Getting Started 1
© 2015 Pearson
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
1.1 DEFINITION AND QUESTIONS
4 Government Budget Deficit and Debt
Every year since 2001, the U.S. government has
run a budget deficit─on average, $1.6 billion a day.
The government’s debt has increased each day by
that amount.
Over the 12 year period from 2002 to 2013,
government debt increased by $6.85 trillion.
Your personal share of this debt is $22,000.
This large deficit and debt is just the beginning of an
even bigger problem.
© 2015 Pearson
1.1 DEFINITION AND QUESTIONS
From about 2020 onwards, the retirement and health-
care benefits to which older Americans are entitled are
going to cost increasingly more than taxes can cover.
With no changes in tax or benefit rates, the budget
deficit will increase and the debt will swell ever higher.
Debts must be repaid. Who will repay them?
When we make our voter choices, we pursue our self-
interest. Do our choices serve the social interest?
Do the choices made by politicians promote the social
interest, or do they serve their self-interests?
© 2015 Pearson
1.2 THE ECONOMIC WAY OF THINKING
Economic Ideas:
• Choice is a tradeoff
• Cost is what you must give up to get something
• Benefit is what you gain from something
• People make rational choices by comparing
benefits and costs
• Choices respond to incentives
© 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