What is Economics?

Definition of Economics

Economics is a social science that studies the choices made by individuals, firms, and societies as they confront the problem of scarcity. Scarcity refers to our inability to satisfy all our wants due to limited resources.

• Scarcity: The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

• Unlimited wants but limited resources: Individuals and societies must make choices about how to allocate resources efficiently.

The Economic Way of Thinking

Rational Choice and Tradeoffs

Scarcity forces individuals and societies to make choices, which always involve tradeoffs. The economic way of thinking involves comparing the benefits and costs of different alternatives.

• Tradeoff: Choosing more of one thing means having less of another.

• Benefit: What you gain from an action or decision.

• Cost: What you must give up to get something.

• Marginal Analysis: Most choices are made at the margin, comparing marginal benefit (MB) and marginal cost (MC).

• Incentives: Choices respond to incentives, which are rewards or penalties that encourage or discourage certain behaviors.

• Opportunity Cost: The highest-valued alternative that must be given up to get something else.

Example: If you spend time studying economics instead of working at a part-time job, the opportunity cost is the wage you forgo.

Two Parts of Economics

Microeconomics vs. Macroeconomics

Economics is divided into two main branches: microeconomics and macroeconomics.

• Microeconomics: Studies the choices of individuals and firms, and how these choices interact in markets. It focuses on the behavior of specific economic agents and the outcomes of their interactions.

• Macroeconomics: Examines the performance of the economy as a whole, including national and global economic trends such as GDP growth, inflation, and unemployment.

Example: Microeconomics analyzes how a firm sets the price of its product, while macroeconomics studies the overall unemployment rate in a country.

Annual Performance of Core Macroeconomic Variables in Canada

Additional info: Table values inferred from the slide image and typical macroeconomic indicators.

Scope of Economics

Two Big Questions

Economics seeks to answer two fundamental questions:

• How do choices determine "what," "how," and "for whom" to produce?

• Do choices made in pursuit of self-interest also promote the social interest?

What to Produce?

Sectoral Contributions to GDP

Every society must decide what goods and services to produce, and in what quantities. This is reflected in the sectoral composition of GDP.

Additional info: Table reconstructed from slide image; some values inferred for completeness.

Summary

• Economics is the study of how people and societies manage scarce resources.

• Scarcity leads to the necessity of making choices, which involve tradeoffs and opportunity costs.

• Microeconomics focuses on individual and firm-level decisions; macroeconomics examines the economy as a whole.

• Key economic questions include what to produce, how to produce, and for whom to produce.