When you have completed your study of this chapter,
you will be able to
Define economics, distinguish between microeconomics and
macroeconomics, and explain the questions of microeconomics.
Describe the work of economists as social scientists.
Explain five core ideas that define the economic way of thinking.
Explain why economics is worth studying.
You are studying microeconomics at a time of
enormous change. After a decade of technological change that brought e-commerce, MP3 music, DVD movies, cell phones, Palm Pilots, and
a host of other gadgets and toys that have transformed the way we work and play, our lives were changed by the terrorist attacks of
September 11, 2001.The shock waves from that
day will pulsate through our economy for many years.They
have shrunk our airlines, expanded our security and defense
industries, and created huge uncertainty about the future.
Outside the United States, more than 1 billion of the
world’s 6.3 billion people survive on $1 a day or less.
Disturbed by the combination of increasing wealth and persistent poverty, some people are pointing to globalization as the source of growing economic inequality.
Your course in microeconomics will help you to understand
the powerful forces that are shaping our economic world and
help you to navigate it in your everyday life and work.
Part 1 • INTRODUCTION
1 .1 DEFINITIONS AND QUESTIONS
The condition that arises because the
available resources are insufficient to
A reward or a penalty—a “carrot” or
a “stick”—that encourages or
discourages an action.
All economic questions and problems arise because human wants exceed the resources available to satisfy them. We want good health and long lives. We want spacious and comfortable homes. We want a huge range of sports and recreational equipment from running shoes to jet skis. We want the time to enjoy our favorite sports, video games, novels, music, and movies; to travel to exotic places; and to just hang out with friends.
In the world of politics, it is easy to get carried away with the idea that we can have it all. Politicians tell us they will provide all the extra public services that we want, and at the same time, they will cut our taxes so that we can spend more on the things that we enjoy.
Despite the promises of politicians, we cannot have it all. The ability of each of us to satisfy our wants is limited by time and by the incomes we earn and the prices we pay for the things we buy. These limits mean that everyone has unsatisfied wants. Our ability as a society to satisfy our wants is limited by the productive resources that exist. These resources include the gifts of nature, our own labor and ingenuity, and tools and equipment that we have produced. Our inability to satisfy all our wants is called scarcity. The poor and the rich alike face scarcity. A child wants a $1.00 can of soda and two 50¢ packs of gum but has only $1.00 in his pocket. He faces scarcity. A millionaire wants to spend the weekend playing golf and spend the same weekend at the office attending a business strategy meeting. She faces scarcity. A society wants to provide vastly improved health care, install an Internet connection in every classroom, explore space, clean polluted lakes and rivers, and so on. Society also faces scarcity. Faced with scarcity, we must make choices. We must choose among the available alternatives. The child must choose the soda or the gum. The millionaire must choose the golf game or the meeting. As a society, we must choose among health care, computers, space exploration, the environment, and so on. The choices we make depend on the incentives we face. An incentive is a reward or a penalty—a “carrot” or a “stick”—that encourages or discourages an action. If the price of gum rises and the price of soda falls,...