The Study of Economics Guided Notes

Economics is the study of how people satisfy their wants with scarce resources Microeconomics: approaches the study of economics from the viewpoint of individual households and firms Macroeconomics: approaches the study of economics from the viewpoint of the economy as a whole (households, firms, government, the rest of the world)

II. The fundamental economic problem - scarcity i. Scarcity is the condition of having unlimited wants and limited resources

1. “Resource has a particular meaning in economics” Productive resources (a.k.a. factors of production or resources) Natural Resources (forests, land, minerals, oil, water, animals) Human Resources (mental and physical) Capital Resources (money, buildings, factories, technology) Entrepreneurs (risk takers who combine the land, capital, labor into new products)

ii. Resources are “scarce” for the simple reason that there is not an unlimited supply of time, people, land, and so on.

iii. Discussion question Why do you think scarcity is an issue with the rich as well as the poor?

Answer It is a human trait that few people, regardless of their economic status, are satisfied with what they have.

III. Each nation in the world has something fundamental in common with all other nations: each has to decide how to answer the three economic questions. What is produced? This is an allocation question. Society must choose based on its needs. How is it produced? This is an efficiency question. Society must choose based on its resources. For whom should we produce? This is a distribution question. Society must choose based on its population and other available markets.

iv. The way in which a society answers these three economic systems defines its economic system.

v. Discussion questions How might the economic decisions of an island society differ from those of a landlocked society?

Answer An island society has water resources to consider and likely a smaller population.

IV. The Scope of Economics Economists analyze how our economy is performing and how to adjust economic growth- using GDP, unemployment rate, tax rates, etc. to do so Economists analyze the “why” and “how” of economic activity- why prices go up and down, or how taxes affect savings Economists use theory to show how yesterday’s and today’s economic activities will affect potential future activity- how government spending today may affect the National Debt

V. Thinking Like an Economist Economists create economic theories to make predications about the real world. Economic theory: a simplification of an economic reality that is used to make predictions about the real world The more detail= more difficult to understand and less useful Other-things-constant assumption (Ceteris Parabis): the idea to identify the variables of interest and then focus exclusively on the relationships among them, assuming nothing else of importance changes

ii. Marginal Analysis MARGINAL= incremental, additional Economic choice is based off of comparing the marginal benefit to the marginal cost (marginal analysis) A rational decision maker will choose to do something as long as the expected marginal benefit exceeds the marginal cost.