

2 The “Information Age”


Makers of computer chips and programs
developed products in their self-interest, but did
they develop their products in the social
interest?
3 Climate Change
The choices we make concerning how to
produce and use energy are made in our self-
interest, but do they serve the social interest?

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

A Choice Is a Tradeoff
Because we face scarcity we must make choices.
To make a choice we select from alternatives.
Whatever choice you make, you could have chosen
something else.
You can think about your choices as tradeoffs.
A tradeoff is an exchange—giving up one thing to get
something else.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Cost: What You Must Give Up


Opportunity cost is the best thing that you must
give up to get something—the highest-valued
alternative forgone.
Benefit: What You Gain
Benefit is the gain or pleasure that something brings.

Benefit is measured by what you are willing to give up.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Rational Choice
A rational choice is a choice that uses the available
resources to best achieve the objective of the person
making the choice.
We make rational choices by comparing costs and
benefits.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

How Much? Choosing at the Margin


A choice made at the margin is a choice made by
comparing all the relevant alternatives systematically
and incrementally.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Marginal Cost
Marginal cost is the opportunity cost of a one-unit increase
in an activity.
The marginal cost of something is what you must give up to
get one additional unit of it.
Marginal Benefit
Marginal benefit is what you gain when you get one more
unit of something.
The marginal benefit of something is measured by what you
are willing to give up to get one additional unit of it.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Making a Rational Choice


You make a rational choice when you take those actions
for which marginal benefit exceeds or equals marginal
cost.

Choices Respond to Incentives


An incentive is a reward or a penalty—a “carrot” or a
“stick”—that encourages or discourages an action.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Economics as Social Science


Economists try to understand and predict the effects of
economic forces by using the scientific method first
developed by physicists.
The scientific method is a common sense way of
systematically checking what works and what doesn’t
work.
An economist begins with a question or a puzzle about
cause and effect arising from some observed facts.

© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING

Economics as Policy Tool


Economics provides a way of approaching problems in
all aspects of our lives:
•Personal
•Business
•Government
Should you take out a student loan?
Is Clayton Kershaw worth $11 million?
How can the government balance its budget?

© 2015 Pearson

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