E-201.Study Guide Chapter1.Key Terms and Questions

E-201.Study Guide Chapter1.Key Terms and Questions -...

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1 1 WHAT IS ECONOMICS? Key Concepts ± Definition of Economics The fundamental economic problem is scarcity , which is the inability to satisfy all our wants. Because the available resources are never enough to satisfy every- one’s wants, choices are necessary. Incentives , a reward that encourages or a penalty that discourages an action, influence people’s choices. Economics 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 those choices. Microeconomics is the study of choices that indi- viduals and businesses make, the way these choices interact in markets, and the influence of govern- ments. Macroeconomics is the study of the performance of the national economy and the global economy. ± Two Big Economic Questions Economics explores two big questions: How do choices end up determining what , how , and for whom goods and services get produced? How can choices made in the pursuit of self interest also promote the social interest? Goods and services are the objects that people value and produce to satisfy wants. Goods and services are produced using productive resources called factors of production. There are four categories: Land: the “gifts of nature” such as land, minerals, and water. Labor: the work time and work effort people de- vote to producing goods and services. The quality of labor depends on human capital , which is the knowledge and skill that people obtain from educa- tion, on-the-job training, and work experience. Capital: the tools, instruments, machines, build- ings, and other constructions that businesses use to produce goods and services. Entrepreneurship: the human resource that organ- izes land, labor, and capital. For whom the goods and services are produced depends on people’s incomes. To earn an income, people sell the services of the factors of production they own. Land earns rent; labor earns wages; capital earns interest; and entrepreneurship earns profit. People make choices that are in their self interest, choices that they think are the best available for them. Choices that are the best for society as a whole are in the social interest. Economists work to understand when choices made in self interest advance the social interest. For instance, does globalization best serve the social interest? Did the high-tech information-age economy result from choices made in the social inter- est? Are the private choices made about global warming and the use of natural resources made in the social in- terest? Do banks’ self-interested choices to loan and people’s self-interested choices to borrow serve the so- cial interest or did they lead to macroeconomic instabil- ity? ± The Economic Way of Thinking
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E-201.Study Guide Chapter1.Key Terms and Questions -...

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