1 Introducing the Economic Way of Thinking Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing

2 What will I discover in this book? The world is full of economics problems requiring more powerful tools than just common sense

3 What will I learn in this chapter? You will be acquainted with the foundation of the economic way of thinking

4 What is the economic way of thinking? A logical framework for organizing thoughts and understanding economics

5 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?

6 What are the 3 building blocks in the economic way of thinking? scarcity & choice model building pitfalls of economic reasoning

7 What is the economic problem? Providing for people’s wants and needs in a world of scarcity

8 What is meant by scarcity? The condition in which wants are forever greater than the available supply of time, goods, and resources

9 What does scarcity force me to do? It forces you to make choices

10 What are resources? The basic categories of inputs used to produce goods and services

11 What are the three categories of resources? Land Labor Capital

12 What is a land resource? A shorthand expression for any natural resource provided by nature

13 What is labor? The mental and physical capacity of workers to produce goods and services

14 What is capital? The physical plants, machinery, and equipment used to produce other goods

15 What is financial capital? The money used to purchase capital

16 What is entrepreneurship? Creative labor of individuals that enables them to seek profits by combining resources

17 Land Labor Capital Entrepreneurship organizes resources to produce goods and services Entrepreneurship organizes resources to produce goods and services

18 What is economics? The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs

19 What is macroeconomics? The branch of economics that studies decision- making for the economy as a whole

20 What is microeconomics? The branch of economics that studies decision- making by a single individual, household, firm, industry, or government

21 What is an economic model? A simplified description of reality used to understand and predict the relationships between variables

22 What is the purpose of an economic model? To forecast or predict the results of various changes in variables

23 What is the scientific method? Problem identification Model development Testing a theory

24 Identify the problem Develop a model based on simplified assumptions Test the model and formulate a conclusion

25 What conclusion can I make? If evidence supports the model, the conclusion is accepted, if not, the model is rejected

26 What assumption is always made when I test a model? ceteris paribus

27 What is ceteris paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged”

28 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

29 What is the difference between association and causation? You cannot always assume that when one event follows another, the first caused the second

30 What are some pitfalls I could fall into? You could fail to understand the ceteris paribus assumption You could confuse association with causation

31 What conclusion can I make? You cannot test a theory unless its ceteris paribus assumption is satisfied

32 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

33 Why do some economists disagree? Because of the difference between positive and normative economics

34 What is positive economics? An analysis limited to statements that are verifiable

35 What is normative economics? An analysis based on value judgement

36 What conclusion can I make? When opinions or points of view are not based on facts, they are scientifically untestable

37 END