Getting Started
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CHAPTER CHECKLIST
When you have completed your study of this chapter, you will be able to
1 Define economics and explain the questions that economists try to answer.
A market economy is one in which individuals and private firms make the major decisions about production and consumption. The extreme case of a market economy, in which the government keeps its hands off economic decisions, is called a laissez-faire economy.
Two big economic questions: • How choices determine what, how, and for whom goods and services get produced? • When do choices made in self-interest also promote social interest?
1.1 DEFINITION AND QUESTIONS
All economic questions and problems arise because human wants exceed the resources available to satisfy them.
Scarcity
The condition that arises because the available resources are insufficient to satisfy wants.
Adam Smith, The Wealth of Nations (1776)
For Whom the Bell Tolls
Why study economics There is an overriding reason for learning the basic lessons of economics: all your life – from cradle to grave and beyond – you will run up against the brutal truths of economics. As a voter, you will make decisions on issues – on the government deficit, on taxes, on free trade, on inflation and umemployment – that cannot be understood until you have mastered the rudiments of this subject. Choosing your life’s occupation is the most important decision you will make.
1.1 DEFINITION AND QUESTIONS
2 The New Economy Makers of computer chip and programs developed products in their self-interest but did they develop their products in the social interest?
1.1 DEFINITION AND QUESTIONS
When Is the Pursuit of Self-Interest in the
Social Interest?
The choices that are best for the individual who makes them are choices made in the pursuit of self-interest.
Faced with scarcity, we must make choices—we must choose among the available alternatives.
The choices we make depend on the incentives we face.
Scarcity and efficiency: the twin themes of economics
Let’s illustrate with eight topics:
1 Globalization and International Outsourcing Globalization and international outsourcing are in the interest of owners of multinational firms that profit, but is it in the social interest?
3 Disappearing Rainforests When we buy products made with ingredients from rainforests are we damaging the social interest?
The choices that are best for society as a whole are choices made in the social interest.
1.1 DEFINITION AND QUESTIONS
Can choices made in self-interest also serve the social interest?
Economics 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 our choices,
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.
To obtain such a good, one must either produce it or offer economic goods in exchange.
Scarcity and efficiency: the twin themes of economics
Goods are limited, while wants seem limitless. Given unlimited wants, it is important that an economy makes the best use of its limited resources. That brings us to the critical notion of efficiency.
For Whom the Bell Tolls
Your future depends not only on your own abilities but also on how economic forces beyond your control affect your wages. Economics may help you invest the nest egg you save from your earnings. Although studying economics cannot make you a genius, without economics the dice of life are loaded against you.
No contemporary society falls completely into either of these polar categories. Rather, all societies are mixed economies, with elements of market and command.
Efficiency denotes the most effective use of a society’s resources in satisfying people’s wants and needs.
1.1 DEFINITION AND QUESTIONS
Economics Defined
Scarcity is that society has limited resources and therefore cannot produce all the goods and services people wish to have
Economic goods are goods that are scarce or limited in supply. Therefore, scarcity is the distinguishing characteristic of an economic good. That an economic good is scarce does not mean that it is rare, but only that it is not freely available for the taking.