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Understanding Economics: Key Concepts and Principles for Individual Decision-Making

Economics is the study of how society manages its scarce resources, focusing on decision-making processes within markets. Key concepts include scarcity, rational behavior, and the importance of incentives. An economic model serves as a simplified representation of reality to analyze real-world situations. This field explores how individuals and firms make choices, balancing marginal benefits against marginal costs. Additionally, economics examines efficiency and equity, along with the distinction between microeconomics and macroeconomics, enriching our understanding of market dynamics and societal needs.

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Understanding Economics: Key Concepts and Principles for Individual Decision-Making

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Presentation Transcript

  1. Section 1 Thinking like an economist

  2. Why is economics important? • Scarcity: limited nature of society’s resources • Economics: the study of how society manages its scarce resources • An economic model is a simplified version of reality used to analyze real world economic situations. Economy: one who manages household

  3. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 1) People are rational • Individuals and firms use all available information as they act to achieve their goals. • We act if the benefits of our actions outweigh the costs.

  4. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 2) People respond to incentives • Moral incentives • Social incentives • Economic incentives

  5. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 3) Optimal decisions are made at the margin • Marginal decision vs. all or nothing decisions • Optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost.

  6. The fundamental problem • Economics is the study of how human beings coordinate their wants and desires. • 1) What and how much to produce? • Butter or guns? • 2) How to produce? • Locally or offshore? • 3) Who should consume what is produced? • Income distribution • Planned vs. Market Economics

  7. Efficiency and Equity • Productive efficiency • When production takes place at the lowest possible cost • Allocative efficiency • When production reflects consumer preferences • Equity • The fair distribution of economic benefits

  8. ECONOMICS • Is it a science? • Economics uses scientific methods • Using assumptions we develop economic models • we collect data • using the data we test hypotheses • we then revise our models if necessary.

  9. Microeconomics vs Macroeconomics • Microeconomics: the study of how households and firms make decisions • Macroeconomics: The study of economy-wide phenomena (inflation, unemployment…) • Positive statement vs Normative statement • Positive: Claims that attempt to describe the world as it is. • Normative: Claims that attempt to prescribe how the world should be.

  10. Positive or Normative Statements? • An increase in the minimum wage will cause a decrease in employment among the least-skilled. ? ?

  11. Positive or Normative Statements? ? • Higher federal budget deficits will cause interest rates to increase. ? ?

  12. Positive or Normative Statements? ? ? • The income gains from a higher minimum wage are worth more than any slight reductions in employment. ? ?

  13. Positive or Normative Statements? ? ? • State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor. ?

  14. Why economists disagree? • Different values  different normative views • they may disagree on theories about how the world works

  15. Problems • 20/8 • 20/14 • 20/18

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