Chapter 1: The Nature & Method of Economics

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Chapter 1 The Nature Method of Economics

• Society uses resources to produce goods
  services
• Production satisfies many economic wants and
  occurs through organizational mechanism called
  economic system or the economy.
• Our economic wants far exceed the productive
  capacity of limited and scarce resources
• Therefore, the complete satisfaction of our
  economic wants is impossible
• Economics is the social science concerned with
  the problem of using scarce resources to attain
  the maximum fulfillment of societys unlimited
  wants

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The Economic Perspective

• The economic perspective is the economic way of
  thinking
• Human property resources are scarce
• Goods services produced with those resources
  are also scarce
• Scarcity limits our options, we must make choices.

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Rational Behavior

• Economics is grounded on the assumption of
  rational self-interest
• Achieve greatest satisfaction
• Rational behavior individuals make different
  choices under different circumstances
• Rational decisions change as costs and benefits
  change
• Self-interest behavior enables a person to
  achieve personal satisfaction.

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Marginalism Benefits Costs

• Economic perspective focuses on marginal
  analysis, the comparison of marginal benefits and
  marginal costs.
• Marginal Extra, Additional
• Choices decisions involve changes in the
  existing state of affairs (status quo)
• When making choices rationally, compare marginal
  benefits vs. marginal costs.
• Marginal Benefit gt Marginal Cost
• Marginal Benefit Marginal Cost At the Margin

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Why Study Economics?

• Economic Issues
• Unemployment
• Inflation
• Economic Growth
• Taxation
• Poverty
• International Trade
• Health Care
• Pollution
• Discrimination
• Immigration
• Education

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Why Study Economics?

• Vital to Business
• An understanding of how to make economic
  decisions and the operation of the economic
  system enables business managers executives to
  increase profit.
• New technology
• Mergers Acquisitions
• Hire/Fire Employees
• Recessions
• Inflation
• Economics helps consumers and workers make better
  buying, employment, financial decisions

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Economic Methodology

• Economics relies on the Scientific Method
• Theoretical Economics Process of deriving
  economic theories and principles is systematic,
  involves fact-gathering and analysis ? generalize
• Economic theories, principles, and laws are
  generalizations relating to economic behavior or
  the economy itself, expressed as tendencies of
  the typical consumer, worker, or firm
• Ceteris Paribus Other things being equal

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Policy Economics

• Recognizes that theories and data can be used to
  formulate policies
• Policies are courses of action on economic
  principles
• Policies are intended to resolve a specific
  economic problem or further an economic goal

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Economic Goals

• Economic Growth Produce better goods
  services Higher SOL
• Full Employment Suitable jobs
• Economic Efficiency Maximize wants w/ available
  Resources
• Price-level Stability Avoid Inflation
  Deflation
• Economic Freedom
• Equitable Distribution of Income Reduce
  Disparity between Poverty Abundance
• Economic Security Minimum Levels of Income
• Balance of Trade Overall balance w/ ROW in
  Trade Financial Transactions

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Macroeconomics

• Macroeconomics examines the economy as a whole or
  aggregates
• Government, Household, Business Sectors
• Aggregate Collection of specific economic units
  treated as one.
• Macro seeks to obtain an overview
• E.g. Total Output, Employment, or Income
  Aggregate Expenditures and General Level of
  Prices

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Microeconomics

• Microeconomics focuses on specific units of the
  economy, observing details of an economic unit,
  or small segment of the economy
• Individual Industry, Firm, or Household
• E.g. Price of Single Product, EE at Single
  Firm, Revenue/Income of Single Household

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Positive Economics (What is)

• Positive economics focuses on facts and
  cause-and-effect relationships
• Avoids value judgments
• Tries to establish scientific statements about
  economic behavior
• Deals w/ what economy is actually like.

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Normative Economics (What ought to be)

• Incorporates value judgments about what economy
  should be like or what particular policy actions
  should be recommended to achieve desired goal.
• Most of the disagreement among economists
  involves normative, value-based policy questions.

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Pitfalls to Sound Reasoning

• Biases
• Loaded Terminology
• Definitions
• Fallacy of Composition
• Causation Fallacies
• Post Hoc Fallacy
• Correlation v. Causation (p. 11)

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Chapter 1 Study Questions

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• 10
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