Chapter 1: The Nature and Method of Economies

1
Chapter 1 The Nature and Method of Economies

• Content taken from McConnell/Brues Economics

2
Right now make a wish list of everything you
would like to have now or in the future.You
have 30 secondsGO!
3
Everybody must choose

• Everybody has stuff they WANT NEED, the more
  you have the bigger and better stuff you want
• The way a society decides to use its productive
  resourcesLAND, TOOLS, MACHINERY, AND
  LABORcreates an ECONOMIC SYSTEM or ECONOMY

4

• BBC VIDEO

5
Economic Perspective

• Simply the economic way of thinking
• ECONOMICSstudy of making choices to decide what
  to do with your limited resources, especially
  money
• Fundamental concepts scarcity, rational
  behavior, and marginalism

6
Scarcity

• Everything desirable on this planet is only
  available in limited quantitiesyes even water is
  limited
• Since we cannot have everything we are forced to
  make choices, which is in itself the essence of
  ECONOMICS
• Every choice involves a cost, or something you
  must give up to get something else
• Even if its not monetary you still sacrifice one
  thing to get something else
• What did you sacrifice to take this course?

7
Rational Behavior

• As a rule, everyone acts to maximize their own
  UTILITY, or happiness/satisfaction
• When we make decisions we tend to do so in a way
  that gives us the greatest benefit possibleidea
  started with Smith and his baker, butcher, and
  wine maker quote
• However, there is a difference between acting in
  your own SELF-INTEREST and acting SELFISHLY
• Self-interest implies you choose what is most
  desirable to you, but isnt necessarily selfish
• Donating money for flood relief is not selfish
  but may be in your own self-interest so you feel
  good about yourself

8

• RATIONAL VIDEO

9
Marginal Benefits and Costs

• When you make choices you analyze what you have
  to gain in the situation compared to what you
  give up, or what the costs are
• You always want to maximize your benefit while
  minimizing you costs
• As long as the marginal (or extra) benefit gained
  is greater than the marginal cost it makes sense
  to follow through with the choiceif it isnt
  then you wouldnt choose to do it
• Anybody want a candy bar for a quarter? How
  about for 20?

10
Why Study Economics?

• Keynes is quoted as saying the following
• The ideas of economists and political
  philosophers, both when they are right and when
  they are wrong, are more powerful than is
  commonly understood. Indeed the world is ruled
  by little else. Practical men, who believe
  themselves to be quite exempt from any
  intellectual influences, are usually the slaves
  of some defunct economist.
• Most decisions and ideologies are based around
  the foundation of economicsmaking choicesand
  all govts focus on these principles heavily when
  deciding the fate of a country

11
Other Reasons

• Economics for Citizenshipeconomics will help you
  understand the political battles occurring
  todaytaxes, oil, etc.
• Applicationsthe content of this course helps to
  make sense of the worldthe entire world is
  governed by rational choices and understanding
  how these choices are made will help understand
  why they are made
• However, a common misconception is that economics
  is all about making money, or money in general,
  which is erroneous (big word!!!)its not but it
  can help you to understand how money is made

12
Theoretical vs Policy Economics

• Theoretical economics is about understanding the
  why, how, when, etc. choices are made
• Policy economics takes those understandings and
  uses them to formulate policies to achieve the
  intended goal

13
Economic Goals

• Every society to some degree will have different
  goalsextremes include comparing the US to Cuba
  or the former Soviet Union, but differences even
  exist between the US and Canadaname some?
• In general, economic goals include growth, full
  employment, efficiency, price stability, freedom,
  equity, security, and balance of trade
• Problem arises in that some of these goals
  directly counter othersneed to sacrifice freedom
  in order to obtain security (air travel)
• Every decision therefore involves TRADEOFFS

14
Micro vs Macro

• Macroeconomics will be addressed first in this
  course and focuses on the economy as a whole or
  large parts of itessentially the BIG PICTURE
• Microeconomics involves the decisions of smaller
  units, including individuals, businesses, and
  households
• Very different yet worth noting that it is
  millions of MICRO decisions that cause MACRO to
  exist

15
Positive vs Normative (technicality)

• Positive economics studies facts alonedoesnt
  matter if things are fair or how they should be,
  instead only looks at things for their face value
• Normative (think Norm from Cheers) adds value
  judgments into the study of choices made
• Positive studies what isnormative studies what
  ought to be

16
Potential Problems Encountered

• Biaseswe already know how we feel which can
  interfere with decision makingshould there be a
  minimum wage?
• Loaded Terminologymedia can sway public
  perceptive by the way they portray an
  eventexploitive vs competitive wages
• Definitionscommon words in economics have very
  different meanings than we are used tocost
• Fallacy of Compositionwhats good for one is not
  always good for allif you stand at a concert
  what happensif a farmer grows a lot of food why
  do other farmers lose money?

17
Causation Fallacies

• Post Hoc Fallacymisconception about A causing B
  if A occurred firstafter this therefore because
  of this
• Did President Bush cause the recession of 2000?
• Correlation vs Causationcorrelation implies two
  things are connectedcausation implies that one
  thing caused the other to happen

18
Summary

• We will find very quickly that this book gives us
  a lot to digest in a very short amount of
  timefirst few chapters introduce most of the
  information we will study all year
• Economics is all about making CHOICESscarcity
  limits what we can have and makes us choosethis
  course is about studying the rational choices we
  make and understanding why we made them

19

• 1,000 WORDS