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Economic Analysis of Social Issues

v3.0 Alan Grant

Chapter 1 Fundamental Concepts in Economics

Learning Objectives

  1. Define economics and explain how a society decides what goods and services to produce and how to distribute them.

  2. Discuss how scarcity and trade-offs affect individuals and society.

  3. Describe how incentives can affect behavior.

  4. Define collective action problems.

  5. Explain the difference between positive and normative economics and explain how the benevolent social planner analyzes economic issues.

We all have problems . . . perhaps not enough time, not enough money, struggles with work and love, or difficult choices.


 
 An overwhelmed man surrounded by chalk pictures of money, car, suitcase and heart. Work and life balance. Choosing life priorities. Not enough time for all.

Everyone has problems. Some people don’t have enough time: “My accounting exam is in two hours, and I haven’t started studying yet.” Some people don’t have enough money: “I just paid my tuition, and now I don’t have enough money left for car insurance.” Other people wish they were more attractive, or maybe better at math. Some problems, of course, are more serious than others: “I don’t have enough to eat.” And other problems, like climate change and access to medical care, have far-reaching consequences that affect large numbers of people.

This book uses basic tools of economics to examine some of society’s largest and most difficult problems. It explores why those problems arise and why they are often so hard to solve. It also looks at some of the ways that individuals and governments try to deal with those problems and evaluates the effectiveness of those efforts. This chapter lays the foundation for that work by introducing you to three of the most fundamental and most useful economic concepts: scarcity, trade-offs, and the power of incentives.