1. 1 Ch 1: What Economics Is About James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University ©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning

2. 2 Economic Definitions Scarcity is the condition in which our wants are greater than the limited resources available to satisfy them. Scarcity is the condition in which our wants are greater than the limited resources available to satisfy them. Economics is the science of scarcity; or how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants. Economics is the science of scarcity; or how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants.

3. 3 Economic Categories Positive and Normative Economics Positive and Normative Economics Microeconomics and Macroeconomics Microeconomics and Macroeconomics

4. 4 Economic Categories Positive Economics: the study of “what is.” Positive Economics: the study of “what is.” Normative Economics: the study of “what should be.” Normative Economics: the study of “what should be.”

5. 5 Microeconomics and Macroeconomics Microeconomics: the branch of economics that deals with human behavior and choices as they relate to relatively small units. Microeconomics: the branch of economics that deals with human behavior and choices as they relate to relatively small units. Macroeconomics: the branch of economics that deals with human behavior and choices as they relate to highly aggregate markets or the entire economy. Macroeconomics: the branch of economics that deals with human behavior and choices as they relate to highly aggregate markets or the entire economy.

6. 6 Self-Test Scarcity if the condition of finite resources. True or false? Explain your answer. Scarcity if the condition of finite resources. True or false? Explain your answer. How are the Friedman and Robbins definitions of economics similar? How are the Friedman and Robbins definitions of economics similar? What is the difference between positive and normative economics? What is the difference between macroeconomics and microeconomics? What is the difference between positive and normative economics? What is the difference between macroeconomics and microeconomics?

7. 7 Key Concepts in Economics Utility/Disutility Utility/Disutility Goods/Bads Goods/Bads –Tangible –Intangible Factors of Production Land (natural resources) Land (natural resources) Labor Labor Capital Capital Entrepreneurship Entrepreneurship

8. 8 Key Concepts in Economics Need for a Rationing Device Implied by Scarcity Implied by Scarcity Price Price First-Come-First Served First-Come-First Served Beauty Beauty Scarcity and Competition Competition exists because of scarcity. Competition exists because of scarcity. Whatever the rationing device, people will compete for it. Whatever the rationing device, people will compete for it.

9. 9 Thinking in Terms of Opportunity Cost The most highly valued opportunity or alternative forfeited when a choice is made. The most highly valued opportunity or alternative forfeited when a choice is made. The higher the opportunity cost of doing something, the less likely it will be done. The higher the opportunity cost of doing something, the less likely it will be done.

10. 10 Exhibit 1: Scarcity and Related Concepts

11. 11 There Is No Such Thing As A Free Lunch Opportunity costs are incurred when choices are made. Opportunity costs are incurred when choices are made. “Free” education, medical care, housing, bridges, and parks may be considered free by some. “Free” education, medical care, housing, bridges, and parks may be considered free by some. None are actually free. None are actually free. The resources could have been used in other ways. The resources could have been used in other ways.

12. 12 Thinking In Terms Of … Costs and Benefits Costs and Benefits Decisions Made At The Margin Decisions Made At The Margin Efficiency Efficiency –Marginal Benefits & Marginal Costs –Marginal Benefits = Marginal Costs –Maximizes Net Benefits

13. 13 Exhibit 2: Efficiency

14. 14 Thinking In Terms Of … Unintended Effects Unintended Effects Equilibrium Equilibrium Ceteris Paribus Assumption: all other things constant. Ceteris Paribus Assumption: all other things constant.

15. 15 Unintended Effects Number Of Accidents Fatalities Per Accident Total Number of Fatalities 200,0000.1020,000 200,0000.0816,000 Versus Number Of Accidents Fatalities Per Accident Total Number of Fatalities 200,0000.1020,000 250,0000.0820,000

16. 16 Thinking In Terms Of … The Difference between Association and Causation The Difference between Association and Causation The Difference between the Group and the Individual The Difference between the Group and the Individual Fallacy of Composition: erroneous view that what is good or true for the individual is necessarily good or true for the group. Fallacy of Composition: erroneous view that what is good or true for the individual is necessarily good or true for the group.

17. 17 Self-Test How does competition arise out of scarcity? How does competition arise out of scarcity? Give an example of how a change in opportunity cost can effect behavior. Give an example of how a change in opportunity cost can effect behavior. There are costs and benefits of studying. If you continue to study as long as the marginal benefits of studying are greater than the marginal costs and stop studying when the two are equal, will your action be consistent with having maximized the net benefits of studying? Explain your answer. There are costs and benefits of studying. If you continue to study as long as the marginal benefits of studying are greater than the marginal costs and stop studying when the two are equal, will your action be consistent with having maximized the net benefits of studying? Explain your answer. Give an example to illustrate how a politician can mislead the electorate by implying association is causation. Give an example to illustrate how a politician can mislead the electorate by implying association is causation.

18. 18 Self-Test Give an example to illustrate how a politician can mislead the electorate by implying association is causation. Give an example to illustrate how a politician can mislead the electorate by implying association is causation. Your economics instructor says, “If the price of going to the movies goes down, people will go the movies more often.” A student in class says, “Not if the quality of the movies goes down.” Who is right? Your economics instructor says, “If the price of going to the movies goes down, people will go the movies more often.” A student in class says, “Not if the quality of the movies goes down.” Who is right?

19. 19 Economists & Theories Theory: an abstract representation of the real world designed with the intent of better understanding the world. Theory: an abstract representation of the real world designed with the intent of better understanding the world. emphasizes those variables that are believed to be the main variables that explain an activity or event. emphasizes those variables that are believed to be the main variables that explain an activity or event.

20. 20 Building and Testing A Theory 1. Decide on what you want to explain or predict. 2. Identify important variables 3. State assumptions of the theory 4. State the Hypothesis

21. 21 Building and Testing A Theory 5. Test the theory by comparing its predictions against real-world events. 6. If the evidence supports the theory, continue to examine the theory. 7. If the evidence rejects the theory, either revise the theory or amend the old theory in terms of variables, assumptions or hypothesis.

22. 22 Exhibit 3: Building and Testing a Theory

23. 23 How Do We Judge Theories? According to Milton Friedman: None are descriptively realistic. None are descriptively realistic. Are they sufficiently good approximations for the purpose in hand? Are they sufficiently good approximations for the purpose in hand? Do they yield sufficiently accurate predictions? Do they yield sufficiently accurate predictions?

24. 24 Self-Test What is the purpose of building a theory? What is the purpose of building a theory? How might a theory of the economy differ from a description of the economy? How might a theory of the economy differ from a description of the economy? Why is it important to test a theory? Why not accept a theory if it “sounds right” ? Why is it important to test a theory? Why not accept a theory if it “sounds right” ?

25. 25 Coming Up (Ch. 2): Economic Activities: Producing and Trading