Ch. 1: The Nature & Methods of Economics. What is Economics?. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction ( utility ) of human wants and needs . wants are unlimited, means to satisfy the wants are limited.
*economics derives from Greek “oikonomos;” (“oikos”=house and “nomo”=managing)
1. Resources can only be used for one purpose at a time.
2. Scarcity requires that “rational” choices be made.
3. The cost of any good/service is the value of what must be given up to obtain
it; the opportunity cost (i.e.: go party? or study for a Macro quiz?)
1. decisions to achieve maximum fulfillment of goals.
2. not the same as selfishness.
Marginal Utility: Costs and Benefits
1. Every decision involves a tradeoff.
2. We weigh the marginal benefit against the marginal cost.
3. Costs should not exceed benefits.
4. “No free lunches” and there CAN be “too much of a good thing.”
Political Economy: political issues are economic
issues (i.e.: budgeting, taxation, welfare, international
trade, environmental regulation).
*Economics is NOT to learn “how to make money,” rather
understanding human decision-making.
Why do different social and cultural groups produce and consume
what they do?
2. Ceteris Paribus:“other things equal” (all other variables are held constant)
3. graphing: many economic relationships are demonstrated quantitatively
A. Biases— preconceptions not based on facts.
B. Loaded terminology— terms that contain biases and value judgments.
post hoc fallacy: 1st event not necessarily cause of 2nd
correlation does not necessarily prove causation(i.e.: education & income).
A. Macroeconomics = economy as a whole
1. output, unemployment, income, aggregate expenditures,
B. Microeconomics = specific decision-making
1. positive describes the economy
2. normative involves value judgments
x- and y- axis?
*the “problem”: how resources are used to satisfy wants
NEEDS(for survival)VS. WANTS(provide utility, satisfaction)
The factors of production:
a. Land (all natural resources; fields, forests, ocean, minerals)
b. Labor (human resources used in production)
c. Capital (means of production; tools, equipment, factories)
d. Entrepreneurship (business person; risk-taker)
Resource payments: Land-Rent Labor-wages Capital-Interest Entrepreneurship-Profit
*efficiency requires full employment of available resources and full production.
full employment: all available resources should be employed (no idle land, labor, or capital).
full production: allocative efficiency & productive efficiency
*PPC curves demonstrate opportunity costs and tradeoffs.
Assumptions of PPC models:
1. full efficiency
2. fixed resources
3. fixed technology
4. focus on only two products.
*society must choose the one good over another.
2. more of a product produced, greater (marginal) opportunity cost.
A. Unemployment and productive inefficiency occur when the economy is producing less than full production or inside the PP curve.
B. PPC curve shifts outward due to:
1. resource supply expansion
2. technological advances
C. International trade?
*Economic systems differ in two important ways:
Who owns the factors of production? How is economic activity organized?
I. “TRADITIONAL ECONOMY”:
Examples: Eskimos, ¡Kung bushmen, Pygmies)
II. “COMMAND ECONOMY”:
-central planners (decides jobs, wages, what to produce)
-state ownership of resources (usually communist or socialist)
Examples: North Korea and Cuba
III. “THE MARKET SYSTEM”:
-private ownership of resources.
-markets and prices coordinate and direct economic activity.
-in pure capitalism the government plays a very limited role.
--- invisible hand
IV. “MIXED MARKET ECONOMY”:
-government plays an important role
Examples: U.S., China, Japan, Sweden, Nazi-Germany
a. Households sell resources (labor)
b. Businesses buy resources (land, labor, and capital)
a. Households buy goods and services.
b. Businesses sell products (profit).
c. Interaction of buyers and sellers determines price.