Chapter 1 Exploring Economics CoreEconomics 2 nd edition by Gerald W. Stone 1 © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone Slides By: Debbie Evercloud

What is Economics About? Key Ideas of Economics Adam Smith (1723 – 1790) Nobel Prize: Paul A. Samuelson Chapter Outline © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

At the end of this chapter, the student will be able to: – Explain the scope of economics and economic analysis – Distinguish between microeconomics and macroeconomics – Describe how economists use models – Describe the ceteris paribus assumption Learning Objectives © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

At the end of this chapter, the student will be able to: – Discuss the difference between efficiency and equity – Recognize fundamental concepts of the economic approach Learning Objectives © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Economic Growth Economic growth is the focus of political debate and government policy. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Economic Growth Small improvements make a significant difference over the long term. Reducing the rate of annual economic growth by one percentage point for the past 75 years would cut our current standard of living in half. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

What is Economics About? Economics analyzes human behavior from the perspective of rationality. We assume that people respond to incentives. This frames the economic perspective as it is used to understand how people react to costs and benefits. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Categories of Economic Theory Microeconomics is concerned with decisions made by consumers, workers, and firms. – Decisions made within the marketplace usually promote efficiency. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Categories of Economic Theory Macroeconomics focuses on the broader issues we face as a nation. – Fluctuations of the business cycle create recessions, unemployment, and periods of inflation. – Monetary and fiscal policy measures are used to smooth out these fluctuations. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Model Building Economic analysis uses a stylized approach. Models typically are accompanied by the ceteris paribus assumption. Models are crafted from new insights, and they are tested against empirical realities. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Equity vs. Efficiency Efficiency deals with how well resources are used and allocated. Equity deals with questions of fairness. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

What is Economics About? Economics is separated into two broad categories: microeconomics and macroeconomics. Microeconomics deals with individuals, firms, and industries and how they make decisions. Macroeconomics focuses on broader economic issues such as inflation, employment and unemployment, and economic growth. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

What is Economics About? Economics uses a stylized approach, creating simple models holding all other relevant factors constant. Economists and policymakers often confront the tradeoff between efficiency and equity. Economists have much to say about efficiency. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Try It! Economists would say that governments are concerned with economic growth because: – A. this is the primary way that countries compete with one another. – B. it is only through economic growth that countries can increase the amount of money they have. – C. economic growth is the primary determinant of the overall standard of living. – D. it is possible for political leaders to claim that economic growth is always strong, since there is no way of measuring it. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Try It! Economists would say that governments are concerned with economic growth because – A. this is the primary way that countries compete with one another. – B. it is only through economic growth that countries can increase the amount of money they have. – C. economic growth is the primary determinant of the overall standard of living. Correct! – D. it is possible for political leaders to claim that economic growth is always strong, since there is no way of measuring it. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Key Ideas of Economics Choice and scarcity force tradeoffs. Opportunity costs dominate our lives. Rational thinking requires thinking at the margin. – Even hummingbirds demonstrate the behavior of comparing costs and benefits. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Key Ideas of Economics People follow incentives. Markets are efficient. – They encourage the provision of goods at the lowest possible opportunity cost. Government must deal with market failure. Information is important. Specialization and trade improve our well- being. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Key Ideas of Economics Productivity determines our standard of living. – The wealth of the economy is determined not by the number of jobs, but by the value of what people produce when they are on the job. Government can smooth fluctuations in the overall economy. – Macroeconomic policy is designed to address the problems of recession, unemployment, and inflation. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Chapter Summary What Is Economics About? Economics is about almost everything. Economic analysis can be usefully applied to the process of decision-making. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Chapter Summary What Is Economics About? Microeconomics deals with consumers, workers, and firms. Macroeconomics focuses on the broader economic issues confronting the nation. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Chapter Summary What Is Economics About? - Economists build models using a stylized approach. - This usually incorporates the ceteris paribus assumption. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

Chapter Summary What Is Economics About?  Policymakers confront a tradeoff between efficiency and equity.  Economists rely on the framework of rational behavior to analyze how people respond to incentives and to relative costs and benefits. © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone