Ch01 Basic

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Chapter 1

Economics:

The WorldAround You

Economics, 7th Edition

Boyes/Melvin

8/4/2019 Ch01 Basic


Copyright © Houghton Mifflin Company. All rights reserved. 1 | 2

Why Study Economics?

• To answer questions like: – Why do economies go through cycles?

– Why are some people unemployed whileothers are able to find jobs?

– Why do some jobs pay so much more thanother jobs?

– Why do some businesses succeed andothers fail?

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Why Study Economics? (Continued)

• More questions: – Why do some people have to live on welfare?

– Why are some nations richer than others?

– Why is health care so expensive?

– What determines the prices of things?

– What is the value of an education?

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What is Economics?

• Economics is a social science. – Economists study how individuals make

decisions about:

• Working and hiring

• Buying consumer goods and services• Producing goods and services for sale

• Building factories, equipment, and tools

• Building and buying houses

• Setting prices and reacting to them

• Coordinating activities in the economy

• Importing goods

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What is Economics? (Continued)

• Economics is form of applied logic (reasoning). – Economists study the reasoning that drives economic

decisions and outcomes.

– One might think of economics as the study ofunintended consequences.

– Understanding causes and effects is critical to:• understanding the ultimate consequences of economic

events and

• effective and responsible policy making.

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Definition of Economics

• Economics is the study of how scarceresources are allocated amongunlimited wants.

• To understand this definition, we mustexamine the concepts of scarcity,economic choice, and rational

self-interest.

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Human Nature and Reality

• People have unlimited wants.• People have limited resources to acquire

the things they want.

• As a result, they must make choices.• Choices involve pursuing some things

while forgoing others.

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Scarcity, Goods and Bads

• An item that costs something is called scarce. – Anything with a price on it is called an

economic good—these include goods andservices.

– A free good is a good for which there is no scarcity.• An economic bad is anything you want to get

rid of (pollution, disease, garbage)

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Clarifying Concepts

• Scarcity means that not enough is availablefor free.

• A shortage occurs when not enough isavailable at the current price. A shortage is

a problem of price .• Poverty occurs when the goods are scarce,

and those who need them do not have the

income to obtain them. Poverty is a problem of income .

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Goods to Produce Goods

• Resources are the elements needed toproduce goods. Resources are also called

– factors of production

– inputs

• They are: – Land (includes natural resources)

– Labor (physical and intellectual services of people)

– Capital (plant, machinery, equipment used inproduction)

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Resources in Production

Producersof Goods

ResourceSuppliers

land

labor

capital

rent

wages

interest

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Scarcity and Choice

• Scarcity necessitates making choices.

Economics is the study of how people choose

to use their resources in attempts to satisfy

their unlimited wants.

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Rational Self-Interest

• Economists believe that people choose optionsthat give them the greatest satisfaction.

• This means that people: – use all available time and information,

– weigh the costs and benefits of all available alternatives, – and choose the alternative that they believe will bring them the

most benefit at the lowest cost. This is the alternative that theybelieve will bring them the most satisfaction.

• This does not mean that people are innatelyselfish. Self-interest is not greed.

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Limits to Rationality

• Depends upon – Information available (and/or its cost)

– Ability to process the information

– Your perception of what constitutes your ―best

interests‖

• This leads to the theory of bounded rationality.

• In practice, this means that people comparecosts and benefits to make a decision.

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Implications

• People weigh the costs and benefits of variousalternatives, choosing the alternative that makes

them best off. – This behavior is called “economic decision making”.

• Costs and benefits are sometimes referred to asnegative and positive incentives. Henceincentives matter.

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Positive vs. Normative Economics

• Positive Economics – Focuses on “what is”.

– Analyzes actual, measurable outcomes.

– Does not impose value judgments, person feelings

or convictions. – Positive economics is economics as a science.

• Normative Economics

– Focuses on what someone thinks “ought to be”

or “should be”.

– Makes ethical judgments—value judgments.

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Common Analytical Mistakes(Logical Fallacies)

• Fallacy of Composition

– The mistaken assumption that what is true of a part is also trueof the whole.

• Association is not Causation

– The mistaken assumption that because two events occurtogether, one must cause the other. Also given as ―correlation is

not causation‖.

• Violation of Ceteris Paribus

– Ceteris Paribus: Latin for “all else equal”. – This occurs when one attempts to analyze the effect of one thing

while holding everything else constant, when in fact other thingshave changed.

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Micro vs. Macro

• Microeconomics – Studies the economy at the level of individual

consumers, workers, firms, goods, and markets

• Macroeconomics – Studies the economy at the aggregate level, at the

level of the economy as a whole.

– Examines total consumer behavior, total employment,

total production, total sales, etc.

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Ch01 Basic

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