What is Economics?

Definition and Scope of Economics

Economics is a social science that examines how individuals, businesses, governments, and societies allocate scarce resources to satisfy unlimited wants. The discipline is built around the concepts of scarcity, choices, and incentives.

• Scarcity: Resources are limited, while human wants are virtually infinite. This fundamental problem forces choices about how to use resources efficiently.

• Choices: Individuals and societies must decide what to produce, how to produce, and for whom to produce.

• Incentives: Incentives are rewards or penalties that influence choices and behavior.

Branches of Economics

• Microeconomics: Focuses on the choices of individuals and businesses, market interactions, and the influence of government policies on specific markets.

• Macroeconomics: Studies the performance and behavior of the economy as a whole, including national and global economic trends.

Examples of Microeconomic Questions: How does a firm decide how much to produce? What determines the price of a good in a market?

Examples of Macroeconomic Questions: What causes inflation? How is unemployment measured? What determines economic growth?

Key Questions in Economics

Two Fundamental Questions

• Allocation: How do choices determine what, how, and for whom goods and services are produced?

• Self-Interest vs. Social Interest: Do choices made in pursuit of self-interest also promote the social interest?

Efficiency and Economic Analysis

• Efficiency: Achieving the maximum possible output from given resources.

• Positive Economics: Objective analysis of 'what is'—statements that can be tested by facts.

• Normative Economics: Subjective judgments about 'what ought to be'—statements based on values and opinions.

Social Interest and Policy Questions

Examples of Social Interest Issues

• Globalization: Examines the integration of economies worldwide, its costs, and benefits.

• Technology and Monopolies: Investigates why certain industries, such as social networking, tend toward monopoly or near-monopoly status.

• Climate Change: Analyzes the impact of production on the global climate, regional differences in emissions, and policy options for reducing carbon output.

• Taxation: Considers how to structure taxes fairly and who should bear the costs of public goods and services.

Example: Fuel taxes fund road construction and maintenance. With the rise of electric vehicles (EVs), policymakers must consider how EV drivers contribute to these costs, especially since EVs may cause more road wear due to their weight.

Distribution of Federal Income Taxes (2022, U.S.)

Additional info: This table illustrates the progressive nature of the U.S. federal income tax system, where higher earners pay a larger share of total taxes.

Factors of Production

Definitions and Income Types

• Land: Natural resources; earns rent.

• Labor: Human effort; earns wages.

• Capital: Tools, machinery, and buildings; earns interest.

• Entrepreneurship: The ability to organize resources and take risks; aims to earn profit.

Ownership: The distribution of income depends on who owns these factors of production.

Economic Approach and Fundamental Principles

Making Choices

• Tradeoffs: Choosing more of one thing means having less of another due to scarcity.

• Rational Choices: Decisions made by comparing costs and benefits.

• Opportunity Cost: The value of the next best alternative forgone when making a choice.

Formula for Opportunity Cost:

Marginal Analysis and Equilibrium

• Marginal Cost: The additional cost of one more unit of an activity.

• Marginal Benefit: The additional benefit from one more unit of an activity.

• Equilibrium: The optimal point is where marginal benefit equals marginal cost.

Incentives and Economic Models

• Incentives: People respond to rewards and penalties; much of law and policy is based on this premise.

• Economic Models: Simplified representations of reality used to analyze economic issues. Models often use the ceteris paribus assumption ("all else equal") to isolate the effects of one variable.

• Correlation vs. Causality: Correlation means two variables move together; causality means one variable causes the other to change. Economists use data and models to distinguish between the two.

Example: Are electric vehicle (EV) prices falling because more people are buying them, or are more people buying EVs because prices are falling? Economists analyze data and use models to determine causality.

Economics as a Policy Tool

Positive and Normative Analysis

• Positive Analysis: Describes and explains economic phenomena without value judgments.

• Normative Analysis: Involves recommendations based on personal or societal values.

• Economists use their toolkit to advise governments, businesses, and individuals by comparing marginal benefits and marginal costs of alternative solutions.

Careers in Economics

Roles and Skills

• Economists collect and analyze data, predict trends, and study resource use efficiency.

• They work in private firms, government agencies, and international organizations.

• Key Skills: Critical thinking, analytical ability, math, statistical analysis, writing, and oral communication.

Salary Information

• Economics majors are not the highest earners at career start, but by mid-career, their average salary is about $140,000 per year, surpassing most other majors.

Diversity in the Economics Profession

Trends and Initiatives

• From 1995 to 2015, the percentage of women and minorities earning economics and STEM degrees has changed.

• The profession is actively working to attract more women and minorities at all levels.

Additional info: Increasing diversity in economics is seen as important for broadening perspectives and improving policy outcomes.