Definition of Economics
Economic questions arise because we face
we all want more than we can get
Because we are unable to satisfy all of our wants, we must make
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 when dealing with scarcity.
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:
is the study of the choices individuals and businesses make, the way those choices
interact in the markets, and the influence of governments.
is the study of the performance of the national economy and the global economy.
Two Big Economics Questions
The first big question is “How do choices end up determining
are goods and services
What goods and services are produced in our economy?
Goods and services
are the objects that people value and produce to satisfy human wants.
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.
How are goods and services produced?
Factors of production
are the productive resources used to produce goods and services. These include
(the work time and work effort of people),
and machines that are used to produce goods and services), and
(the human resource
that organizes land, labor, and capital).
The quality of labor depends on
which is the knowledge and skill that people obtain
from education, work experience, and on-the-job training. Figure 1.2
shows how the level of human
capital (measured by educational attainment) in the United States has increased over the past century.
For whom are goods and services produced?
Who gets to consume the goods and services that are produced depends on the
that people earn.
Owners of the factors of production earn income, which is a monetary return for using the resources for
production: Land earns
, capital earns
and entrepreneurship earns
In the United States, labor earns the largest share of all income (70 percent), but this income is not
distributed equally across the population.
The second big question is “When is the pursuit of self-interest also in the social interest?”
People make choices in their own
—they make choices they think are best for their own well-