Ch 1: What Economics Is About

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Ch 1 What Economics Is About
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Economic Definitions

• Scarcity is the condition in which our wants are
  greater than the limited resources available.
• Economics is the science of how individuals and
  societies deal with the fact that wants are
  greater than the limited resources available to
  satisfy those wants.

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Economic Categories

• Positive Economics
• Normative Economics
• Microeconomics
• Macroeconomics

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Economic Categories

• Positive economics the study of what is in
  economic matters.
• Normative economics the study of what should
  be in economic matters.

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Macro. Vs. Micro

• Microeconomics deals with human behavior and
  choices as they relate to relatively small units.
• Macroeconomics deals with human behavior and
  choices as they relate to an entire economy

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Q A

• Scarcity is the condition of finite resources.
  True or False. Explain your answer.
• What is the difference between positive and
  normative economics
• What is the difference between macroeconomics and
  microeconomics?

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Thinking In Terms of Scarcity

• Scarcity and Effects
• Land
• Labor
• Capital
• Entrepreneurship

• Utility/Disutility
• Rationing Devices
• Scarcity and Competition
• Opportunity Cost

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Opportunity Cost

• The Higher the opportunity cost of doing
  something, the less likely it will be done.
• Opportunity Costs and Behavior
• Thinking in Terms of What Would Have Been.

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There Is No Such Thing As A Free Lunch

• Consider people who speak about free medical
  care, free housing, free bridges (no charge to
  cross it), and free parks. None of these things
  are actually free. The resources that provide
  medical care, housing, bridges, and parks could
  have been used in other ways.

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Thinking In Terms Of

• Costs and Benefits
• Marginal Benefits Marginal Costs
• Decisions Made At The Margin
• Efficiency
• Unintended Effects vs. Intended Effects
• What Dollars Buy
• Equilibrium
• The Ceteris Paribus Assumption

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Thinking In Terms Of

• The Difference between Association and Causation
• The Difference between the Group and the
  Individual

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Economics and Statistics
Number Of Accidents Fatalities Per Accident Total Number of Fatalities
200,000 0.10 20,000
200,000 0.08 16,000
Versus
Number Of Accidents Fatalities Per Accident Total Number of Fatalities
200,000 0.10 20,000
250,000 0.08 20,000
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Q A

• How does competition arise out of scarcity?
• Give an Example how a change in opportunity cost
  can effect behavior.
• There are costs and benefits to studying. If you
  continue to study, will your action be consistent
  with having maximized the net benefits of
  studying? Explain your answer.
• Give an example to illustrate how a politician
  can mislead the electorate by implying
  association is causation?

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Economists Theories

• A theory is an abstract representation of the
  real world designed with the intent of better
  understanding the world.
• A theory emphasizes only those variables that the
  theorist believes are the critical variables that
  explain an activity or event.

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Building and Testing A Theory

• Decide on what you want to explain or predict.
• Identify important variables
• State assumptions of the theory
• State the Hypothesis

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More Theory Building

• Test the theory by comparing its predictions
  against real-world events.
• If the evidence supports the theory, reexamine
  the theory.
• If the evidence rejects the theory, either revise
  the theory or amend the variables, assumptions or
  hypothesis.

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Even More Theory Building

• If the theory works, if the evidence supports
  the theory, then it is a good and useful theory,
  no matter what anyone else might think.

• If your theory is correct, what does the
  theorist predict will be seen in the world?

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Q A

• What is the purpose of building a theory?
• How might a theory of the economy differ from a
  description of that economy.
• Why is it important to test a theory? Why not
  accept a theory if it sounds right?