Introduction to Economics

Scarcity and Choice

Economics is the study of how individuals and societies make choices under conditions of scarcity, and the consequences of those choices. Scarcity refers to the fundamental problem that resources are limited while human wants are unlimited, necessitating decisions about how to allocate resources efficiently.

• Scarcity Principle: Because resources (such as time, money, labor, and raw materials) are limited, every choice involves trade-offs. Individuals and societies must decide which needs and wants to satisfy and which to forego.

• Trade-offs: Choosing one option means giving up others due to limited resources.

• Example: Choosing to spend money on education means less money available for leisure activities.

Cost-Benefit Principle

The Cost-Benefit Principle states that an action should be taken if and only if its benefits are at least as great as its costs. This principle guides rational decision-making in economics.

• Cost: What you must give up to obtain something (e.g., money, time, effort).

• Benefit: What you gain from obtaining something (e.g., satisfaction, utility, profit).

• Rational Person: Someone with well-defined goals who attempts to fulfill those goals as best as possible.

• Incentive Principle: Incentives are rewards or penalties that influence people's choices and behavior.

• Example: A student decides to study for an exam if the expected benefit (higher grade) outweighs the cost (time spent studying).

Microeconomics vs Macroeconomics

Scope and Examples

Economics is divided into two main branches: Microeconomics and Macroeconomics. Microeconomics focuses on individual agents and markets, while macroeconomics examines the economy as a whole.

• Microeconomics: The study of choices made by individuals, households, and firms. Examples include:

  • GGC students’ consumption of sugar

  • The cost to produce a BMW

  • Canadian high school seniors’ class attendance rate

• Macroeconomics: The study of aggregate economic phenomena, such as national output, unemployment, and inflation. Examples include:

  • U.S. national unemployment rate

  • Japan’s export tariff of rice

  • Post COVID inflation trends

Thinking at the Margin

Marginal Analysis

Marginal analysis involves evaluating the additional (marginal) costs and benefits of a decision. Economists distinguish between average and marginal values, and consider sunk costs as irrelevant to current decisions.

• Average Cost: Total cost divided by the number of units produced.

• Average Benefit: Total benefit divided by the number of units produced.

• Marginal Cost: The increase in total cost from producing one more unit.

• Marginal Benefit: The increase in total benefit from consuming or producing one more unit.

• Sunk Cost: A cost that has already been incurred and cannot be recovered; it should not affect current decisions.

• Example: If launching a new product costs $3 for the first unit and $4 for the second, the marginal cost of the second launch is $4.

Table: Launches, Costs, and Benefits

The following table illustrates how total cost and total benefit change with the number of launches, and how average and marginal values are calculated.

Formulas:

• Average Cost:

• Marginal Cost:

• Average Benefit:

• Marginal Benefit:

Additional info: The table does not provide total benefit values; in practice, these would be needed to calculate average and marginal benefit. Marginal analysis is central to economic decision-making, especially in determining optimal production or consumption levels.