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Getting Started

1. Getting Started. CHAPTER. EYE ONS. Benefit Macroeconomics Rational Choice Ceteris Paribus Margin Scarcity Correlation Marginal Benefit Self-interest Economics Marginal Cost Social interest Goods & Services Microeconomics Sunk cost Incentive Opportunity Cost.

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Getting Started

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  1. 1 Getting Started CHAPTER EYE ONS Benefit Macroeconomics Rational Choice Ceteris Paribus Margin Scarcity Correlation Marginal Benefit Self-interest Economics Marginal Cost Social interest Goods & Services Microeconomics Sunk cost Incentive Opportunity Cost

  2. CHAPTER 1: CONCEPTS • Economics Defined Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile our choices, • Two big economic questions: • How choices determine what, how, and for whom goods and services get produced? • When do choices made in self-interest also promote social interest? • What, How, and For Whom? • Goods and services are the objects (goods) and actions (services) that people value and produce to satisfy human wants. • What goods and services get produced and in what quantities? • How are goods and services produced? • For Whom are the various goods and services produced?

  3. Economic Questions • When Is the Pursuit of Self-Interest in the Social Interest? • Can this be done? • Let’s look at 8 topics… • Globalization and International Outsourcing • The New Economy • Disappearing Rainforests • Water Shortages • Global Warming • Natural Disasters • Unemployment • Social Security Time Bomb

  4. Core Economic Concepts • Rational choice • Cost • Benefit • Margin • Incentives • Compare Cost and Benefit before deciding • The Best thing you MUST give up • What you are WILLING to give up / Gain received • Comparing ALL relevant alternatives • Reward/Penalty that encourages/discourages action

  5. Core Economic Concepts • Rational choice • Cost • Sunk Cost • Benefit • Margin • Marginal Cost • Marginal Benefit • Incentives • Compare Cost and Benefit before deciding • Take the action for which MB>=MC • The Best thing you MUST give up • Irreversible Cost – NOT in Opportunity Cost • What you are WILLING to give up / Gain received • Comparing ALL relevant alternatives • Cost of 1 unit increase • Benefit/Gain from 1 unit increase • Reward/Penalty that encourages/discourages action

  6. MACRO VS MICRO VIEWS OF THE WORLD MACRO MICRO Study of choices that individuals and businesses make and the way these choices interact and are influenced by governments • Study of aggregate/total effects on national/global economy of the choices that individuals, businesses, and governments make.

  7. SCARCITY‘Resulting condition of insufficient resources’ HUMAN WANTS RESOURCES NEEDED ALL economic problems arise because: Available resources are insufficient to satisfy wants. > Faced with Scarcity we must make CHOICES Must choose among available alternatives Choices depend on incentives we face Everyone faces scarcity

  8. THE ECONOMIC WAY OF THINKING ‘A SOCIAL SCIENCE’ POSITIVE STATEMENTS NORMATIVE STATEMENTS WHAT OUGHTTOBE ECONOMISTS DISTINGUISH BETWEEN: • WHAT IS TASK of ECONOMIC SCIENCE: test positive statements about how the economic world works and weed out those that are wrong

  9. Ceteris paribus “other things being equal.” • How do Economists unscramble Cause and Effect? • By Changing ONE factor at a time • And Holding ALL other factors constant • Thus you can investigate the effects of the factor at hand. • Postive Correlation – Move in same direction • Negative Correlation – Move in opposite directions • Correlation “tendency for values to move in a predictable and related way.”

  10. Adam Smith and the Birth of Economics as a Modern Social Science • Adam Smith made economics a social science. • Born in 1723 in Scotland, Smith’s masterpiece was An Inquiry into the Nature and Causes of The Wealth of Nations, published in 1776. • Why, Adam Smith asked, are some nations wealthy while others are poor? • His answer: the division of labor and free markets.

  11. Adam Smith and the Birth of Economics as a Modern Social Science • Using hand tools, one person might make 20 pins a day. • By breaking the process into a number of individually small operations in which people specialize—by the division of labor—ten people could make a staggering 48,000 pins a day. • But a firm must sell 15 million pins a year to stay in business! • So free markets are needed too.

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