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Economics 114 Summary: Microeconomics
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Includes Chapters 1 to 8 of Economics 114 needed for A1
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DOPE NOTESECONOMICS 114
, Economics 114
Chapter 1:
Introduction
1
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,Definition of economics:
• Our inability to get everything we want is called scarcity
• What everyone can get (society) is limited by the productive resources available
• Because we cant get everything we want, we must make choices
• An incentive is a reward that encourages an action or a penalty that discourages one
• Prices act as incentives
• Economics is the social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with
scarcity and the incentives that influence and reconcile those choices
• Economics has two parts:
Microeconomics: the study of choices that individuals and businesses make, the
way these choices interact in markets, and the influence of governments
Macroeconomics: the study of the performance of the national economy and the
global economy
Two big economic questions:
Two big questions summarize the scope of economics:
1. How do choices end up determining WHAT, HOW and FOR WHOM goods and
services are produced?
2. Do choices made in the pursuit of SELF-INTEREST also promote SOCIAL
INTEREST?
1. What, How, and For Whom?
• WHAT:
What we produce varies across countries and changes over time
• HOW:
How we produce is described by the technologies and resources that we use
The resources used to produce goods and services called factors of production,
which are grouped into four categories:
Land:
“Gifts of nature”, consists of natural resources
Labour:
Work time and effort people put into producing goods and services. Includes
all mental and physical efforts. Quality of labour depends on human capital
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, (knowledge and skill obtained through education, on the job training, work
experience)
Capital:
Tools, instruments, machines, buildings and other constructions that
businesses use to produce goods and services. Money, stocks, and bonds
are financial capital and can be used to buy physical capital, but are not
factors of production themselves
Entrepreneurship:
The human resource that organizes labour, land, and capital. They are the
drivers of the economic progress. (Develop new ideas about what and how
to produce, make business decisions and bear the risks of those decisions)
• FOR WHOM:
Who consumes the goods and services that are produced depends on the incomes
that people earn
People earn their incomes by selling the services of the factors of productions they
own
1. Land earns rent
2. Labour earns wages
3. Capital earns interest
4. Entrepreneurship earns profit
2. Can choices made in the pursuit of self-interest also promote the
social interest?
• Self-interest: Choices made that are believed to be the best for you, people
allocate their time and resources that make the most sense to them
• Social interest: Choices that are the best for society as a whole
• Self-interest and social interest are in harmony when everyone comes out
better off for the transaction having taken place
• “Efficient” is used to describe a situation that cannot be improved upon
(resource use is efficient if someone cannot be made better off without
making someone else worse off)
o When a situation is efficient, everyone is better off and the outcome is
in the social interest
The economic way of thinking:
Six key ideas define the economic way of thinking
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