CHAPTER 1
What Economics Is About
Chapter 1 provides students with an overview of what economics is and of some of the key
concepts in economics. It also introduces students to the market-versus-government debate
over economic problems. There are two appendices to this chapter. Appendix A covers working
with graphs—teaching the student how to read a graph, how to derive the slope of both a line
and a curve, and introducing the student to bar graphs, pie charts, and line graphs. Appendix B
discusses economics as a major and careers for economics majors.
KEY IDEAS
1. Economics is the science of scarcity.
2. Economists think in terms of key concepts.
3. The market-versus-government debate is an important one to know about, but it takes
time to learn the particulars.
4. Economics is sometimes broken down into different categories.
5. [Appendix A] Economists work with diagrams.
6. [Appendix B] Economics can be a viable major.
CHAPTER OUTLINE
I. YOUR LIFE, 2016–2026
The study of economics is relevant to everyone’s lives today and tomorrow. With the
help of economics, one can find specific answers to questions such as “How much will
one earn as salary after college?” “What is one’s life going to be like during 2016-2026?”
etc.
II. A DEFINITION OF ECONOMICS
A. Goods and Bads
Economists talk about goods (anything that gives a person utility) and bads
(anything that gives a person disutility). People want goods and they do not want
bads.
B. Resources
It takes resources to produce goods. Economists divide resources into four broad
categories: land, labor, capital, and entrepreneurship.
C. Scarcity and a Definition of Economics
Scarcity is the condition where our wants are greater than the limited resources
available to satisfy them. Scarcity is the basic economic problem confronting all
1
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,2 Chapter 1
individuals and societies. For this reason, economics is defined as the science of
how individuals and societies deal with the fact that wants are greater than the
limited resources available to satisfy those wants.
D. The Counterintuitive in Economics
The economic and political institutions under which a country operates play a
very important role in determining the outcomes that the country faces while
dealing with scarcity. These institutions are different in various countries and it is
the difference here that matters to poverty and wealth.
Scarcity affects everyone. Three effects of scarcity are (1) the need to make
choices, (2) the need for a rationing device, and (3) competition. Competition
occurs because of scarcity, and takes the form of people trying to get more of the
rationing device.
III. KEY CONCEPTS IN ECONOMICS
A. Opportunity Cost
The opportunity cost of anything is the most highly valued opportunity or
alternative forfeited when a choice is made. Opportunity costs are incurred
whenever choices are made because the resources used for those choices could
have been used in other ways.
B. Opportunity Cost and Behavior
The higher the opportunity cost of doing something, the less likely it will be done.
C. Benefits and Costs
Economists are careful to think in terms of both costs and benefits.
D. Decisions Made at the Margin
Decision making at the margin is characterized by weighing additional (marginal)
benefits of a change against the additional (marginal) costs of a change with
respect to current conditions.
E. Efficiency
The right amount of anything is the optimal or efficient amount: the amount for
which the marginal benefits equal the marginal costs. Net benefits are maximized
when efficiency is achieved.
F. Economics is About Incentives
An incentive is something that encourages or motivates a person to undertake an
action. Individuals have an incentive to undertake actions for which the benefits
are greater than the costs or, stated differently, for which they expect to receive
net benefits (benefits greater than costs).
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, What Economics Is About 3
G. Unintended Effects
Economists try to look at the unintended effects of an action.
H. Exchange
Exchange or trade is the process of giving up one thing for something else.
People enter into exchanges in order to make themselves better off.
IV. THE MARKET AND GOVERNMENT
When it comes to economic problems, the national debate usually proceeds along these
lines: first, the problem is identified and defined or described, second, individuals attempt
to identify the cause of the problem, and third, individuals propose solutions to the
problem. Most of the debate focuses on the cause(s) of the problem and the proposed
solutions. With respect to both the cause and the solution, we often hear two words
mentioned: the “market” and “government.” The market-versus-government debate is an
important one to know about, but it takes time to learn the particulars. Much of this book
will help you learn those particulars.
V. CETERIS PARIBUS AND THEORY
B. Ceteris Paribus Thinking
Ceteris paribus means “all other things held constant” or “nothing else changes.”
Invoking this assumption allows us to clearly designate what we believe is the
correct relationship between two variables.
B. What is a Theory?
Economists build theories to answer questions that do not have obvious
answers. To an economist, a theory is an abstract representation of the world.
When they build a theory they leave out certain things and focus on the major
factors or variables that they believe will explain the phenomenon they are trying
to understand. A theory emphasizes only the variables that the theorist believes
are the main or critical ones that explain an activity or event.
VI. ECONOMIC CATEGORIES
A. Positive and Normative Economics
Positive economics addresses what is, while normative economics attempts to
determine what should be. This book mainly deals with positive economics.
B. Microeconomics and Macroeconomics
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
What Economics Is About
Chapter 1 provides students with an overview of what economics is and of some of the key
concepts in economics. It also introduces students to the market-versus-government debate
over economic problems. There are two appendices to this chapter. Appendix A covers working
with graphs—teaching the student how to read a graph, how to derive the slope of both a line
and a curve, and introducing the student to bar graphs, pie charts, and line graphs. Appendix B
discusses economics as a major and careers for economics majors.
KEY IDEAS
1. Economics is the science of scarcity.
2. Economists think in terms of key concepts.
3. The market-versus-government debate is an important one to know about, but it takes
time to learn the particulars.
4. Economics is sometimes broken down into different categories.
5. [Appendix A] Economists work with diagrams.
6. [Appendix B] Economics can be a viable major.
CHAPTER OUTLINE
I. YOUR LIFE, 2016–2026
The study of economics is relevant to everyone’s lives today and tomorrow. With the
help of economics, one can find specific answers to questions such as “How much will
one earn as salary after college?” “What is one’s life going to be like during 2016-2026?”
etc.
II. A DEFINITION OF ECONOMICS
A. Goods and Bads
Economists talk about goods (anything that gives a person utility) and bads
(anything that gives a person disutility). People want goods and they do not want
bads.
B. Resources
It takes resources to produce goods. Economists divide resources into four broad
categories: land, labor, capital, and entrepreneurship.
C. Scarcity and a Definition of Economics
Scarcity is the condition where our wants are greater than the limited resources
available to satisfy them. Scarcity is the basic economic problem confronting all
1
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,2 Chapter 1
individuals and societies. For this reason, economics is defined as the science of
how individuals and societies deal with the fact that wants are greater than the
limited resources available to satisfy those wants.
D. The Counterintuitive in Economics
The economic and political institutions under which a country operates play a
very important role in determining the outcomes that the country faces while
dealing with scarcity. These institutions are different in various countries and it is
the difference here that matters to poverty and wealth.
Scarcity affects everyone. Three effects of scarcity are (1) the need to make
choices, (2) the need for a rationing device, and (3) competition. Competition
occurs because of scarcity, and takes the form of people trying to get more of the
rationing device.
III. KEY CONCEPTS IN ECONOMICS
A. Opportunity Cost
The opportunity cost of anything is the most highly valued opportunity or
alternative forfeited when a choice is made. Opportunity costs are incurred
whenever choices are made because the resources used for those choices could
have been used in other ways.
B. Opportunity Cost and Behavior
The higher the opportunity cost of doing something, the less likely it will be done.
C. Benefits and Costs
Economists are careful to think in terms of both costs and benefits.
D. Decisions Made at the Margin
Decision making at the margin is characterized by weighing additional (marginal)
benefits of a change against the additional (marginal) costs of a change with
respect to current conditions.
E. Efficiency
The right amount of anything is the optimal or efficient amount: the amount for
which the marginal benefits equal the marginal costs. Net benefits are maximized
when efficiency is achieved.
F. Economics is About Incentives
An incentive is something that encourages or motivates a person to undertake an
action. Individuals have an incentive to undertake actions for which the benefits
are greater than the costs or, stated differently, for which they expect to receive
net benefits (benefits greater than costs).
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, What Economics Is About 3
G. Unintended Effects
Economists try to look at the unintended effects of an action.
H. Exchange
Exchange or trade is the process of giving up one thing for something else.
People enter into exchanges in order to make themselves better off.
IV. THE MARKET AND GOVERNMENT
When it comes to economic problems, the national debate usually proceeds along these
lines: first, the problem is identified and defined or described, second, individuals attempt
to identify the cause of the problem, and third, individuals propose solutions to the
problem. Most of the debate focuses on the cause(s) of the problem and the proposed
solutions. With respect to both the cause and the solution, we often hear two words
mentioned: the “market” and “government.” The market-versus-government debate is an
important one to know about, but it takes time to learn the particulars. Much of this book
will help you learn those particulars.
V. CETERIS PARIBUS AND THEORY
B. Ceteris Paribus Thinking
Ceteris paribus means “all other things held constant” or “nothing else changes.”
Invoking this assumption allows us to clearly designate what we believe is the
correct relationship between two variables.
B. What is a Theory?
Economists build theories to answer questions that do not have obvious
answers. To an economist, a theory is an abstract representation of the world.
When they build a theory they leave out certain things and focus on the major
factors or variables that they believe will explain the phenomenon they are trying
to understand. A theory emphasizes only the variables that the theorist believes
are the main or critical ones that explain an activity or event.
VI. ECONOMIC CATEGORIES
A. Positive and Normative Economics
Positive economics addresses what is, while normative economics attempts to
determine what should be. This book mainly deals with positive economics.
B. Microeconomics and Macroeconomics
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
