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Chapter 1 – What Is Economics?
A Definition of Economics
Our inability to satisfy all our wants is called scarcity. The choices that we make depend on the incentives that we face. An incentive is a reward that encourages or a penalty that discourages an action. 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. The subject divides into two main parts: -
Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets and the influence of governments.
Macroeconomics is the study of the performance of the national economy and the global economy.
Two Big Economic Questions
Two big questions summarize the scope (gebied/bereik) of economics: -
How do choices end up determining what, how and for whom goods and services get produced? -
When do choices made in the pursuit of self-interest also promote the social interest?
What, How, and For Whom?
Goods and services are the objects that people value and produce to satisfy wants. Goods are physical objects. Services are actions performed.
What? – What we produce changes over time.
How? – Goods and services get produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: -
Land: The “gifts of nature” that we use to produce goods and services are called land. In economics, land is what in everyday language we call natural resources. It includes land in the everyday sense together with metal ores, oil, gas and coal, water, air, wind and sunshine. -
Labor: the work time and work effort that people devote to producing goods and services is called labor. The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training and work experience. -
Capital: The tools, instruments, machines, buildings and other constructions that businesses now sue to produce goods and services are called capital. -
Entrepreneurship: The human resource that organizes labor, land and capital is called entrepreneurship.
For Whom? – Who gets 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 production they own: 1.
Land earns rent.
Labor earns wages.
Capital earns interest.
Entrepreneurship earns profit.
Knowing how income is shared among the factors of production doesn’t tell us how it is shared among individuals. Some differences in income are persistent. The second big question of economics is:
When Is the Pursuit of Self-interest in the Social Interest? Self-interest – You make choices that are in your self-interest – choices that you think are best for you.
Social Interest – Could it be possible that when each one of us makes choices that are in our own best interest, it turns out these choices are also the best for society as a whole? Choices that are the best for society as a whole are said to be in the social interest. To help you start thinking about the question, we’re going to illustrate it with 10 topics that generate heated discussion in today’s world: -
The new economy
Disappearing tropical rainforests
Deficits (tekort/achterstand) and debts
The Economic Way of Thinking
The definition of economics and the questions that economics tries to answer tell us about the scope of economics. But they don’t tell you how economists think about these questions and go about seeking answers to them. You’re now going to begin to see how economists approach...
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