Chapter 1: The Nature & Method of Economics

1. 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 society’s unlimited wants

2. 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.

3. 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.

4. 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 > Marginal Cost • Marginal Benefit = Marginal Cost: “At the Margin”

5. Why Study Economics? • Economic Issues • Unemployment • Inflation • Economic Growth • Taxation • Poverty • International Trade • Health Care • Pollution • Discrimination • Immigration • Education

6. 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

7. 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”

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. Pitfalls to Sound Reasoning • Biases • Loaded Terminology • Definitions • Fallacy of Composition • Causation Fallacies • Post Hoc Fallacy • Correlation v. Causation (p. 11)

15. Chapter 1 Study Questions • 4 • 10 • 11 • 12 • 13 • 14