1. Chapter 1 Introducing the Economic Way of Thinking
Microeconomics for Today Irvin B. Tucker
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2. What will you learn in this chapter?
You will be acquainted with the foundation of the economic way of thinking
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3. What is the economic way of thinking?
A logical framework for organizing your thoughts and understanding economics
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What are some examples?
Can you prove there is no person worth a trillion dollars?
Why would you purchase more Coca-Cola when the price increases?
How can you explain the relationship between the Super Bowl winner and changes in the stock market?
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5. What are the 3 building blocks in the economic way of thinking?
scarcity & choice
model building
pitfalls of economic reasoning
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6. What is the economic problem?
Providing for people’s wants and needs in a world of scarcity
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7. What is meant by scarcity?
The condition in which wants are forever greater than the available supply of time, goods, and resources
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8. What does scarcity force us to do?
It forces us to make choices
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What are resources?
The basic categories of inputs used to produce goods and services
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10. What are the three categories of resources?
Land
Labor
Capital
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What is a land resource?
A shorthand expression for any natural resource provided by nature
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What is labor?
The mental and physical capacity of workers to produce goods and services
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What is capital?
The physical plants, machinery, and equipment used to produce other goods, they do not directly satisfy human wants
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14. What is financial capital?
The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital
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15. What is entrepreneurship?
Creative labor of individuals that enables them to seek profits by combining resources
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Labor
Land
Capital
Entrepreneurship organizes
resources to produce goods
and services
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What is economics?
The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs
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18. What is macroeconomics?
The branch of economics that studies decision-making for the economy as a whole
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19. What is microeconomics?
The branch of economics that studies decision-making by a single individual, household, firm, industry, or government
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20. What is an economic model?
A simplified description of reality used to understand and predict the relationships between variables
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21. What is the purpose of an economic model?
To forecast or predict the results of various changes in variables
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22. What is the scientific method?
Problem identification
Model development
Testing a theory
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23. Develop a model based on simplified assumptions
Identify the problem
Develop a model based on simplified assumptions
Test the model and formulate a conclusion
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24. What conclusion can we make?
If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected
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25. What assumption is always made when testing a model?
ceteris paribus
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26. What is ceteris paribus?
A Latin phrase that means that while certain variables can change, “all other things remain unchanged”
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27. What is an example of ceteris paribus?
If the price of new Ford cars decrease, and everything else stays the same, consumers will buy more, but if other variables change, we cannot make a prediction
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28. What is the difference between association and causation?
We cannot always assume that when one event follows another, the first caused the second
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What are the two common pitfalls in understanding how the economy works?
failing to understand the ceteris paribus assumption
confusing association with causation
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30. What conclusion can we make?
A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied
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31. Why do economists forecasts differ?
Because using the same methodology, economists can agree that event A causes event B, but disagree over the assumption that event A will occur
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32. Why do some economists disagree?
The answer lies in understanding the difference between positive and normative economics
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33. What is positive economics?
An analysis limited to statements that are verifiable
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34. What is normative economics?
An analysis based on value judgement
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35. What conclusion can we make?
When opinions or points of view are not based on facts, they are scientifically untestable
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END
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