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 Questions4 10 11 12 13 14