Did greedy Wall Street bankers cause the global economic slump?
The banks incurred huge losses and their executives received fat bonuses and flew to Washington in private jets to ask for handouts from taxpayers. But did they cause the global financial crisis?

1

Getting Started

When you have completed your study of this chapter, you will be able to

1
CHAPTER CHECKLIST

1.1 DEFINITION AND QUESTIONS
All economic questions and problems arise because human wants exceed the resources available to satisfy them.

 Scarcity
1 Define economics and explain the questions that economists try to answer. 2 Explain the core ideas that define the economic way of thinking. Scarcity is the condition that arises because wants exceeds the ability of resources to satisfy them. Faced with scarcity, we must make choices—we must choose among the available alternatives. The choices we make depend on the incentives we face.
© 2011 Pearson Education

1

1.1 DEFINITION AND QUESTIONS

1.1 DEFINITION AND QUESTIONS

 Economics Defined
Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them. Two big economic questions: • How do choices determine what, how, and for whom goods and services get produced? • When do choices made in self-interest also promote the social interest?

 What, How, and For Whom?
Goods and services are the objects (goods) and actions (services) that people value and produce to satisfy human wants. What goods and services get produced and in what quantities? How are goods and services produced? For Whom are the various goods and services produced?

1.1 DEFINITION AND QUESTIONS

1.1 DEFINITION AND QUESTIONS Can choices made in self-interest also serve the social interest? Let’s illustrate with seven topics: 1 Financial Crisis and Global Slump
The bankers that were eager to lend to home buyers between 2000 and 2006 were pursuing their self-interest (what has been called greed). Borrowers and homebuyers also acted in what they saw as their self-interest.

 When Is the Pursuit of Self-Interest in the
Social Interest?
The choices that are best for the individual who makes them are choices made in the pursuit of self-interest. The choices that are best for society as a whole are choices made in the social interest.

2

1.1 DEFINITION AND QUESTIONS
When the housing bubble burst and homeowners defaulted on their loans, they acted in self-interest. When banks foreclosed on borrowers, they acted in self-interest. But these actions were not in the social interest.

1.1 DEFINITION AND QUESTIONS 3 The Information-Age Economy Makers of computer chip and programs developed products in their self-interest but did they develop their products in the social interest? 4 Disappearing Rainforests and Fish Stocks When we buy products made with ingredients from rainforests are we damaging the social interest?

2 Globalization and International Outsourcing
Globalization and international outsourcing are in the interest of owners of multinational firms that profit, but is it in the social interest?

1.1 DEFINITION AND QUESTIONS 5 Water Shortages Are the global water resources managed in the self-interest or in the social interest? 6 Global Warming The choices we make concerning how to produce and use energy are made in our selfinterest, but do they serve the social interest?

1.1 DEFINITION AND QUESTIONS 7 Social Security Time Bomb As baby boomers reach retirement age, social security payments will increase faster than the taxes used to pay them and the United States will have to borrow from foreigners. Someone will have to pay off these debts. Each voter’s choice about who will pay is made in the self-interest but is it in the social interest?

3

1.2 THE ECONOMIC WAY OF THINKING

1.2 THE ECONOMIC WAY OF