Scarcity our inability to get everything we want forces us to make choices Incentive a reward that encourages an action or a penalty that discourages one Economics 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 Microeconomics the study of the choices that individuals and businesses make the way these choices interact in markets and the influence of governments Ex Why are people downloading more movies Macroeconomics the study of the performance of the national economy and the global economy Ex Why is the U S unemployment rate so high Two key questions in economics How do choices end up determining what how and for whom goods and services are produced Can the choices that people make in the pursuit of their own self interest also promote the broader social interest Goods and Services the objects that people value and produce to satisfy human wants In the US agriculture 1 manufactured goods 22 services 77 What how and for whom Factors of production Land the gifts of nature or natural resources Most are renewable energy resources are not Labor the work time and work effort that people devote to producing goods and services Human capital the knowledge and skill that people obtain from education on the job training and work experience Determines quality of labor Capital the tools instruments machines buildings and other constructions that businesses use to produce goods and services Entrepreneurship the human resource entrepreneurs that organizes labor land and capital People earn their incomes by selling the services of the factors of production they own Land earns rent Labor earns wages Capital earns interest Entrepreneurship earns profit Earns the most income Can the pursuit of self interest promote the social interest Self interest a choice one makes if is the best one available for you Social interest a choice that leads to an outcome that is the best for society as a whole can be efficient or fair Efficiency achieved when the available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit Equity or fairness whatever is fair No clear definition Examples Globalization the expansion of international trade borrowing and lending and investment Globalization is in the self interest of those consumers who buy low cost goods and services produced in other countries But it is not in the self interest of the low wage workers Information revolution the technological change of the past forty years Serves self interest of consumers and producers did not serve social interest because of over pricing and other factors Climate change every person makes self interest decisions that use electricity and power not for the social interest of the Earth Should government enforce incentives to make our self interest match the Earth s social interest Economic instability Banks borrow and lend in their own self interest Is it in the social interest When the Federal Reserve bailed out banks was that in the social interest The economic way of thinking A choice is a tradeoff Tradeoff an exchange giving up one thing to get something else Scarcity forces us to make choices Making a rational choice Rational choice a choice that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice Only the wants of the person making a choice are relevant to determine the rationality Benefit What you gain Benefit the gain or pleasure that it brings and is determined by preferences Preferences what a person likes and dislikes and the intensity of those feelings Economists measure benefit as the most that a person is willing to give up to get something Cost What you MUST give up opportunity cost the highest valued alternative that must be given up to get it Ex Opportunity cost of being in school is all the goods you can t afford and the time you can t enjoy How much Choosing at the margin Marginal benefit the benefit that arises from an increase in an activity Ex Spending one more night studying increases your grade Marginal cost the opportunity cost of an increase in an activity Ex Spending one more night studying costs you a night out with friends To make decisions one must compare marginal benefits and costs Choices respond to incentives Economists believe that incentives are the key to reconciling self interest and social interest Economics as a Social Science Positive Statements A statement about what is currently believed about the way the world works can be wrong or right needs to be tested Ex The planet is warming because of the amount of coal we re burning Normative Statements A statement is about what should be depends on values and cannot be tested Ex We should cut our coal usage in half Unscrambling cause and effect Economic model a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand Economics as a policy adviser Graphing Data Economics provides a method of evaluating alternative solutions by weighing the marginal benefits and costs and finding the solution that makes the best use of resources Economic model a stripped down simplified description of an economy or of a component of an economy such as a business or a household calculating the slope of a curved line At a point Construct a tangent to the arc find the slope of the straight line Ceteris paribus if all other relevant things remain the same