Economics and Economic Reasoning

1. Economics and Economic Reasoning Chapter 1

2. Laugher Curve Q. Why did God create economists? A. In order to make weather forecasters look good.

3. What Economics Is Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

4. What Economics Is One of the key words in the above definition is “coordination.”

5. What Economics Is Three central coordination problems any economic system must solve are:

6. What Economics Is Scarcity ensues because individuals want more than can be produced.

7. What Economics Is The degree of scarcity is constantly changing.

8. What Economics Is Economics is the study of how to get people to do things they're not wild about doing and not to do things they are wild about doing.

9. What Economics Is The following are the five important things to learn in economics:

10. What Economics Is The following are the five important things to learn in economics:

11. A Guide to Economic Reasoning Economic reasoning is making decisions by comparing costs and benefits.

12. Marginal Costs and Marginal Benefits The relevant costs and benefits that matter are the expected incremental or additional costs incurred and the expected incremental benefits of a decision.

13. Marginal Costs and Marginal Benefits If the marginal costs of doing something exceeds the marginal benefits, don’t do it.

14. Marginal Costs and Marginal Benefits In economists’ jargon, marginal refers to additional or incremental.

15. Marginal Costs and Marginal Benefits Marginal cost – the additional cost to you over and above the costs you have already incurred.

16. Marginal Costs and Marginal Benefits Marginal benefit – the additional benefit above and beyond what you’ve already accrued.

17. Marginal Costs and Marginal Benefits According to the economics decision rule:

18. Economics and Passion Economic reasoning is based on the premise that everything has a cost.

19. Economics and Passion Although economists can be as passionate as the next person, they must squelch this normal human response in order to do their work with objectivity.

20. Opportunity Cost Opportunity cost – the basis of cost/benefit economic reasoning; it is a cost of the activity you have chosen measured by the benefit foregone, of the next-best alternative to the activity you have chosen.

21. Opportunity Cost In economic reasoning, opportunity cost must be less than the benefit of what you have chosen.

22. Opportunity Cost Opportunity costs are not limited to individual decisions but to government decisions as well.

23. Opportunity Cost The opportunity cost concept applies to all aspects of life and is fundamental to understanding how society reacts to scarcity.

24. Economics and Market Forces When goods are scarce, they must be rationed. Rationing is a mechanism chosen to determine who gets what.

25. Economics and Market Forces One of the important choices that a society must make is to what extent economic forces are allowed free rein.

26. Economics and Market Forces A market force is an economic circumstance that is given relatively free rein by society to work through the market.

27. Economics and Market Forces Economic reality is controlled by three forces: Economic forces (the invisible hand). Social and cultural forces. Political and legal forces.

28. Economics and Market Forces Economic forces:

29. Economics and Market Forces Social and cultural forces, political and legal forces:

30. Economic Terminology Learning economic terminology takes repetition and memorization, hardly a fun things to do.

31. Economic Terminology Hundreds of economic terms will be introduced in this book.

32. Economic Insights General insights into how economies work are often based on economic theory. Economic theory – generalizations about the workings of an abstract economy.

33. Economic Insights Theory ties together economists’ terminology and knowledge about economic institutions and leads to economic insights.

34. Economic Insights Because theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle.

35. Economic Insights Because theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle.

36. Economic Insights Theories, and the models and principles used to represent them, are abstract but efficient means of conveying information.

37. Economic Insights In order to understand the theory you must understand the assumptions underlying the theory.

38. The Invisible Hand Theory The invisible hand theory states that markets are efficient in coordinating individuals’ decisions, allocating scarce resources to their best possible use.

39. The Invisible Hand Theory This insight is called the invisible hand theory – a market economy through the price mechanism will allocate resources efficiently.

40. Economic Theory and Stories Economic theory and its models are a shorthand means of telling a story. If you can’t translate a theory into a story, you don’t understand the theory.

41. Microeconomics and Macroeconomics Economic theory is divided into two parts: microeconomics and macroeconomics.

42. Microeconomics and Macroeconomics Economic theory is divided into two parts: microeconomics and macroeconomics.

43. Microeconomics Microeconomics is the study of individual choice, and how that choice is influenced by economic forces.

44. Microeconomics Microeconomic theory considers economic reasoning from the viewpoint of individuals and firms and builds up from there to an analysis of the entire economy.

45. Microeconomics Microeconomics studies such things as: pricing policy of firms, households’ decisions on what to buy, and how markets allocate resources among alternative ends.

46. Microeconomics Microeconomics analyses from the parts to the whole.

47. Macroeconomics Macroeconomics is the study of inflation, unemployment, business cycles, and economic growth. Macroeconomics analyzes from the whole to the parts.

48. Economic Institutions Corporations, governments, and cultural norms are all economic institutions. They differ significantly among nations. Economic institutions sometimes seem to operate in ways quite different than economic theory predicts.

49. Economic Institutions In applying economic theory to reality, you’ve got to have a sense of economic institutions.

50. Economic Policy Options Economic policies are actions (or inactions) taken by government to influence economic actions.

51. Economic Policy Options Those who wish to carry out economic policy effectively must understand how institutions might change as a result of the economic policy.

52. Objective Policy Analysis Good objective policy analysis keeps the value judgments separate from the analysis. Subjective policy analysis is that which reflects the analyst’s view of how things should be.

53. Objective Policy Analysis In order to make the distinction between objective and subjective analysis clear, economists have divided economics into three categories.

54. Objective Policy Analysis Positive economics is the study of what is, and how the economy works.

55. Objective Policy Analysis Normative economics is the study of what the goals of the economy should be.

56. Objective Policy Analysis Normative economics is the study of what the goals of the economy should be.

57. Objective Policy Analysis Art of economics is the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics.

58. Objective Policy Analysis Maintaining objectivity is easier in positive economics – harder in normative economics.

59. Objective Policy Analysis It is hardest to maintain objectivity in the art of economics since it embodies the problems of both positive and normative economics.

60. Objective Policy Analysis One of the best ways to find out about feasible economic policy options is to compare them from one country to another.

61. Policy and Social and Political Forces The choice of policy options depends on more than economic theory. As soon as economists apply economy theory to policy, political and social forces must be taken into account.

62. Economics and Economic Reasoning End of Chapter 1