Nature

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Chapter 1
Uncle Sam wants you to do better in economics.
Limits, Alternatives , and Choices
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ECONOMICS
- "science of scarcity"
Scarcity
Choices
Opportunity Cost
What is given up
Choices
No horn of plenty
Unlimited Needs and Wants Demand
Limited Resources Supply
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.
Objectives 1. Be able to define
economics. Economics-the study of the
choices people make in an effort to satisfy
their unlimited wants from limited
resources. 2. Differentiate between descriptive,
theoretical, policy economics. 3. What are
economic laws. 4. Differentiate between micro
macroeconomics. 5. Ceteris paribus
why it is usedisolating 2 variables 6.
Positive(descriptive) normative(prescribing)
econ. 7. Eight econ goals (conflict with-FE PL
complementary-FE econ growth) 8. Pitfalls to
Clear Economic Thinking such as the
fallacy of composition post hoc fallacy 9.
Explain a direct relationship (positive sloping
curve)
Nature Method of Economics
What great branches!
What a beautiful forest!
Body weight
Body Weight
Ave. miles jogged
Calories Consumed
10. Explain and illustrate an inverse
relationship between two variables and
identify a negative sloping curve. 11. Identify
independent (cause-induces) dependent
(effect-responds) variables.
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INDUCTION and DEDUCTION Methodology used to
gain economic knowledgeand stamp out
economic ignorance

• Induction from facts to generalizations, or
  theory.
• Generalizations are created from a careful
  evaluation of facts. They
• go from the particular facts to the
  generalization. From facts,
• economists note cause and effect relationships
  among facts. From
• this, they derive theory. From theory, they
  develop economic policy
• relevant to the real world. Any economic theory
  not based on facts
• is not sound economics.

Just the facts, mam.
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Induction and Deduction Forms of Methodology
2. Deduction - from theory to facts. This is
the hypothetical method. hypothesis is an
educated guess or theory of how key
variables relate. It goes from the
general to the particular. Economists
dont usually hypothesize without having prior
experience of the facts. hypothesis is an
educated guess, but untested if it passes the
test, it becomes economic theory In other
words, if you start with an untested hypothesis,
you would want to test the hypothesis in
the real world by gathering and examining
all relevant facts. If it proves a realistic
explanation passes the test of some economic
relationship, we can proceed to the setting
of policy based on it.
Deductionstory on how
something works.
The story has to match the facts
Econ Theory
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.
ABSTRACTION ignoring most details in order to
focus on the most important ones.
When President Bush saw the Eiffel Tower, he
said, That is a heck of an oil derrick you have
there.
The map of Paris is a model because it is an
abstraction From the actual beauty of the
city. A key assumption is that one can
rationally interpret this model. 99 is
removed
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Map B shows only the major freeways
A map is a simplified big picture.
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.
The Economist and Assumptions

• There were three people shipwrecked on a remote
• island a chemist, an engineer, and an
  economist.
• There was no food on the island and their
  plight
• seemed desperate.
• However, they discovered a crate of canned food
• dampened when they realized they had no means
• of opening the cans. So they decided that each
  of
• them would use their expertise to find a
  solution.

• The chemist searched around for various
• minerals that could be heated up to produce a
• compound that would burn through the lids.

• The engineer hunted around for rocks and then
• worked out what height of tree they would have
• to be dropped from to smash open the cans.

• Meanwhile the economist sat down and
• thought, Assuming we had a can opener

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Methodology Theory 2nd Approach in Examining
Economics
Abstraction focusing on 2 variables to explain
an event. A theory is not theory without
abstraction (it would be the real world). Theory
attempts to explain how real world phenomena
are related. Models abstract from reality to
reduce complexity.
P QD
2. Theories abstract generalizations about
cause and effect in the real world.
Simplified big picture of the real world
concerning 2 variables Theories laws, models,
generalizations, principles are statements
about what causes what.
Real World
Ceteris paribus Latin for all else held
constant is the most important assumption in
economics. Means everything else being equal.
Models allow you to reason about the
relationship between X and Y without the
intrusion of Z. The disagreements occur over
the quantitative magnitudes. Dont tax peoples
savings and they will save more. (how much
more)
NO
Economic Models (theories) may be expressed 4
ways. 1. Verbal statements 2. Pictorially 3.
Graphically 4. Mathematical equations
Law of Demand
Example If interest rates were lowered,
more houses would be sold.
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Policy 3rd Approach in Methodology
3. Policy this is concerned with controlling
or influencing economic behavior. This way we
can predict and control future events. Policy
means taking a course of action intended
to influence or control the behavior of the
economy. Example Make policy by lowering
interest rates and giving tax deductions to
help the housing industry.
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ECONOMIC METHODOLOGY
Policy Economics
Theoretical Economics
Theories
Facts
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8 Economic Goals
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8 Economic Goals
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Eight Economic Goals
1. Economic Growth Increase in Real GDP or per
capita GDP 3 annual growth will increase
our standard of living. 1929-Per capita792
1933-Per capita430 2007-per capita 44,000
2. Full Employment about 95-96 employment
is full employment. In 1982, unemployment was
10.8 12 M unempl.
3. Economic Efficiency obtaining the maximum
output from available resources or maximum
benefits at minimum cost from our limited
resources.
Doing the best with what we have.
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Eight Economic Goals
4. Price Level Stability sizable inflation or
deflation should be avoided. We had over 10 in
73, 79, 80. Inflation was 2 in the 1950s, 2.3
in 1960s and 7.4 in 80s. A person making
25,000 a year at age 30 would need
(with average inflation of 5) 125,000 a year
at age 65 to have the same standard of living.
1972 82, 2.141.00
2008 1982
In 1982, it took 2 to buy what 1 bought in 1972.
In 1945, 1.50 bought what 1.00 did in
1860. Today, it takes 11 to buy what 1 bought
in 1945.
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HYPERINFLATION in Brazil 1988-1994
1988 1,300 1991 1,000 1989 2,900 1992
1,260 1990 44 1993 1,740 Prices in
1994 were 4 million times higher than in 1988.
If we had Brazils inflation from 1988 to
1994 1. 35 Blue jeans would increase to 140
million per pair. 2. Gas would increase from
2.00 to 5 million per gallon. 3. 20 for a
pizza and movie would increase to 80 million. 4.
One new real was exchanged for 2,750 of the old
reals.
And why did Brazils inflation increase so
much?
Only 140 million per pair
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Eight Economic Goals
5. An Equitable Distribution of Income. One group
shouldnt have extreme luxury while another
is in stark poverty. The
richest 1(3 mil.) have as much total income
after taxes average 400,000 a year as the
bottom 40 100 million people. The
richest 1 have greater wealth than the
bottom 90 of the population.
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HOUSEHOLDS AS INCOME RECEIVERS
Personal Income ()
Only 1 in 7 within this group even works.
Lowest 20 Income Group only 3 graduate from
college
3.6
Second 20 Income Group only 4.6 graduate from
college
8.9
Middle 20 Income Group only 12 graduate
college
14.9
Fourth 20 Income Group 25 graduate from
college
23.2
Highest 20 51 graduate college
49.4
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6. Economic Freedom guarantee that
businesses , workers, and consumers
have a high degree of economic freedom.
7. Economic Security provision should be
made for those not able to take care of
themselves handicapped, disabled, old
age, chronically ill, orphans. Protection from
lay-offs unemployment insurance. Also
no discrimination. 43 million Americans
have some type of disability. A. Hearing
impaired 22 million (including 2 million
deaf) B. Totally blind 120,000 (Legally blind
60,000) C. Epileptic 2 million D. Paralyzed
1.2 million E. Developmentally disabled 9.2
million F. Speech impaired 2.1 million G.
Mentally retarded up to 2.5 million H. HIV
infected 900,000
8. Balance of Trade. Over 400 billion a year the
last few years.Some of these goals are
complementary economic growth F.E. and
some conflict F.E. and price level stability.
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Positive Economics Normative Economics 1. Can
be tested 1. Cannot be tested 2.
Scientific 2. Value judgment 3. In the
economy 3. Ought to be in the economy
Straight facts
In my opinion
Positive Scientific v. Normative Prescriptive
(personal) describing just the facts v. the
economist being a policymaker 1. The economy
grew at 3.6. 1. The economy ought to grow
more. 2. Unemployment is 4.8. 2. Unemployment
is too high.
Positive economics observable, factual,
testable economic events trade deficit,
budget deficit, etc. deals with straight
facts on economic behavior and doesnt give
opinions or value judgments. It is concerned
with what is, was, or will be. objective - not
influenced by emotions Statements that are
verifiable
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Positive Economics Normative
Economics 1. In the economy 1. Ought to be
in the economy 2. Scientific 2. Value
judgment 3. Can be tested 3. cannot be tested
Straight facts
In my opinion
Normative Economics expresses opinions or value
judgments. It is concerned with what ought to be
and uses words like should, needs, and too.
Unemployment ought to be reduced. These opinions
cannot be proved or disproved. We should protect
the auto industry from foreign competition,
Normative involves judgments and prescriptions
for preferred courses of action. Subjective
influenced by emotions Most of the disagreements
among economists involve normative economics.
Ideally, value judgments are involved at the
policy level only.
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Positive or Normative?
1. It is too cold to play football today. 2.
Gross Domestic Product grew 4 last year. 3. The
temperature is too cold today. 4. The temperature
is 92 degrees today. 5. The humidity is too
hot. 6. People who are unemployed are just too
lazy to work. 7. Suzie RahRah should be
friendlier to me this time.
NOT
After turning me down 3 times, Susie RahRah
should be friendlier to me this time.
Answers 1. N 2. P 3. N 4. P 5. N 6. N
7. N
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Beautiful, beautiful forest!.
MACROECONOMICS...
Beautiful leaf!
MICROECONOMICS...
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.
1. Macro national economics concerned with
the economy as a whole or with aggregates
like government, business sectors, or
households. Macroeconomics is concerned with
an overview of the economy. Macro
examines the forest, not the trees, leaves,
or specific pieces of bark. It gives us a
birds-eye view of the economy.
Great Forest!
2. Micro details of the big picture concerned
with specific economic units or individual
markets under a microscope. Emphasis is on
individual households, industries, or firms
like the of workers employed by Ford
Concerns the components of the economy
Micro examines the trees, leaves, pieces of
bark, rather than the forest. It gives a
worms-eye view of a specific component of
our economy.
Beautiful bark!
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.
Macrolarge(telescope) whole economy
economy-wide issuesMicrosmall(microscope
segment of the economy issues in the economy
Beautiful, beautiful forest!
Check out those pieces of bark!.
Production Microeconomics Macroeconomics How
much steel Total industrial output How much
office space Gross Domestic Product How many
cars Total decline during recession
Prices Price of individual goods Aggregate price
level Price of medical care Consumer Price
Index Apartment rents Rate of inflation
Employment Jobs in the steel industry Total
number of jobs of employees in a
firm Economys unemployment of
doctors/accountants of discouraged workers
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Is the following Micro or Macro?
1. The price of digital cameras increased 5
last year. 2. Unemployment was 5.4 for
the U.S. workforce. 3. Unemployment in the auto
industry was 8 last year. 4. Duck National Bank
lowered its interest rates on CDs to 8. 5. The
Consumer Price Index rose to 2.7 last year. 6.
The computer industry laid off 8 of its workers
last year. 7. The price of gasoline rose 25 last
year.
What forest, check these branches, limbs, and
leaves.
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Pitfalls To Sound Reasoning
Chuckholes

• 1. Bias preconceived beliefs not warranted
  by facts.
• We tend to accept everything that reinforces
  our prejudices. We will
• not learn economics if we reject things
  before we understand them.
• Try to understand things first before you
  reject them. This interferes
• with objective analysis.
• 2. Loaded terminology use of emotional terms
  leading
• to a nonobjective analysis. corporate
  profits - obscene G
• regulations - socialists low wages -
  exploitive flood control
• creeping socialism. We must have
  objectivity.
• 3. Definitionscertain economic terms
• have different meanings than normal.
• A. Utility means satisfaction.
• B. Investment means purchase of
• machinery, tools and factories.
• C. Price ceilings are below equilibrium.
• D. Price floors are above equilibrium.

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4. Fallacy false notion of composition
combining parts into a whole

• What is true for the individual/part is
  necessarily true for the group/whole. This is an
  error of generalizing from the particular to the
  general.
• A. The safest way for an individual
• to leave a burning theater
• is to run for the nearest exit.
• B. Tariffs are good for specific
• industries but not individuals.
• C. Too much money is good for
• you but not for everyone.
• D. You stand up to see better.

Ill stand up so I can see
better.
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Fallacy of Composition Example When the price of
oil goes up, Texas 8 other states benefit, but
it hurts the 42 others.
Helped
Hurt
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.
5. Post hoc fallacy
happenstance or coincidence is not causality.

Two Causation Fallacies
Post hoc it happened after this, ergo
therefore propter hoc because of this. This
fallacy is saying because event A precedes
event B, A is necessarily the cause of
B. It is a fallacy that association or
happenstance is causation. Ex Last night I
turned the TV on and the Yankees were winning
6-3. They ended up losing the game to the
Boston Red Sox. I jinxed them and also they
now have the curse of Alex Rodriquez.
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6. Correlation v. causation because two
events occur together correlation, one
event has caused the other. Ex 1 Super Bowl
Indicator The argument says that if the NFC
rep or an original NFL team win the Super Bowl,
the stock market goes up. It has been right
over 80 of the time.
Wall Street will love this.
Ex 2 Hemline Indicator The higher the skirts,
the higher the market Wall Street would
welcome the return of hot pants In the
roaring 20s, short Flapper dresses were the
rage.
Hello Wall Street
The longer styles of the 1930s heralded a bear
market of 90. Rising stocks in the 60s
coincided with the rise of the micromini, only
to give way in the 70s to more conservative
Dress lengths and a bear market. Even
Charlies Angels wore their skirts long.
During the booming 80s, womens business
suits had broad shoulders and tiny skirts.
During the 90s bull market, skirts got short
again, this time with slits.
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Construction of Econ Graphs
Table of Values
INCOME (per week)
0 100 200 300 400
50 100 150 200 250
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Construction of Econ Graphs
Table of Values
INCOME (per week)
Vertical Axis
400 300 200 100
0 100 200 300 400
50 100 150 200 250
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Construction of Econ Graphs
Table of Values
INCOME (per week)
Vertical Axis
400 300 200 100
0 100 200 300 400
50 100 150 200 250
Horizontal Axis
0 100 200 300
400
INCOME (Y)
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A Direct Relationship...
Exists Between Consumption Income
INCOME (per week)
400 300 200 100
0 100 200 300 400
50 100 150 200 250
a
b
C
250
150
b
a
0 100 200 300
400
INCOME (Y)
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Direct(positive) RelationshipIndependent
variableinduces(cause) Dependent variable
responds(effect)
Direct 2 variables move in same direction.
Econ, Econ
Econ
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Inverse (Negative) Relationship
Inverse - 2 variables move in opposite directions
TICKET PRICE
a
50 40 30 20 10
In Economics the independent variable can be
on either axis.
50 40 30 20 10 0
0 4 8 12 16 20
a
b
b
c
c
d
d
e
e
f
f
0 4 8 12
16 20
ATTENDANCE IN THOUSANDS (Q)
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Construction of Econ Graphs
INFINITE ZERO SLOPES
Slope Infinite
Y
Y
Slope Zero
X
X
Increasing Y has no effect on X.
Increasing X has no effect on Y.
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Tell everything you know about each topic.You
have only 6 seconds on each topic.
40
1. Economics ____________________________________
____ 2. The inductive method moves from (facts to
generalizations/ generalizations to facts).
3. Theories and generalizations (are/are not)
the same thing. 4. The deductive method moves
from (facts to generalizations/generalizations to
facts). 5. Descriptive economics is the process
of gathering (generalizations/facts) about
economic behavior of individuals and
institutions. 6. Economic theories are
(specifics/generalizations) based upon
observing all the facts. They are called laws,
principles, generalizations or models. 7.
Economic laws that lead to policy are not true in
every situation, but they are (useful/not
useful) because they allow us to predict
therefore (control or adjust to events/not
control or adjust to events). 8. Economic models
(abstract/leave in) the complexities of the real
world. 9. Ceteris paribusother things being
________, that is all variables are constant
except ___. 10. Ceteris paribus model allows
us to reason about the relation- ship between
variables __ __ without the intrusion of
variable __.
NS 1-10
The study of the choices people make in an effort
to satisfy their unlimited needs and wants from
scarce resources.
constant
2
Y
X
Z
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NS 11-21
11. A hypothesis is a tentative,
(tested/untested) principle. If the
hypothesis passes the test, it becomes economic
theory. 12. A positive statement is concerned
with (what is/what ought to be). They
collect and present facts. 13. A normative
statement is based upon (facts/value judgments).
These statements are concerned with what
the economy should be like or which policies are
best.
14. An example of a normative statement would be
(It is too

hot
to jog today./ The temperature is 88 degrees
today.) 15. Ideally, value judgments are involved
at the (level of policy only/ level of
facts only).
16. Most of the disagreement among economists
involves (positive/normative) statements
as regards economic (policy/facts). 17.
Microeconomics is concerned with (specific
economic units/the entire economy).
18. Which of the following is associated with
macroeconomics? (an examination of the
incomes of Richland Duck graduates/
unemployment in the civilian labor force). 19.
Which of the following is a microeconomic
statement? (GDP decreased by 1 last
year/Auto prices declined this year). 20. Full
employment conflicts with the economic goal of
(economic growth/price stability). 21. Full
employment is complementary with the goal of
(economic security/ price stability). 
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NS 22-23
22. Bias preconceptions that (are/are not)
based on facts. 23. Loaded terminology
(emotional/non-emotional) terms leading to
a nonobjective analysis. 24. Definitions
economic words have different meanings.
Examples 1. Utility means
(extra/satisfaction) 2. Investment means
(money/tools, machinery, factories) 3.
Price floors are (above/below) price ceilings
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NS 25-29
Ill lean over maybe I can see better.
25. The fallacy of composition states that what
is true for the (individual/group) must
necessarily be true for the (individual/group). 26
. Prosperity depression notions valid during
prosperity saving (may/may not) be valid
during depressions. 27. Cause effect The
after this, because of this fallacy states
that because event A precedes event B, ___ is
necessarily the cause of ___. 28. If you leave a
football game at the end of the 3rd quarter, you
will avoid traffic get home more quickly.
Therefore, everyone should leave the game
early. This is an example of the (post hoc
fallacy/fallacy of composition). 29. An example
of the post hoc fallacy is (I turned the game on
the Mavs lead but lost the game/My grade
in econ has improved because Ive studied more.)
A
B
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Zero slope and an Infinite slope
C
A
B
D
Direct
Inverse
30. Which graph shows the amount of Y inversely
related to the amount of X? ____ 31. In
which graph above is the amount of Y (constant
at 10) unrelated to the increasing amount
of X? ___ 32.In which graph above is the amount
of Y directly related to the amount of X?
___
C
B
A
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The End