Thinking Like an Economist

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Thinking Like an Economist

• 4 Questions about Economics
• Thinking in Terms of Scarcity, Opportunity Costs
  and Decisions at the Margin
• Economic Categories

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4 Questions about Economics

• What is Economics?
• Science of choices that individuals and societies
  must make. Society has to make choices because
  we cant have everything that we want. Our wants
  are greater than the resources available to
  satisfy those wants. Our wants are infinite our
  resources are finite. This condition is called
  scarcity.

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4 Questions about Economics

• What do Economists Study?
• Prices, costs, interest rates, unemployment,
  inflation, profit, budget deficits, trade
  deficits, exchange rates, crime, family
  relationships, war and politics. Economic
  analysis is unlimited because everything relates
  to benefits and costs.

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4 Questions about Economics

• Is there an economic way of thinking?
• Yes, an economist doesnt just notice things, he
  or she notices how things came to be and how
  others view the importance of those things.

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4 Questions about Economics

• Why study Economics?
• Economists look to economics for its explanatory
  and predictive power
• John Maynard Keynes
• Practical men, who believe themselves to be
  quite exempt from any intellectual influences are
  usually slaves to some defunct economist.

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Thinking in Terms of Scarcity and its Effects

• Scarcitywantsgtresources
• Wants include anything that provides utility or
  satisfaction (a good)
• Something that provides disutility or
  dissatisfaction ( a bad)
• It takes resources (inputs or factors of
  production) to produce goods. Resources are
  divided into four categories land, labor,
  capital and entrepreneurship.

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Land

• Land includes natural resources (minerals,
  forests, water)

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Labor

• Physical and mental talents people contribute to
  the production process

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Capital

• Produced goods that can used as inputs for
  further production

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Entrepreneurship

• Talent for organizing resources (land, labor and
  capital) to produce goods, seek new business
  opportunities, and develop new ways of doing
  things.

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Thinking in Terms of Opportunity Cost

• Because wantsgtresources, some wants go
  unsatisfied. We must choose between those we
  satisfy and those we will not. The most highly
  valued alternative that is forfeited when a
  choice is made is known as opportunity cost.

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Thinking in Terms of Decisions Made at the Margin

• Do the marginal benefits of doing something
  outweigh the marginal costs? Economists refer to
  choices made on the basis of this question as a
  decision at the margin.

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Economic CategoriesTwo Approaches to an Issue

• Positive and Normative Economics
• The Positive Approach is objective and does not
  contain value judgments (the way things are, can
  be tested)
• The Normative Approach is subjective and does
  contain value judgments (the way things should be)

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Economic CategoriesTwo Divisions of Economics

• Microeconomics deals with individual
  decision-making units such as a firm or household
  (prices per unit, wage rate)
• Macroeconomics deals with broad economic
  aggregates rather than individual units
  (inflation, taxation, unemployment)