1. The Nature and Method of Economics Chapter 1

2. The Economic Perspective Economics has a number of key concepts: –Scarcity and choice –Rational behavior –Marginalism

3. Scarcity and Choice Economists believe that: –Resources are limited –Material wants are unlimited –Therefore society must choose where and how to spend these limited resources.

4. Rational behavior Economists believe that human behavior reflects rational self-interest. Rational behavior is when: –People try to increase their utility (pleasure, satisfaction). –People try to decrease their disutility (pain, dissatisfaction).

5. Rational behavior Economists believe that people maximize their utility in a completely rational and logical fashion.

6. Marginalism Economists focus on marginal analysis: Marginal analysis is the comparison of marginal benefits and marginal costs.

7. Marginalism Marginal benefit is the additional or extra benefit that is the result of a choice. Marginal cost is the additional or extra cost that is the result of a choice.

8. Economic Perspective Economists believe that people compare the marginal benefits with the marginal costs whenever they make a decision; that they do so rationally; and that their decisions are to maximize their utility.

9. Scientific Method Recognize Assume Develop Hypothesize Test

10. Scientific Method: Recognize Recognize the problem or Identify an issue

11. Scientific Method: Assume Make a series of simplifying assumptions to manage the problem.

12. Scientific Method: Develop Use the assumptions to create a model

13. Scientific Method: Hypothesize Out of the model create an hypothesis. Use the hypothesis to solve the problem.

14. Scientific Method: Test Collect your data. Test your hypothesis against the data.

15. Ceteris Paribus Defined as: ALL OTHER THINGS BEING EQUAL

16. Ceteris Paribus This means holding everything else constant, except for the variables in our hypothesis or model. If we hold everything else constant, we hold it fixed. If we hold it fixed, we can ignore it.

17. Ceteris Paribus Ceteris paribus is a key assumption, because it allows us to treat everything outside of our model as unimportant.

18. Fallacy of Composition Beware of fallacy of composition! Fallacy of composition is the idea that what is good for one person (or part) is good for everyone (or the whole).

19. Post Hoc Fallacy One needs to think very carefully in order to decide whether something is the cause of something else.

20. Correlation vs. Causation Beware of the difference between correlation and causation: Correlation is coincidence. Causation is X causes Y.

21. Positive vs. Normative Analysis Be aware of the difference between positive and normative approaches! Positive analysis is an attempt to do value free analysis of an economic issue. Normative analysis is analysis with openly stated values.

22. Economics There are two main branches of economics: –Macroeconomics –Microeconomics

23. Macroeconomics Defined as: The study of the economy as a whole, or major sectors of the economy.

24. Macroeconomics In macro, we study: - Government policies - Aggregate business behavior - Aggregate consumer behavior - Money and banking

25. Microeconomics Defined as: The study of decision making by firms, households and individuals.

26. Microeconomics In micro, we study: - How prices are formed. - How much is to be produced. - Individual behavior in the marketplace. - The application of economic logic to a variety of contemporary problems.