1 WHAT IS ECONOMICS? 2012 Pearson Addison-WesleyYou are studying economics at a time of extraordinary change. Your life will be shaped by the challenges you face and the opportunities that you create. But to face those challenges and seize the opportunities they present, you must understand the powerful forces at play.The economics that youre about to learn will become your most reliable guide. 2012 Pearson Addison-WesleyDefinition of EconomicsAll economic questions arise because we want more than we can get.Our inability to satisfy all our wants is called scarcity.Because we face scarcity, we must make choices.The choices we make depend on the incentives we face.An incentive is a reward that encourages an action or a penalty that discourages an action. 2012 Pearson Addison-WesleyEconomics is 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.Economics divides in to main parts: Microeconomics MacroeconomicsDefinition of Economics 2012 Pearson Addison-WesleyMicroeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.An example of a microeconomic question is: Why are people buying more e-books and fewer hard copy books?Macroeconomics is the study of the performance of the national and global economies.An example of a macroeconomic question is: Why is the unemployment rate in the United States so high?Definition of Economics 2012 Pearson Addison-WesleyTwo Big Economic Questions Two big questions summarize the scope of economics:How do choices end up determining what, how, and for whom goods and services get produced?When do choices made in the pursuit of self-interest also promote the social interest? 2012 Pearson Addison-WesleyWhat, How, and For Whom?Goods and services are the objects that people value and produce to satisfy human wants.What?Agriculture accounts for less than 1 percent of total U.S. production, manufactured goods for 22 percent, and services for 77 percent. In China, agriculture accounts for 11 percent of total production, manufactured goods for 49 percent, and services for 40 percent. Two Big Economic Questions 2012 Pearson Addison-WesleyTwo Big Economic Questions Figure 1.1 shows these numbers for the United States and China. It also shows the numbers for Brazil. What determines these patterns of production?How do choices end up determining the quantity of each item produced in the United States and around the world? 2012 Pearson Addison-Wesley 2012 Pearson Addison-WesleyHow?Goods and services are produced by using productive resources that economists call factors of production.Factors of production are grouped into four categories: Land Labor Capital EntrepreneurshipTwo Big Economic Questions 2012 Pearson Addison-WesleyThe “gifts of nature” that we use to produce goods and services are land.The work time and work effort that people devote to producing goods and services is labor.The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital.The human resource that organizes land, labor, and capital is entrepreneurship.Two Big Economic Questions 2012 Pearson Addison-WesleyFigure 1.2 shows a measure of the growth of human capital in the United States over the last centurythe percentage of the population that has completed different levels of education.Economics explains these trends.Two Big Economic Questions 2012 Pearson Addison-Wesley 2012 Pearson Addison-WesleyFor Whom?Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit.Two Big Economic Questions 2012 Pearson Addison-WesleyCan the Pursuit of Self-Interest Promote the Social Interest?Every day, 311 million Americans and 6.9 billion people in other countries make economic choices that result in What, How, and For Whom goods and services are produced.Do we produce the right things in the right quantities?Do we use our factors of production in the best way?Do the goods and services go to those who benefit most from them?Two Big Economic Questions 2012 Pearson Addison-WesleySelf-InterestYou make choices that are in your self-interest choices that you think are best for you.Social InterestChoices that are best for society as a whole are said to be in the social interest.Social interest has two dimensions:EfficiencyEquityTwo Big Economic Questions 2012 Pearson Addison-WesleyEfficiency is achieved when the available resources are used to produce goods and services:1. A