1. Introduction to Economics Lecture 1
Scarcity and Choice
Positive and Normative Economics
Why study Economics?

2. overview What is economics? Math review
Definition, scarcity, and choice
The world of economics
Micro vs. Macro
Positive vs. Normative
Why and how to study economics
The methods of economics
Math review

3. Economics, Scarcity, and Choice
is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
Study of choice under conditions of scarcity
Scarcity
Situation in which the amount of something available is insufficient to satisfy the desire for it

4. Scarcity and Individual Choice
Unlimited variety of scarcities, based on two basic limitations:
Scarce time
Limited number of hours in each day to satisfy our desires
Scarce spending power
Cannot afford to buy more of the things we want

5. Scarcity and Individual Choice
Limitations force each of us to make choices
Economists study
Choices
Consequences of those choices
Indirect effects of individual choice on our society

6. Scarcity and Social Choice
Society faces a scarcity of resources
Categories of resources:
Labor
Capital
Human capital
Capital stock
Land/natural resources
Entrepreneurship

7. Scarcity and Economics
Problems studied in economics: the scarcity of resources—and the choices it forces us to make
Households – have limited income to allocate among goods and services
Firms – production is limited by costs of production
Government agencies – the budget is limited, so goals must be carefully chosen

8. Scarcity and Economics
Economists study the decisions made by households, firms, and governments to
Explain how our economic system operates
Forecast the future of our economy,
Suggest ways to make that future even better

9. Microeconomics Micro comes from the Greek word mikros, meaning “small”
Studies the behavior of individual households, firms, and governments
Choices they make
Interaction in specific markets
Focuses on individual parts of an economy
is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households.

10. Macroeconomics Macro comes from the Greek word makros, meaning “large”
Studies the behavior of the overall economy
Focuses on big picture and ignores fine details.
is the branch of economics that examines the behavior of economic aggregates— income, output, employment, and so on—on a national scale.

11. Examples of Micro & Macro Economic Concerns

12. Positive and Normative Economics
Positive economics: how the economy works
Can be true or false
Can be tested by looking at the facts
studies economic behavior without making judgments. It describes what exists and how it works.
Normative economics: what should be
Value judgments, identify problems, and prescribe solutions
Cannot be proved or disproved by the facts alone.
also called policy economics, analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.

13. The Methods of Economics
Positive economics includes:
Descriptive economics, which involves the compilation of data that describe phenomena and facts.
Economic theory, which involves building models of behavior.
An economic theory is a general statement of cause and effect, action and reaction.

14. The Methods of Economics
Empirical economics refers to the collection and use of data to test economic theories.
Many data sets are available to facilitate economic research. They are collected by both government agencies and private companies,

15. Economic Policy Criteria for judging economic outcomes:
Efficiency, or allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.
Equity, or fairness of economic outcomes.
Economic growth, or an increase in the total output of an economy.
Economic stability, or the condition in which output is steady or growing, with low inflation and full employment of resources.

16. Theories and Models
Theories involve models, and models involve variables.
A model is a formal statement of a theory. Models are descriptions of the relationship between two or more variables.
Ockham’s razor is the principle that irrelevant detail should be cut away. Models are simplifications, not complications, of reality

17. Theories and Models
A variable is a measure that can change from observation to observation.
The ceteris paribus device is part of the process of abstraction.
Using the ceteris paribus, or all else equal, assumption, economists study the relationship between two variables while the values of other variables remain constant.

18. Theories and Models Pitfalls to avoid in formulating economic theory:
The post hoc, ergo propter hoc fallacy refers to a common error made in thinking about causation: If event A happened before event B, it is not necessarily true that A caused B.
The fallacy of composition is the erroneous belief that what is true for a part is also true for the whole.

19. Why Economists Disagree
The difference of opinion may be positive in nature
Facts are being disputed
The disagreement can be normative
Facts are not being disputed
When economists have different values, they may arrive to different conclusions
Disagreement - over goals and values

20. Why Study Economics To understand the world better
Global events and personal phenomena
To achieve social change
Understand the origins of social problems
Design more effective solutions
Voting decisions also require a basic understanding of economics.

21. Why Study Economics To help prepare for other careers
A wide range of careers deal with economic issues on many levels
To become an economist
Develop a body of knowledge that could lead you to become an economist in the future

22. Why Study Economics
An important reason for studying economics is to learn a way of thinking.
Three fundamental concepts:
Opportunity cost
Marginalism, and
Efficient markets

23. Opportunity Cost
Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision.
Nearly all decisions involve trade-offs.

24. Marginalism
In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.
For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost.
Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

25. Efficient Markets
An efficient market is one in which profit opportunities are eliminated almost instantaneously.
There is no free lunch! Profit opportunities are rare because, at any one time, there are many people searching for them.

26. More Reasons to Study Economics
The study of economics is an essential part of the study of society.
Economic decisions often have enormous consequences.
During the Industrial Revolution, new manufacturing technologies and improved transportation gave rise to the modern factory system.

27. The Methods of Economics
Use economic models to develop economic theories
Economic models are built with words, diagrams, and mathematical statements
Economic models
Abstract representation of reality
Should be as simple as possible to accomplish its purpose

28. Economic Models: Assumptions and Conclusions
Two types of assumptions:
Simplifying assumptions
Essential features can stand out more clearly
Critical assumptions
Affect the conclusions of a model in important ways
If critical assumptions are wrong, the model will be wrong

29. Math, Jargon, and Other Concerns
Economic jargon
Special words that allow economists to more precisely express themselves
Math
High school level algebra and geometry
We will cover some of the basic math concepts that you will need tomorrow

30. How to Study Economics
Economics must be studied actively, not passively
Active study
Reproduce what you have learned
List the steps in each logical argument
Retrace the cause-and-effect steps
Draw the graphs
Basic principles
relate to what you are learning