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Chapter
1 | What is economics? |

Chapter Key Ideas
Understand our Ever-Changing World
A. Economics is the science of choice. It gives us valuable insight into how we can best deal with the challenges and opportunities that we all face.
1. Our global economy allows technological changes to bring affordable, innovative products andservices to consumers around the world.
2. Our global economy also allows the repercussions from a single terrorist act or the poor economic policies of a single nation to spread economic hardship worldwide.
B. This makes for a life that is rich with problems to be tackled and choices to be understood. A course in economics can help students to understand the powerful forces that shape and changeour world.
Outline
I. Definition of Economics
A. Economic questions arise because we face scarcity—we all want more than we can get.
1. Because we are unable to satisfy all of our wants, we must make choices.
2. Incentives are the rewards that encourage us, or the penalties that discourage us, from taking an action. The incentives that we face will influence the choices that we make whendealing with scarcity.
B. 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. It can be divided into two areas of study:
1. Microeconomics is the study of the choices individuals and businesses make, the way those choices interact in themarkets, and the influence of governments.
2. Macroeconomics is the study of the performance of the national economy and the global economy.
II. Two Big Economics Questions
A. The first big question is “How do choices end up determining what, how and for whom are goods and services produced?
1. What goods and services are produced in our economy?
a) Goods and services are the objects thatpeople value and produce to satisfy human wants.
b) Figure 1.1 shows the trends in what the U.S. economy has produced over the past 60 years. It shows the decline of agriculture, mining, construction, and manufacturing goods, and the expansion of services.
2. How are goods and services produced?
a) Factors of production are the productive resources used to produce goods and services. These includeland (natural resources), labor (the work time and work effort of people), capital (tools, instruments, and machines that are used to produce goods and services), and entrepreneurship (the human resource that organizes land, labor, and capital).
b) The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, work experience, and on-the-jobtraining. Figure 1.2 shows how the level of human capital (measured by educational attainment) in the United States has increased over the past century.
3. For whom are goods and services produced?
a) Who gets to consume the goods and services that are produced depends on the incomes that people earn.
b) Owners of the factors of production earn income, which is a monetary return for using theresources for production: Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit.
c) In the United States, labor earns the largest share of all income (70 percent), but this income is not distributed equally across the population.
B. The second big question is “When is the pursuit of self-interest also in the social interest?”
1. People make choices intheir own self-interest—they make choices they think are best for their own well-being.
a) The incentives surrounding an individual’s choice amongst available alternatives influence the tradeoffs involved in making that choice.
b) The choice made by one individual changes the incentives surrounding the tradeoffs facing other individuals, which influences their choices.
c) In this way, many...
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