Part 1: What is Economics?
Definition of Economics
: our inability to satisfy all our wants
>> choose among available alternatives
- Choices that we make depend on the incentives that we face
: a reward that encourages or a penalty that discourages an action
: 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.
: the study of the choices that individuals an businesses make, the way these
choices interact in markets, and the influence of governments.
: the study of the performance of the national economy and the global
Two Big Economic Questions
How do choices end up determining
goods and services get
What? >>What we produce changes over time.
How? >> Goods and services are produced using productive resources called
: Land, Labor, Capital and Entrepreneurship
: “gifts of nature” used to produce goods and services; natural resources.
Includes metal ores, oil, gas and coal, water and air.
: the work time and work effort that people devote to producing goods and
services. Includes physical and mental efforts.
Quality depends on
: the knowledge and skill that people obtain
from education, on-the-job training, and work experience.
Human capital expands over time.
: the tools, instruments, machines, buildings, and other constructions that
businesses now use to produce goods and services
Financial capital: money, stocks, and bonds.
used to produce goods and
: the human resource that organizes labor, land, and capital
For Whom? >> People earn their incomes by selling the services of the factors of production
The factor of production that earns most income is labor. Wages and fringe benefits
are around 70% of total income. Land, capital, and entrepreneurship share the rest.
We can get a good sense of who consumes the goods and services produced by
looking at the percentages of total income earned.
On the average, people in the top 20% earn more than 12x the incomes of those in the