Chapter OneChapter One

Roadmap for EconomicsRoadmap for Economics

EconomicsEconomics

Social science concerned with Social science concerned with the efficient use of limited or the efficient use of limited or scarce resources to achieve scarce resources to achieve maximum satisfaction of maximum satisfaction of human material wants.human material wants.

EconomicsEconomics

Economics studies the Economics studies the allocation of scarce resources allocation of scarce resources

in response to unlimited wants. in response to unlimited wants. Economics is about Economics is about choice.choice. Society is forced to choose Society is forced to choose

because because resources are scarce.resources are scarce.

Why Study Economics?Why Study Economics?““The ideas of economists and The ideas of economists and

political philosophers, both when they political philosophers, both when they are right and when they are wrong, are are right and when they are wrong, are more powerful than is commonly more powerful than is commonly understood. Indeed the world is ruled by understood. Indeed the world is ruled by little else. Practical men, who believe little else. Practical men, who believe themselves to be quite exempt from any themselves to be quite exempt from any intellectual influences, are usually the intellectual influences, are usually the slaves of some defunct economist.”slaves of some defunct economist.”

John Maynard Keynes (1883-1946)John Maynard Keynes (1883-1946)

√ Economics for CitizenshipEconomics for Citizenship Well informed citizens will vote Well informed citizens will vote intelligently intelligently Well informed politicians will choose Well informed politicians will choose wisely among alternativeswisely among alternatives√ Professional and Personal ApplicationProfessional and Personal Application Businessmen need an understanding of Businessmen need an understanding of economy economy Problems are examined from social Problems are examined from social rather than personal viewpointrather than personal viewpoint

Why Study EconomicsWhy Study Economics

Economic perspectiveEconomic perspective: an : an unique way of thinking about unique way of thinking about economic issueseconomic issues

√√ Scarcity and ChoiceScarcity and Choice √√ Rational BehaviorRational Behavior√√ Marginal Thinking: Marginal Thinking:

Costs and BenefitsCosts and Benefits

ScarcityScarcity

Scarcity - When There Is Not Enough Scarcity - When There Is Not Enough For Everyone – Someone SuffersFor Everyone – Someone Suffers

TheoriesTheories

FactsFacts

Policy EconomicsPolicy Economics

Theoretical EconomicsTheoretical Economics

Economic Way of ThinkingEconomic Way of Thinking

Descriptive EconomicsDescriptive Economics√√ Based on facts—observable and Based on facts—observable and

verifiable behavior of certain data or verifiable behavior of certain data or subject mattersubject matter

√√ Economists examine behavior of Economists examine behavior of individuals and institutions engaged in the individuals and institutions engaged in the production, exchange, and consumption production, exchange, and consumption of goods and services. of goods and services.

Economic Way of ThinkingEconomic Way of Thinking

Economic Principles (laws, models)Economic Principles (laws, models)√√ Task of analysisTask of analysis is to systematically arrange, interpret, is to systematically arrange, interpret,

and generalize upon factsand generalize upon facts√√ Principles and theories Principles and theories bring order and meaningbring order and meaning to to

facts by tying them together, putting them in correct relationship facts by tying them together, putting them in correct relationship to one another and generalizing. to one another and generalizing.

√√ Principles are Principles are expressed as the tendenciesexpressed as the tendencies of typical, or of typical, or average consumers, workers, or business firmsaverage consumers, workers, or business firms

√√ Three GeneralizationsThree Generalizations““Other things equal” assumptionOther things equal” assumption—controlling all —controlling all

variables except onevariables except oneAbstractionsAbstractions—do not mirror the complexity of real world—do not mirror the complexity of real worldGraphic ExpressionsGraphic Expressions—models used to show theory—models used to show theory

Economic Way of ThinkingEconomic Way of Thinking

Policy EconomicsPolicy Economics√√ Applied Economics that Applied Economics that

recognizes the principles and data which recognizes the principles and data which can be used to formulate policies.can be used to formulate policies.

√√ Determining a course of action to Determining a course of action to resolve a problem or to further a nation’s resolve a problem or to further a nation’s economic goalseconomic goals

Economic Way of ThinkingEconomic Way of Thinking

Steps in Policy Economics-an exampleSteps in Policy Economics-an example1. State the goal1. State the goalA clear, specific statementA clear, specific statement• • Every able-bodied individual should have opportunity to Every able-bodied individual should have opportunity to workwork

3. Implement and Evaluate the policy selected3. Implement and Evaluate the policy selected • • Monitor steps in implementing the policy initiatives takenMonitor steps in implementing the policy initiatives taken • • Survey statistics on employmentSurvey statistics on employment • • Do follow-up on job placements and training programsDo follow-up on job placements and training programs

2. Determine the policy options2. Determine the policy options• • List specific policies to achieve goal with an assessment of List specific policies to achieve goal with an assessment of possible effectspossible effects • • Fund vocational training programs in high schools and junior Fund vocational training programs in high schools and junior collegescolleges • • Create job training and subsidy to business firms willing to Create job training and subsidy to business firms willing to take on new workerstake on new workers

The Economic LandscapeThe Economic Landscape

Principles Are Derived At Two Levels:Principles Are Derived At Two Levels:

MacroMacroeconomics: economy as a whole economics: economy as a whole and its basic subdivisions such as and its basic subdivisions such as

government, business and households. government, business and households. Macro looks at totals or aggregates to Macro looks at totals or aggregates to

examine the “big picture”.examine the “big picture”.

MicroMicroeconomics: looks at specific units economics: looks at specific units or segments of the economy, a particular or segments of the economy, a particular

firm or household. Micro looks at the firm or household. Micro looks at the “trees not the forest”.“trees not the forest”.

POSITIVE POSITIVE Economics collects and presents Economics collects and presents facts. It avoids value judgments—”just the facts. It avoids value judgments—”just the facts, madam”! Positive economics concerns facts, madam”! Positive economics concerns WHAT IS—what the economy is really like.WHAT IS—what the economy is really like.

NORMATIVENORMATIVE Economics involves value Economics involves value Judgments. It is concerned with HOW IT Judgments. It is concerned with HOW IT SHOULD BE!SHOULD BE!

ECONOMIC GOALSECONOMIC GOALS

•Economic GrowthEconomic Growth•Full EmploymentFull Employment•Economic EfficiencyEconomic Efficiency•Price-Level StabilityPrice-Level Stability•Economic FreedomEconomic Freedom•Equitable DistributionEquitable Distribution•Economic SecurityEconomic Security•Balance of TradeBalance of Trade

ECONOMIC GOALSECONOMIC GOALS

√√ BiasBias preconceptions not based on factspreconceptions not based on facts

√√ Loaded TerminologyLoaded Terminology slanted/distorted termsslanted/distorted terms

√√ DefinitionsDefinitions redefined words specific for redefined words specific for economicseconomics

√√ Fallacy of CompositionFallacy of Composition assuming that what is true for assuming that what is true for individual is true for the groupindividual is true for the group

√√ Causation FallaciesCausation Fallacies post hocpost hoc—if A precedes B, it is —if A precedes B, it is not necessarily the cause of Bnot necessarily the cause of B

CorrelationCorrelation—some —some association in association in a dependable a dependable way, but not way, but not necessarily the necessarily the cause cause

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

Three Basic QuestionsThree Basic Questions

1. What?1. What?

What goods and services will be What goods and services will be produced and offered for sale, produced and offered for sale,

and in what quantities?and in what quantities?

Three Basic QuestionsThree Basic Questions

2. How?2. How?

How will the goods and services How will the goods and services be produced?be produced?

Three Basic QuestionsThree Basic Questions

3. For Whom?3. For Whom?

Who will consume the goods and Who will consume the goods and services which are produced?services which are produced?

Two Primary Two Primary

Economic ObjectivesEconomic Objectives

Equity-fairness

Efficiency-best use

Technological or productive efficiency:Technological or productive efficiency: getting the greatest quantity of output getting the greatest quantity of output from the resources that are being used from the resources that are being used —least cost!—least cost!

Allocative efficiency:Allocative efficiency: choosing the most choosing the most valuable mix of outputs to produce—valuable mix of outputs to produce—what society wants!what society wants!

EfficiencyEfficiency

The Spectrum of Economic The Spectrum of Economic SystemsSystems

CommandCommand

and and

ControlControl

Laissez-FaireLaissez-Faire

Free MarketsFree MarketsMixedMixed

““The Invisible Hand”The Invisible Hand”

Adam Smith described in Adam Smith described in The Wealth of The Wealth of NationsNations, how the , how the invisible handinvisible hand of the of the

marketplace leads the economy to marketplace leads the economy to produce an efficient variety of goods produce an efficient variety of goods

and services, with efficient production and services, with efficient production methods as well. methods as well.