Lectcture1 intrducing economic way of thinking KUST KOHAT

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Chapter 1Introducing the Economic

Way of Thinking• Key Concepts

• Summary

Dr. Hidayat Ullah KhanAssistant Professor

Department of Economics - KUST

Dr. Hidayat Ullah Khan Department of Economics

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In this chapter, you will learn to solve these economic puzzles:

Can you prove there is no person worth a

trillion dollars?

Why would you purchase more Coca-Cola when the

price increases?

How can we explain the relationship between the

Super Bowl (rugby) winner and changes in the stock

market?Dr. Hidayat Ullah Khan

Department of Economics

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What is theEconomic Problem?Providing for people’s

wants and needs in a world of scarcity

* Return to previous slide while in slide showDr. Hidayat Ullah Khan

Department of Economics

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What is meant by Scarcity?

The condition in which wants are forever greater than the available supply of time, goods, and resources


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What does Scarcity force us to do?It forces us to

make choices


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What are Resources?The basic categories of inputs used to produce goods and services


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What are the three categories of Resources?

LandLaborCapital


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What is aLand Resource?

A shorthand expression for any natural resource provided by nature


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What is Labor?The mental and physical

capacity of workers to produce goods and services


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What is Capital?The physical plants, machinery, and equipment used to produce other goods


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What isFinancial Capital?The money used to purchase capital


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What is Entrepreneurship?The creative ability of individuals to seek profits by combining resources to produce innovative products


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LandLabor

Capital

Entrepreneurship organizesresources to produce goods

and services


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What is Economics?The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants


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What is Macroeconomics?

The branch of economics that studies decision-making for the economy as a whole


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What is Microeconomics?

The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government


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What is theScientific Method?

• Problem identification• Model development• Testing a theory


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What is the purpose of an Economic Model?To forecast or predictthe results of various changes in variables


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Identify the problem

Develop a model basedon simplified assumptions

Collect data andtest the model


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What assumption is always made when

testing a model?Ceteris Paribus


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What isCeteris Paribus?

A Latin phrase that means that while certain variables can change, “all other things remain unchanged”


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What is the difference between Association

and Causation?We cannot always assume

that when one event follows another, the first caused the second


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What isPositive Economics?

An analysis limited to statements that are verifiable


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What isNormative Economics?

An analysis based on value judgement


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Key Concepts


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• What is the Economic Problem?• What is meant by Scarcity?• What are resources?• What are the three categories of Resources?• What is Entrepreneurship?• What is Economics?• What is Macroeconomics?• What is Microeconomics?


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• What is the Scientific Method?• What assumption is always made

when testing a model?• What is Ceteris Paribus?• What is the purpose of model

building?• What is Positive Economics?• What is Normative Economics?


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Summary


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Scarcity is the fundamental economic problem that human wants exceed the availability to time, goods, and resources. Individuals and society therefore can never have everything they desire.


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Resources are factors of production classified as land, labor, and capital. Entrepreneurship is a special type of labor. An entrepreneur combines resources to produce innovative products.


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Economics is the study of how individuals and society choose to allocate scarce resources. In order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives.


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Unlimitedwants

Scarcity

Society Chooses

Resources


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Macroeconomics applies an economy wide perspective that focuses on such issues as inflation, unemployment, and the growth rate of the economy.


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Microeconomics examines individual decision-making units within an economy. Microeconomics studies such topics as a consumer’s response to changes in the price of coffee and the reasons for changes in the market price of personal computers.


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Models are simplified descriptions of reality used to understand and predict economic events. An economic model can be stated verbally or in a table, graph, or equation. If the evidence is not consistent with the model, the model is rejected.


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Identifythe

problem

Developa model based

on assumptions

Collect dataand test

the model


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Ceteris paribus holds “all other factors unchanged” that might affect a particular relationship. If this assumption is violated, a model cannot be tested. Another reasoning pitfall is to think association means causation.


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Use of positive versus normative economic analysis is a major reason for disagreement among economists. Positive economics uses testable statements. Often a positive argument is expressed as an “if-the” statement. Normative economics is based on value judgments or opinions and uses words such as good, bad, ought to, and ought not to.


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Reference: South-Western College Publishing


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Lectcture1 intrducing economic way of thinking KUST KOHAT

Education