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ECON101 - Chapter 1
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Economics is the study of how people manage resources. Decisions about how to allocateresources can be made by individuals, but also by groups of people in families, firms,
governments, and other organizations.
Microeconomics is the study of how individuals and firms manage resources.
Macroeconomics is the study of the economy as a whole, and how policymakers manage
the growth and behavior of the overall economy. Microeconomics and macroeconomics
are highly related and interdependent; we need both to fully understand how economies
work.
When people make choices to achieve their goals in the most effective way possible
given the resources they have, economists say they are exhibiting rational behavior.
Scarcity
Economists define scarcity as the condition of wanting more than we can get with
available resources.
Incentives
● A positive incentive (sometimes just called an incentive) makes people more
likely to do something. For example, lowering the price of spaghetti creates a
positive incentive for people to order it because it lowers the opportunity cost:
When you pay less for spaghetti, you give up fewer other things you could
have spent the money on.
● A negative incentive (sometimes called a disincentive) makes them less likely
to do it. Charging people more for pizza is a negative incentive to buy pizza
because they now have to give up more alternative purchases.
Yunus’s idea, called group responsibility, was simple but hugely significant. Yunus
concluded that borrowers would have a strong incentive to repay their loans: They
wouldn’t want to ruin relationships with other members of the group—their fellow
villagers, with whom they live every day and rely on for mutual support in hard times.
This incentive, in turn, changed the trade-off faced by banks; they responded by being
more willing to lend to the poor at lower rates. By asking himself how villagers would
respond to the new kind of loan and how banks in turn would respond to the villagers’
response, Yunus was able to predict that his idea could be the key to spreading banking
services to the poor.
, Efficiency
Efficiency describes a situation in which resources are used in the most productive way
possible to produce the goods and services that have the greatest total economic value to
society
- Increasing efficiency means finding a way to better use resources to produce the
things that people want.
- Innovation: Innovation is the explanation you’re hoping is correct. Maybe your
idea has not been used yet because it is too new. If you have come up with a truly
new idea, whether it is new technology or a new business model, people cannot
have taken advantage of it yet because it didn’t exist before.
- Market failure: Market failures are an important cause of inefficiency.
Sometimes people and firms fail to take advantage of opportunities because
something prevents them from capturing the benefits of the opportunity, or
imposes additional costs on them. For instance, maybe your great new idea won’t
work because it would be impossible to prevent others from quickly copying it. Or
perhaps your great new idea won’t work because a few big companies already
have the market for it sewn up. Economists call such situations market failures.
We will discuss market failures in much greater depth later in the book.
- Intervention: If a powerful force—often the government—intervenes in the
economy, transactions cannot take place the way they normally would. We’ll see
later in the book that many government economic policies intentionally or
unintentionally interfere with people’s ability to take advantage of profit-making
opportunities.
- Unprofitable idea: Maybe your idea won’t produce a profit. Individuals and
governments have goals other than profit, of course—for example, creating great
art or promoting social justice. But if your idea doesn’t also generate a profit, then
it is less surprising that no one has taken advantage of it.
Correlation and causation
. For the instance in which two variables have a consistent relationship, we say there is a
correlation between them. Correlation can be positive or negative:
● If both variables tend to move in the same direction, we say they are positively
correlated. For example, wearing raincoats is positively correlated with rain.
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