Chapter 1 The Central Idea
At the center of economicsThe study of how people deal with scarcity. is the idea that people make purposeful choices with scarce resources and interact with others when they make these choices. Sometimes those choices that people make have substantial impacts on the global economy. Consider Mark Zuckerberg, the founder and CEO of Facebook. He faced a big choice when he was in college in 2004: that is, whether to finish his degree or to drop out and devote all his time to transform a novel idea into a start-up firm. Completing college while pursuing the start-up was not an option because time is scarce, only 24 hours in a day, and he did not have enough time to do both activities and sleep a bit, so he had to make a choice. In choosing one activity, he would have to incur the cost of giving up the other activity. Dropping out of college would mean passing up a degree that would help him get a good job but staying in college would mean he could not start up a new firm.
Zuckerberg chose to drop out of college, and it looks like he made the right choice: His firm, Facebook, is now worth billions of dollars and provides a social media platform that connects hundreds of millions of people all over the world. Or consider the story of Elon Musk, the founder and CEO of Tesla and SpaceX among other companies. Musk chose to stay in college and earned not one but two degrees—one in economics and one in physics—at the University of Pennsylvania, choosing to extend his time spent in college to five years. He joined the PhD program in Physics at Stanford University, but then decided to leave the program in a matter of days, choosing instead to join the entrepreneurial start-up culture of neighboring Silicon Valley. The resulting companies that Elon Musk founded have expanded the technological frontier of the economy over the past decade.
Of course, not every successful choice involves dropping out of college! In most cases the choice to stay in school and pursue an education is what pays off. Consider the story of Maryam Mirzakhani. She was a mathematical prodigy growing up in Iran, where she won two gold medals at the International Mathematical Olympiad. After completing her undergraduate education in Iran, Mirzakhani had to make a choice about whether to continue her mathematical studies and also about where to pursue those further studies. She chose to pursue her PhD at Harvard, became a professor at Stanford and in 2014 was the first woman to win the prestigious Fields Medal in Mathematics, considered by some to be an achievement harder than winning a Nobel Prize in an academic discipline.
The purposeful choices that these remarkable people made were magnified by the opportunities they had to interact with people. Hundreds of millions of people around the world interact through Facebook. Facebook benefits from this interaction, too, in part because people pay to advertise products on their site. Mirzakhani’s discoveries have inspired other mathematicians and researchers in other areas like physics and engineering to make more discoveries. The electric cars produced by Tesla and the positive experiences of Tesla drivers has inspired many other manufacturers to pursue the use of electric motors in cars and to pursue other forms of technological advances such as driverless cars.
ScarcityThe situation in which the quantity of resources is insufficient to meet all wants. is a situation in which people’s resources are limited. People always face a scarcity of some sort. Scarcity implies that people must make a choiceA selection among alternative goods, services, or actions. to forgo, or give up, one thing in favor of another. The successes of Mirzakhani, Musk and Zuckerberg also reflect purposeful choices that other individuals, organizations, firms and governments made with scarce resources. Harvard University had to decide who received admission to the select few openings in their PhD program, venture capitalists in Silicon Valley had to decide which of the many hundreds of entrepreneurs asking for their financial investments were the most worthy recipients, thousands of college students had to decide that they needed to take a study break on a regular basis to connect with their friends, the government of Iran had to decide how much funding to allocate to their universities to allow young talented students like Maryam Mirzakhani to achieve their full potential, and the government of the United States had to decide how many immigrants—like the South African-born Musk and the Iranian-born Mirzakhani—should be granted the opportunity to become American citizens and make contributions to the economy and the country. As you read this text, you may find yourself reflecting on decisions that you have to make—whether to major in economics or biology, whether to take all your classes after 10:00 A.M. or to schedule them all before noon, whether to search the Internet or to study.
Economic interactionsExchanges of goods and services between people. between people occur every time they trade or exchange goods with each other. A college student buys education services from a university in exchange for tuition. A teenager sells labor services to Taco Bell in exchange for cash. Within a household, one member may agree to cook dinner in exchange for the other person agreeing to wash the dishes. Economic interactions typically take place in a marketAn arrangement by which economic exchanges between people take place.. A market is simply an arrangement by which buyers and sellers can interact and exchange goods and services with each other. There are many types of markets, ranging from the New York stock market to a local flea market. Interactions do not have to take place with the buyer and seller in physical proximity to each other; the Internet, for example, greatly enhances the opportunities for economic interaction.
The purpose of this book is to introduce you to the field of economics, to provide you with the knowledge that will help you understand how so much of what happens in the world is shaped by the actions of people who had to make choices when confronted by scarcity. A better understanding of economics will equip you to handle the opportunities and challenges you face—should you continue with schooling if the economy is weak and it is hard to find a job? It also will leave you better informed about the challenges that the nation faces—should the government intervene in the economy to regulate businesses, or should it provide economic stimulus packages to help the economy? Soon you will find yourself viewing the world through the lens of economics. Your friends may tell you that you are “thinking like an economist.” You should take that as a compliment. The first step on this path is to understand the enormous power of the central ideas of scarcity, choice, and economic interactions. That’s the purpose of this chapter.