Chapter 1: What is economics?Definitions -Economics is the social science that studies the choices that individuals, businesses, governments and entire societies make when they cope with scarcity and the incentivesthat influence and reconcile those choices-Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.-Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses.What makes these definitions suitable? Each has the following elements: study, chooses, scarce resources. The Problem of Scarcity- Scarcity is the condition in which human wants are forever greater than available supply time, goods, and resources needed to satisfy those wants. Without scarcity there would be no need to study economics. There will always be scarcity because someone will always want more than what they have. Economics looks at desires. Humans routinely want more,at any point in time we can only produce/provide a certain amount of those things. -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. 1Scarce Resources and Production Resources or factors of production are the basic categories of inputs used to produce goods and services. - Land: any natural resources provided by nature. Undeveloped land, trees, etc… - Labor: The mental and physical capacity of workers to produce goods and services. Any human exertion that goes into the production. - Capital: The physical plants, machinery, and equipment used to produce other goods. Capital goods are human-made goods that do not directly satisfy human wants. Capital is something that is produced that is long lasting and is used again and again in the production process. o Human Capital- Human knowledge and information and experience used in the production process. 2 Entrepreneurship: The creative ability of individuals to seek profits by combining resources to produce goods and services. Starting the business, running the business and accepting the risks.  ** Adam Smith Land Labor Capital↓ ↓ ↓Entrepreneurship Organizes resources to produce goods andservices Financial Capital is the money value of paper assets, such as stocks, bonds, or deed to ahouse. Financial capital by itself is not productive; instead, it is only a paper claim on economic capital. Money is not a resource in this context. 3Economics is generally divided into two main branches: -Microeconomics is the study of the choices individuals and businesses make, the way those choices interact in the markets, and the influence of governments. Look solely at your own concerns and assume all other effects are not important. -Macroeconomics is the study of the performance of the national economy and the global economy. Allow all markets and sectors to simultaneously interact with one another. 4Two Big Economic QuestionsA. How do choices wind up determining what, how, and for whom goods and services are produced?  This question is generally referred to as the “Three Fundamental Economic Questions” that all economies must answer.1. What to Produce? -Goods and services are the objects that people value and produce to satisfy human wants. What we produce changes over time.-How is this determined in a market economy?2. How to Produce? -Goods and services are produced using the factors of production (land, labor, capital, and entrepreneurship). -How is this determined in a market economy?3. For Whom to Produce? -Land earns rent labor earns wages capital earns interest and entrepreneurship earns profit. -How is this determined in a market economy?5B. When is the pursuit of self-interest in the social interest?-People make choices in their self-interest. -Choices that are the best for society as a whole are said to be in the social interest.When people pursue their own self-interest, is it possible that these choices are also in the social interest?6We can examine whether the self-interested choices serve the social interest for a variety topics. For example,-Privatization: fall of socialism in Europe-Globalization: Local impact of expanding of international trade -“New” Economy: Technological revolution forces change-Post 9-11 economy: terror changes business travel and vacation habits -Corporate Scandals-HIV/AIDS: Poorest countries worst hit, lack available drugs -Disappearing Tropical Rainforests-Water shortages-Unemployment-Deficits and Debts7Below are institutions essential in an economy to align self-interest in a way that economic activity will lead to the social interest.- Property Rights that are enforceable by a system of laws to protect them- A dependable and non-corrupt Legal System - A stable political system with a non-corrupt government- Competitive and Open Markets that enable voluntary exchange 8Economic Way of ThinkingScarcity requires choices and choices create tradeoffs A tradeoff is an exchange—giving up one thing to get another. The answers to the fundamental questions of economics all involve tradeoffs. For example,-Government redistribution of income plays a role in answering “for whom” goods and services are produced, but redistribution confronts society with the tradeoff between equity and efficiency. Taxing productive workers lessens their incentives to work and transferring funds to low income people blunts their incentives to work. ON Seeing choices as tradeoffs shows there is an opportunity cost of a choice.-Opportunity Cost is the best alternative sacrificed for a chosen alternative Marginal Analysis is an examination of the effects of additions to or subtractions from a current situation.-Choosing at the Margin or making choices at the margin means looking at the trade-offsthat arise from making small changes in an activity. -When pay goes down, average hours worked goes down. As a result the amount of products goes down and consumption is lowered and the entire economy slows down. 9Responding to Incentives-Changes in marginal benefits and marginal costs alter the incentives that we face when making choices. When incentives change, people’s decisions change.-Economics is a Social Science that follows a standard scientific method.The Scientific