What Economics Is About Chapter 1

1
What Economics Is About Chapter 1
2
Economic Definitions

• Scarcity is the condition in which our wants are
  greater than the limited resources available to
  satisfy them.
• Economics is the science of scarcity or how
  individuals and societies deal with the fact that
  wants are greater than the limited resources
  available to satisfy those wants.

3
Economic Definitions

• Economics is the study of how society manages its
  scarce resources.

4
Economic Categories

• Positive and Normative Economics
• Microeconomics and Macroeconomics

• Positive Economics the study of what is.
• Normative Economics the study of what should
  be.

• Microeconomics the branch of economics that
  deals with human behavior and choices as they
  relate to relatively small units.
• Macroeconomics the branch of economics that
  deals with human behavior and choices as they
  relate to highly aggregate markets or the entire
  economy.

5
Economic Categories

• Positive or Normative Statements?
• An increase in the minimum wage will cause a
  decrease in employment among the least-skilled.
• The income gains from a higher minimum wage are
  worth more than any slight reductions in
  employment.

6
Economic Categories

• Microeconomics or Macroeconomics?
• How households and firms make decisions and how
  they interact in specific markets
• Economy-wide phenomena, including inflation,
  unemployment, and economic growth

7
Key Concepts in Economics

• Utility/Disutility
• Utility Satisfaction one receives from a good
• Disutility The dissatisfaction one receives
  from bad
• Goods/Bads
• Good Anything from which individuals receive
  utility
• Bad Anything from which individuals receive
  disutility or dissatisfaction.
• Tangible
• Intangible

8
Key Concepts in Economics

• Factors of Production/Resources
• Land All natural resources, such as minerals,
  forests, water, and unimproved land.
• Labor The physical and mental talents people
  contribute to the production process.
• Capital Produced goods that can be used as
  inputs for further production, such as factories,
  machinery, tools, computers, and buildings.
• Entrepreneurship A particular talent that some
  people have for organizing the resources of land,
  labor, and capital to produce goods, seek new
  business opportunities, and develop new ways of
  doing things.

9
Key Concepts in Economics

• Factors of Production
• Apartment building
• Farm Animals
• NASA Engineer
• Road
• School
• North Sea oil and gas development
• Opera singer
• Housewife
• Air

10
Exhibit 1 Scarcity and Related Concepts
11
Key Concepts in Economics

• Need for a Rationing Device
• Implied by Scarcity
• Price
• First-Come-First Served
• Beauty
• Scarcity and Competition
• Competition exists because of scarcity.
• Whatever the rationing device, people will
  compete for it.

12
Thinking in Terms of Opportunity Cost

• The most highly valued opportunity or alternative
  forfeited when a choice is made.
• The higher the opportunity cost of doing
  something, the less likely it will be done.

13
There Is No Such Thing As A Free Lunch

• Opportunity costs are incurred when choices are
  made.
• Free education, medical care, housing, bridges,
  and parks may be considered free by some.
• None are actually free.
• The resources could have been used in other ways.

14
Thinking In Terms Of

• Costs and Benefits
• Decisions Made Efficiency
• Marginal Benefits Marginal Costs
• Marginal Benefits Marginal Costs
• Maximizes Net Benefits
• At The Margin

15
Example
16
Exhibit 2 Efficiency
17
Thinking In Terms Of

• Equilibrium Natural resting place
• Ceteris Paribus Assumption all other things
  constant nothing else changes!

18
Thinking In Terms Of

• The Difference between Association and Causation
• The Difference between the Group and the
  Individual
• Fallacy of Composition erroneous view that what
  is good or true for the individual is necessarily
  good or true for the group.

19
Economists Theories

• Theory an abstract representation of the real
  world designed with the intent of better
  understanding the world.
• emphasizes those variables that are believed to
  be the main variables that explain an activity or
  event.

20
Building and Testing A Theory

• Decide on what you want to explain or predict.
• Identify important variables
• State assumptions of the theory
• State the Hypothesis
• Test the theory by comparing its predictions
  against real-world events.
• If the evidence supports the theory, continue to
  examine the theory.

21
Building and Testing A Theory

• If the evidence rejects the theory, either revise
  the theory or amend the old theory in terms of
  variables, assumptions or hypothesis.

22
Exhibit 3 Building and Testing a Theory
23
How Do We Judge Theories?

• According to Milton Friedman
• None are descriptively realistic.
• Are they sufficiently good approximations for the
  purpose in hand?
• Do they yield sufficiently accurate predictions?