Chapter 1 Introducing the Economic Way of Thinking Key Concepts Summary Practice Quiz ©2004 Thomson/South-Western
What do the first two chapters do? They introduce you to a foundation of economic knowledge * Return to previous slide while in slide show mode
What is the economic problem? Providing for people’s wants and needs in a world of scarcity
What is meant by scarcity? The condition in which wants are forever greater than the available supply of time, goods, and resources
What does scarcity force us to do? It forces us to make choices
What are resources? The basic categories of inputs used to produce goods and services
What are the three categories of resources? Land Labor Capital
What is a land resource? A shorthand expression for any natural resource provided by nature
What is labor? The mental and physical capacity of workers to produce goods and services
What is capital? The physical plants, machinery, and equipment used to produce other goods
What is financial capital? The money used to purchase capital
Labor Land Capital Entrepreneurship organizes resources to produce goods and services
What is entrepreneurship? The creative ability of individuals to seek profits by combining resources to produce innovative products.
What is economics? The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants
What is macroeconomics? The branch of economics that studies decision-making for the economy as a whole
What is microeconomics? The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government
What is an economic model? A simplified description of reality used to understand and predict the relationship between variables
What is the purpose of an economic model? To forecast or predict the results of various changes in variables
What are the steps in model building? Problem identification Model development Testing a theory
Develop a model based on simplified assumptions Identify the problem Develop a model based on simplified assumptions Collect data and test the model
What assumption is always made when testing a model? ceteris paribus
What is ceteris paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged”
What is the difference between association and causation? We cannot always assume that when one event follows another, the first caused the second
What is positive economics? An analysis limited to statements that are verifiable
What is normative economics? An analysis based on value judgement
Key Concepts
What is the economic problem? What is meant by scarcity? What are resources? What are the three categories of resources? What is entrepreneurship? What is economics? What is macroeconomics? What is microeconomics?
What is the scientific method? What assumption is always made when testing a model? What is ceteris paribus? What is the purpose of model building? What is positive economics? What is normative economics?
Summary
Scarcity is the fundamental economic problem that human wants exceed the availability to time, goods, and resources. Individuals and society therefore can never have everything they desire.
Resources are factors of production classified as land, labor, and capital. Entrepreneurship is a special type of labor. An entrepreneur combines resources to produce innovative products.
Economics is the study of how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives.
Society Chooses Resources Scarcity Unlimited wants
Macroeconomics applies an economy wide perspective that focuses on such issues as inflation, unemployment, and the growth rate of the economy.
Microeconomics examines individual decision-making units within an economy. Microeconomics studies such topics as a consumer’s response to changes in the price of coffee and the reasons for changes in the market price of personal computers.
Models are simplified descriptions of reality used to understand and predict economic events. An economic model can be stated verbally or in a table, graph, or equation. If the evidence is not consistent with the model, the model is rejected.
Collect data and test the model Develop a model based on assumptions Identify the problem
Ceteris paribus holds “all other factors unchanged” that might affect a particular relationship. If this assumption is violated, a model cannot be tested. Another reasoning pitfall is to think association means causation.
Positive economics uses testable statements Positive economics uses testable statements. Often a positive argument is expressed as an “if-the” statement. Normative economics is based on value judgments or opinions and uses words such as good, bad, ought to, and ought not to.
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