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Chapter 1: The Nature & Method of Economics

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1 Chapter 1: The Nature & Method of Economics
Society uses resources to produce goods & services Production satisfies many economic wants and occurs through organizational mechanism called economic system or the economy. Our economic wants far exceed the productive capacity of limited and scarce resources Therefore, the complete satisfaction of our economic wants is impossible Economics is the social science concerned with the problem of using scarce resources to attain the maximum fulfillment of society’s unlimited wants

2 The Economic Perspective
The economic perspective is “the economic way of thinking” Human & property resources are scarce Goods & services produced with those resources are also scarce Scarcity limits our options, we must make choices.

3 Rational Behavior Economics is grounded on the assumption of “rational self-interest” Achieve greatest satisfaction Rational behavior: individuals make different choices under different circumstances Rational decisions change as costs and benefits change Self-interest behavior enables a person to achieve personal satisfaction.

4 Marginalism: Benefits & Costs
Economic perspective focuses on marginal analysis, the comparison of marginal benefits and marginal costs. Marginal: “Extra”, “Additional” Choices & decisions involve changes in the existing state of affairs (status quo) When making choices rationally, compare marginal benefits vs. marginal costs. Marginal Benefit > Marginal Cost Marginal Benefit = Marginal Cost: “At the Margin”

5 Why Study Economics? Economic Issues Unemployment Inflation
Economic Growth Taxation Poverty International Trade Health Care Pollution Discrimination Immigration Education

6 Why Study Economics? Vital to Business
An understanding of how to make economic decisions and the operation of the economic system enables business managers & executives to increase profit. New technology Mergers & Acquisitions Hire/Fire Employees Recessions Inflation Economics helps consumers and workers make better buying, employment, & financial decisions

7 Economic Methodology Economics relies on the Scientific Method
Theoretical Economics: Process of deriving economic theories and principles is systematic, involves fact-gathering and analysis  generalize Economic theories, principles, and laws are generalizations relating to economic behavior or the economy itself, expressed as “tendencies” of the typical consumer, worker, or firm Ceteris Paribus = “Other things being equal”

8 Policy Economics Recognizes that theories and data can be used to formulate policies Policies are courses of action on economic principles Policies are intended to resolve a specific economic problem or further an economic goal

9 Economic Goals Economic Growth: Produce better goods & services; Higher SOL Full Employment: Suitable jobs Economic Efficiency: Maximize wants w/ available Resources Price-level Stability: Avoid Inflation & Deflation Economic Freedom Equitable Distribution of Income: Reduce Disparity between Poverty & Abundance Economic Security: Minimum Levels of Income Balance of Trade: Overall balance w/ ROW in Trade & Financial Transactions

10 Macroeconomics Macroeconomics examines the economy as a whole or aggregates Government, Household, Business Sectors Aggregate: Collection of specific economic units treated as one. Macro seeks to obtain an overview E.g.: Total Output, Employment, or Income; Aggregate Expenditures; and General Level of Prices

11 Microeconomics Microeconomics focuses on specific units of the economy, observing details of an economic unit, or small segment of the economy Individual Industry, Firm, or Household E.g.: Price of Single Product, EE at Single Firm, Revenue/Income of Single Household

12 Positive Economics (“What is”)
Positive economics focuses on facts and cause-and-effect relationships Avoids value judgments Tries to establish scientific statements about economic behavior Deals w/ what economy is actually like.

13 Normative Economics (“What ought to be”)
Incorporates value judgments about what economy should be like or what particular policy actions should be recommended to achieve desired goal. Most of the disagreement among economists involves normative, value-based policy questions.

14 Pitfalls to Sound Reasoning
Biases Loaded Terminology Definitions Fallacy of Composition Causation Fallacies Post Hoc Fallacy Correlation v. Causation (p. 11)

15 Chapter 1 Study Questions
4 10 11 12 13 14

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