Economics Defined The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human wants and needs. Wants are unlimited Resources are limited so satisfying wants can be a problem

Perspectives in Economics Scarcity and choice Resources can only be used for one purpose at a time Scarcity thus requires that choices must be made The cost of any good, service, or activity is the value of what must be given up to get it. This is opportunity cost. This is a most important concept which we will refer to over and over.

Rational Behavior Rational self interest means you make decisions to achieve the maximum fulfillment of your goals Different preferences (personal wants and needs) and circumstance lead to different choices for individuals Rational self interest is not to be equated with selfishness although an argument could be made to do so. (Also known as the invisible hand)

Marginalism: How much wood.. In economics marginalism refers to extra. If you talk about marginal benefit or marginal cost you are talking about extra or added to the original. Most decisions concern a change in current conditions: so the focus of choice is based on marginal analysis or is the benefit of the choice greater than the cost of the choice. This is true for each additional choice involved with this decision.

Marginalism Economics uses certain short cuts to refer to marginalism: MB= marginal benefit. That is the added benefit one receives for making or doing a particular thing. MC= marginal cost. That is the added cost one receives for making or doing a particular thing.

Marginalism cont. This applies to individuals, firms, and government. The principle is the same. If the marginal cost of an action or decision exceeds the marginal benefit then it should not be done or chosen. TINSTAAFL-this is no such thing as a free lunch. Learn this acronym!!!!!! Let’s look at this to see if it is true.

Methodology of the Science of Economics Observation Formulation of explanations for the cause and effect relationships(hypotheses) Testing hypotheses Accepting, rejecting, or modifying the hypotheses

continued Many economic principles are embodied in Theories Laws Models You can usually tell who has studied economics too long because they have a law named after them.

Ceteris Paribus This assumption is all important when working with assumptions and information in economics. Essentially, what it means is “ all other things being equal” or “we are going to keep all factors the same except one which we are going to change” and see what happens. In most circumstances only ONE condition is changed at a time allowing us to look at its effect. If asked for then another condition would change and we would do the same thing.

Theoretical versus Policy Theory economics is intellectual and academic. It is used to test abstractions and connections of hypotheses, models, usually in the most simple way. In this economics models scientific experiment.

Policy Economics Policy economics uses economic facts and principles to resolve specific problems and achieve certain goals in a specific economic function.

Formulating Policy State goals for policy Recognize options that may be used to achieve goals Evaluate the options on the basis of criteria specific and important to those who are in power. (decision makers)

Economic Goals common to Western Capitalist Democracies Economic growth Full Employment (low unemployment) Economic Efficiency Price Level Stability (low inflation) Economic Freedom Equitable Distribution of Income Economic Security Economic Justice

Issues with goals Some are contradictory Some are complementary Some are wishes and unfulfillable Not all goals can be attained at the same time or with the scarce resources we have so choices must be made

There are two schools of economics Macroeconomics is the study of the economy as a whole by looking at large segments known as aggregates such as GDP, unemployment, inflation, etc. Microeconomics is the study of specific economic units such as households, firms, and specific markets and products

Positive and normative Positive economics describes the economy as it actually is, avoids value judgment and bias, and attempts to establish scientific statements about economic behavior. Normative economics involves value judgments and bias in which the economy is seen as it SHOULD be according to the perspective of that person and what needs to be done to get it to that point. Most political economic statements are normative.

Pitfalls for economic students Bias and preconceptions should be limited Loaded terminology enhances bias and should be used as little as possible. Not knowing the correct economic language to use. Terms are important and should be learned as appropriate. Fallacies: Post Hoc Fallacy and Correlation versus Causation. I will give examples.