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Ch 1: What Economics Is About

Ch 1: What Economics Is About. Economic Definitions. Scarcity is the condition in which our wants are greater than the limited resources available.

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Ch 1: What Economics Is About

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  1. Ch 1: What Economics Is About

  2. 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.

  3. Economic Categories • Positive Economics • Normative Economics • Microeconomics • Macroeconomics

  4. Economic Categories • Positive economics: the study of “what is” in economic matters. • Normative economics: the study of “what should be” in economic matters.

  5. 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

  6. 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?

  7. Scarcity and Effects Land Labor Capital Entrepreneurship Utility/Disutility Rationing Devices Scarcity and Competition Opportunity Cost Thinking In Terms of Scarcity

  8. 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.

  9. There Is No Such Thing As A Free Lunch Considerpeople 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.

  10. 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

  11. Thinking In Terms Of … • The Difference between Association and Causation • The Difference between the Group and the Individual

  12. Economics and Statistics

  13. 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?

  14. 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.

  15. 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

  16. 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.

  17. 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? Even More Theory Building

  18. 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”?

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