Ch. 1: What is Economics?

1
Ch. 1 What is Economics?

• Objectives
• Define economics and distinguish between
  microeconomics and macroeconomics
• Explain the big questions of economics
• Explain the key ideas that define the economic
  way of thinking
• Explain how economists go about their work as
  social scientists

2
Definition of Economics

• Social science that studies the choices that
  individuals, businesses, governments, and
  societies make as they cope with scarcity and the
  incentives that influence and reconcile those
  choices.

3
Micro vs Macro

• Microeconomics
• study of choices made by individuals and
  businesses, and the influence of government on
  those choices.
• Macroeconomics
• study of the effects on the national and global
  economy of the choices that individuals,
  businesses, and governments make.

4
Economic Questions

• What to produce?
• How to produce?
• Factors of production
• Land earns rent
• Labor earns wages
• Capital earns interest/dividends
• Entrepreneurship earns profits
• For whom to produce?

5
Free market vs. Command

• Free market allows individuals and businesses to
  decide without government intervention.
• Command centralizes all decisions.
• Mixed market is a combination of extremes.
• Examples
• Education
• Transportation
• Energy

6
Types of government intervention

• Direct control
• national defense, police, roads
• Price Controls
• Subsidies
• Ethanol, hybrid cars, crops
• Taxes
• Tariffs on imports
• Excise taxes on cigarettes, gasoline
• Income
• Property
• Regulation
• Anti-trust
• Laws designed to encourage competition.

7
Views on government intervention

• Communists versus Capitalists
• Democrats versus Republicans
• Equity versus Efficiency

8
Economic Growth

• Economic growth is an expansion in an economys
  ability to produce goods and services.
• Economic growth is affected by
• Capital goods vs consumer goods.
• Education and training.
• Research and development (new tech)

9
Why does income per capita vary so much around
the world?
10
The Economic Way of Thinking

• Economists assume individuals compare costs and
  benefits in decision making.
• Cost is measured by opportunity cost.
• the highest-valued alternative that we give up to
  get something is the opportunity cost of the
  activity chosen.

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The Economic Way of Thinking

• Economists assume that people make decisions on
  the margin
• evaluate the consequences of making incremental
  changes in the use of their resources.
• Marginal Benefit (MB) the benefit from pursuing
  an incremental increase in an activity.
• Marginal Cost (MC) The opportunity cost of
  pursuing an incremental increase in an activity.
• If MBgtMC ? pursue more of the activity.
• If MBltMC ? pursue less of the activity.

12
The Economic Way of Thinking

• Economists assume people respond to incentives.
• Incentives can affect MB or MC
• Taxes
• Subsidies
• Employer compensation methods.
• Incentives are key to reconciling self-interest
  and the social interest.
• Pollution
• Crime
• Fishing
• Water usage

13
The Economic Way of Thinking

• Two types of economic statements
• positive statements
• normative statements
• A positive statement can be tested by checking it
  against facts
• A normative statement cannot be tested.

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The Economic Way of Thinking

• Model Building
• economic model is a description of some aspect of
  the economic world that includes only those
  features of the world that are needed for the
  purpose at hand.
• Testing Models
• economic theory is a generalization that
  summarizes what we think we understand about the
  economic choices that people make and the
  performance of industries and entire economies.

15
The Economic Way of Thinking

• Obstacles and Pitfalls in Economics
• Ceteris paribus (other things being the same)
• To isolate the effect of interest, economists use
  the logical device called ceteris paribus or
  other things being equal, or other things
  being the same.
• The fallacy of composition
• The false conclusion that
• what is true for the parts is true for the whole
• what is true for the whole is true for the parts.
• The post hoc fallacy
• the error of reasoning that a first event causes
  a second event because the first occurs before
  the second