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. ECONOMICS ANDECONOMIC REASONING Chapter 1

4. You will need to: Define economics. Examine three economic (coordinating) problems all economies must solve. Compare marginal costs and marginal benefits to make economic decisions. Define and explain opportunity costs.

5. You will need to: Explain how economic, social, and political forces influence real-world events. Distinguish between: microeconomics and macroeconomics. positive economics, normative economics, and the art of economics.

6. 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.

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

8. What Economics Is Any economic system must solve three central coordination problems:

9. What Economics Is Scarcity exists because individuals want more than can be produced.

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

11. 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.

12. What Economics Is To understand the economy, you need to learn:

13. What Economics Is To understand the economy, you need to learn: Information about economic institutions.

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

15. 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.

16. Marginal Costs and Marginal Benefits Economist use the term marginal when referring to additional or incremental.

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

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

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

20. Economics and Passion Economic reasoning is based on the premise that everything has a cost. It leads to a better society for the majority of people.

21. Opportunity Cost Opportunity cost is the basis of cost/benefit economic reasoning It is the benefit foregone, or cost, of the next-best alternative to the activity you have chosen.

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

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

24. Economics and Market Forces The opportunity cost concept applies to all aspects of life. It is fundamental to understanding how society reacts to scarcity.

25. Economics and Market Forces When goods are scarce, they must be rationed.

26. Economics and Market Forces Economic forces are the necessary reactions to scarcity.

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

28. Economics and Market Forces Market forces ration by changing prices.

29. Economics and Market Forces Economic reality is controlled by three forces:

30. Economics and Market Forces The invisible hand is the price mechanism, the rise and fall of prices, that guides our actions in a market.

31. Economics and Market Forces Social, cultural, and political forces play a major role in deciding whether to allow market forces to predominate.

32. Economics and Market Forces Political and social forces often work together against the invisible hand.

33. Economics and Market Forces What happens in society can be seen as a reaction to, and interaction of, economic forces, political forces, social forces, and historical forces.

34. Economic Terminology You’ll need to learn economic terminology. Hundreds of economic terms will be introduced in this book.

35. Economic Insights General insights into how economies work are often based on generalizations called economic theories.

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

37. Economic Insights Economic theories are too abstract to apply to specific cases.

38. Economic Insights Economic model – a framework that places the generalized insights of the theory in a more specific contextual setting.

39. Economic Insights Economic principle – a commonly held insight stated as a law or general assumption.

40. Economic Insights Economists cannot test their models with controlled experiments.

41. Economic Insights Theories, models, and principles must be combined with a knowledge of real-world economic institutions to arrive at a specific policy recommendation.

42. The Invisible Hand Theory Economist have come to the following insight: Price has a tendency to fall when the quantity supplied is greater than the quantity demanded. Price has a tendency to rise when the quantity demanded is greater than the quantity supplied.

43. The Invisible Hand Theory According to the invisible hand theory, a market economy, through the price mechanism, will allocate resources efficiently.

44. 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.

45. Microeconomics and Macroeconomics Economic theory is divided into two parts: microeconomic theory and macroeconomic theory.

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

47. Microeconomics Microeconomics studies such things as:

48. Macroeconomics Macroeconomics is the study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and economic growth.

49. Economic Institutions To apply economic theory to reality, you’ve got to have a sense of economic institutions. Economic institutions – laws, common practices, and organizations in a society that affect the economy.

50. Economic Institutions Economic institutions differ significantly among nations.

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

52. Economic Policy Options To carry out economic policy effectively, one must understand how the economic policy might change institutions.

53. 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.

54. Objective Policy Analysis To make clear the distinction between objective and subjective analysis, economics is divided into three categories:

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

56. Objective Policy Analysis Art of economics – the application of the knowledge learned in positive economics to achieve the goals determined in normative economics.

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

58. Objective Policy Analysis It is hardest to maintain objectivity in the art of economics.

59. 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.

60. Economics and Economic Reasoning Summary In solving the economic problem of scarcity, any economy must answer the questions what should be produced how should it be produced who should get it Economic reasoning compares marginal benefits with marginal costs. Do something if its marginal benefits > its marginal costs. The opportunity cost of an activity is the benefit you would have gained from the next best alternative.

61. Economics and Economic Reasoning Summary The market, which rations scarce resources by changing prices, is efficient under certain conditions. Economics can be divided into Microeconomics – the study of individual choice Macroeconomics – the study of the economy as a whole Economics can be subdivided into Positive economics – the study of what is Normative economics – the study of what should be The art of economics – relating positive to normative economics

62. Review Exercise 1-1

63. Economics and Economic Reasoning End of Chapter 1