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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.

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what is 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)

the economic perspective scarcity rational choice
The Economic Perspective: Scarcity & Rational Choice

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?)

Rational Choice:

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.”

why study economics
Why Study Economics?

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?

economic methodology
Economic Methodology
  • the scientific method

2. Ceteris Paribus:“other things equal” (all other variables are held constant)

3. graphing: many economic relationships are demonstrated quantitatively

pitfalls to objective thinking
Pitfalls to Objective Thinking

A. Biases— preconceptions not based on facts.

B. Loaded terminology— terms that contain biases and value judgments.

  • Causation fallacies—

post hoc fallacy: 1st event not necessarily cause of 2nd

correlation does not necessarily prove causation(i.e.: education & income).

macro vs micro
Macro vs. Micro

A. Macroeconomics = economy as a whole

1. output, unemployment, income, aggregate expenditures,

price level.

B. Microeconomics = specific decision-making

  • Positive and Normative Economics

1. positive describes the economy

2. normative involves value judgments

graphing review
Graphing Review

x- and y- axis?


positive correlation?

negative correlation?

Ch. 2: The Economizing Problem

*the “problem”: how resources are used to satisfy wants

NEEDS(for survival)VS. WANTS(provide utility, satisfaction)

i four types of scarce resources
I. Four types of scarce resources:

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

ii economic efficiency
II. Economic Efficiency:

*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

iii production possibilities curves ppc s
III. Production possibilities curves (PPC’s)

*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.

*optimal mix?
  • Some point on the curve
  • The exact point depends on society’s wants
iv law of increasing opportunity costs
IV. Law of Increasing Opportunity Costs:
  • opportunity cost: the amount of one product that must be given up to produce another.

2. more of a product produced, greater (marginal) opportunity cost.

v how to achieve economic growth
V. How to Achieve Economic Growth:

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?

*comparative advantage

types of economic systems

*Economic systems differ in two important ways:

Who owns the factors of production? How is economic activity organized?



Examples: Eskimos, ¡Kung bushmen, Pygmies)


-central planners (decides jobs, wages, what to produce)

-state ownership of resources (usually communist or socialist)

Examples: North Korea and Cuba


-private ownership of resources.

-markets and prices coordinate and direct economic activity.

­-in pure capitalism the government plays a very limited role.

--- invisible hand


-government plays an important role

Examples: U.S., China, Japan, Sweden, Nazi-Germany

* Money flows in one direction, while goods, services, and the factors of production flow in the opposite direction.

Resource/Factor markets:

a. Households sell resources (labor)

b. Businesses buy resources (land, labor, and capital)

Product markets:

a. Households buy goods and services.

b. Businesses sell products (profit).

c. Interaction of buyers and sellers determines price.