WHY DO WE STUDY ECONOMICS??

WHY STUDY ECONOMICS Among TOP TEN REASONS …..

Economists can supply it on demand.

You can talk about money without ever having to make any.

When you are in the unemployment line, at least you will know why you are there.

So that you know more than the most world leaders about what is actually going on.

Current News on World Economy

Output drops worse-than-expected 1.1 percent

By MARTIN CRUTSINGER, AP Economics Writer Mon Sep 15, 9:16 AM ET

WASHINGTON - Government data show the nation's industrial output plunged in August by nearly four times the amount that had been expected. It's the worst performance since Hurricane Katrina devastated the Gulf Coast in 2005.

CHAPTER 1: CHAPTER 1: WHAT IS WHAT IS ECONOMICSECONOMICS

Definition of Economics

-scarcity and choices

-economics

-Microeconomics

-Macroeconomics

Big Microeconomics Questions

-What, How, For Whom

-Factors of Production

Land, Labor, Capital and Entrepreneur

Economics: A Social Science

-positive statement

-normative statement

-Economic theory

-economic model

-ceteris paribusEconomic Way of Thinking

-Choice

-Tradeoff

-opportunity cost

-Marginal benefit and Marginal Cost

Slide #1

WHAT IS ECONOMICS? 1CHAPTER

Definition of Economics

All economic questions arise because we want more than we can get.

Our inability to satisfy all our wants is called scarcity.

Because we face scarcity, we must make choices.

The choices we make depend on the incentives we face.

An incentive is a reward that encourages or a penalty that discourages an action.

Economics

We want more than what we get

leads SCARCITY

CHOICES

INCENTIVES

depends

Definition of Economics

Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Economics

Microeconomics Macroeconomics

Definition of Economics

MicroeconomicsMicroeconomics is the study of choices made

by individuals and businesses, and the influence of government on those choices.

MacroeconomicsMacroeconomics is the study of the effects

on the national and global economy of the choices that individuals, businesses, and governments make.

TWO BIG ECONOMIC QUESTIONS

CHOICES

1. FIRST BIG ECON QUESTION

What to produce How to Produce For whom to produce

2. SECOND BIG ECON QUESTION

Self Interest or Social Interest

Two Big Economic Questions

Two big questions summarize the scope of economics:

How do choices end up determining what, how, and for whom goods and services get produced?

When do choices made in the pursuit of self-interest also promote the social interest?

Two Big Economic Questions What, How, and For Whom?Goods and services are the objects

that people value and produce to satisfy wants.

What?Given the resources or factors of

production available to us, we have to decide on what to produce

Two Big Economic Questions

How?Goods and services are produced by using

productive resources that economists call factors of production.

Factors of production are grouped into four categories:

Land Labor Capital Entrepreneurship

Factors of Production

The “gifts of nature” that we use to produce goods and services are land.

The work time and effort that people devote to producing goods and services is labor.

The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

Two Big Economic Questions

The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are capital.

The human resource that organizes land, labor, and capital is entrepreneurship.

Two Big Economic Questions

For Whom?Who gets the goods and services depends

on the incomes that people earn. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit.

Two Big Economic Questions

When is the Pursuit of Self-Interest in the Social Interest?Every day, 6.3 billion people make economic choices that result in “What,” “How,” and “For Whom” goods and services get produced.

Do we produce the right things in the right quantities? Do we use our factors of production in the best way? Do the goods and services go the those who benefit

most from them?

Two Big Economic Questions

You make choices that are in your self-interest—choices that you think are best for you.

Choices that are best for society as a whole are said to be in the social interest.

Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest?

ECONOMIC WAY OF THINKING

The Economic Way of Thinking

Choices and TradeoffsThe economic way of thinking places scarcity and

its implication, choice, at center stage.You can think about every choice as a tradeoff—

an exchange—giving up one thing to get something else.

The classic tradeoff is “guns versus butter.”“Guns” and “butter” stand for any two objects of

value.

(give up the highest value alternative)

SCARCITY

CHOICES

TRADEOFF

OPPORTUNITY COST

The Economic Way of Thinking

Opportunity CostThinking about a choice as a tradeoff

emphasizes cost as an opportunity forgone.

The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen.

The Economic Way of Thinking

Choosing at the MarginPeople make choices at the margin, which

means that they evaluate the consequences of making incremental changes in the use of their resources.

The benefit from pursuing an incremental increase in an activity is its marginal benefit.

The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.

Marginal Benefit vs Marginal Cost

Marginal Benefit: the benefit arises from an increase in activity

i.e- Study three nights in a week GPA is 3.0 Study 4 nights in a week GPA is 3.5 Marginal Benefit = 3.5- 3.0 =0.5 Marginal cost: The cost of an increase in activity Marginal cost: cost of additional night not watching

TV DECISION: MB> MC STUDY MB< MC DON’T STUDY

Marginal Benefits vs. Marginal Costs

MB >MC Incentive to continue activity

MB < MC Incentive to discontinue activity

ECONOMICS: A SOCIAL SCIENCE

Economics: A Social Science

Social scienceEconomics is a social science.Economists distinguish between two types of

statement: What is—positive statements What ought to be—normative statements

A positive statement can be tested by checking it against facts

A normative statement cannot be tested.

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3. ECONOMIC METHODOLOGY Relying on scientific method to

view at things. Consisting of the following elements:- Observation of facts- Hypothesis formulation- Testing- Acceptance/rejection: Modification- Continued testing against facts

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3. ECONOMIC METHODOLOGY Continued testing against facts

Accumulation of favorable results =THEORYAccepted theory = LAW/PRINCIPLESCombination of law & principles = MODELS (Simplified version of relationships)

All these enable us to understand, explain & predict economic outcomes

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3. ECONOMIC METHODOLOGY Theoretical economics

- Develop models of behavior of economic agents- Relevant and useful information- Establishing cause-effect

testing discovering theories & principles use in analytical economics

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3. ECONOMIC METHODOLOGY Terminology

- Hypothesis – Needs initial testing

- Theories – Tested, need more testing

- Law/principle – accepted theory, provided strong predictive accuracy

- Model – Combines principles into simplified representation of reality

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3. ECONOMIC METHODOLOGY Generalizations

- Theories, laws & principles are generalizations to economic behavior

- Imprecise due to economic diversity

- Economic principles are expressed as the tendencies of average economic agents

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3. ECONOMIC METHODOLOGY Other-things-equal assumption

- Ceteris paribus- Enable generalizations- All variables, except the one under analysis, are held constant

THE END