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The Nature & Method of Economics

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Chapter 1: The Nature & Method of EconomicsThe Economic PerspectiveRational BehaviorMarginalism: Benefits & CostsWhy Study Economics?Slide 6Economic MethodologyPolicy EconomicsEconomic GoalsMacroeconomicsMicroeconomicsPositive Economics (“What is”)Normative Economics (“What ought to be”)Pitfalls to Sound ReasoningChapter 1 Study Questions1Chapter 1: The Nature & Method of EconomicsSociety uses resources to produce goods & servicesProduction satisfies many economic wants and occurs through organizational mechanism called economic system or the economy.Our economic wants far exceed the productive capacity of limited and scarce resourcesTherefore, the complete satisfaction of our economic wants is impossibleEconomics is the social science concerned with the problem of using scarce resources to attain the maximum fulfillment of society’s unlimited wants2The Economic PerspectiveThe economic perspective is “the economic way of thinking”Human & property resources are scarceGoods & services produced with those resources are also scarceScarcity limits our options, we must make choices.3Rational BehaviorEconomics is grounded on the assumption of “rational self-interest”Achieve greatest satisfactionRational behavior: individuals make different choices under different circumstancesRational decisions change as costs and benefits changeSelf-interest behavior enables a person to achieve personal satisfaction.4Marginalism: Benefits & CostsEconomic perspective focuses on marginal analysis, the comparison of marginal benefits and marginal costs.Marginal: “Extra”, “Additional”Choices & decisions involve changes in the existing state of affairs (status quo)When making choices rationally, compare marginal benefits vs. marginal costs. Marginal Benefit > Marginal CostMarginal Benefit = Marginal Cost: “At the Margin”5Why Study Economics?Economic IssuesUnemploymentInflationEconomic GrowthTaxationPovertyInternational TradeHealth CarePollutionDiscriminationImmigrationEducation6Why Study Economics?Vital to BusinessAn understanding of how to make economic decisions and the operation of the economic system enables business managers & executives to increase profit.New technologyMergers & AcquisitionsHire/Fire EmployeesRecessionsInflationEconomics helps consumers and workers make better buying, employment, & financial decisions7Economic MethodologyEconomics relies on the Scientific MethodTheoretical Economics: Process of deriving economic theories and principles is systematic, involves fact-gathering and analysis  generalizeEconomic theories, principles, and laws are generalizations relating to economic behavior or the economy itself, expressed as “tendencies” of the typical consumer, worker, or firmCeteris Paribus = “Other things being equal”8Policy EconomicsRecognizes that theories and data can be used to formulate policiesPolicies are courses of action on economic principlesPolicies are intended to resolve a specific economic problem or further an economic goal9Economic GoalsEconomic Growth: Produce better goods & services; Higher SOLFull Employment: Suitable jobsEconomic Efficiency: Maximize wants w/ available ResourcesPrice-level Stability: Avoid Inflation & DeflationEconomic FreedomEquitable Distribution of Income: Reduce Disparity between Poverty & Abundance Economic Security: Minimum Levels of IncomeBalance of Trade: Overall balance w/ ROW in Trade & Financial Transactions10MacroeconomicsMacroeconomics examines the economy as a whole or aggregatesGovernment, Household, Business SectorsAggregate: Collection of specific economic units treated as one.Macro seeks to obtain an overviewE.g.: Total Output, Employment, or Income; Aggregate Expenditures; and General Level of Prices11MicroeconomicsMicroeconomics focuses on specific units of the economy, observing details of an economic unit, or small segment of the economyIndividual Industry, Firm, or HouseholdE.g.: Price of Single Product, EE at Single Firm, Revenue/Income of Single Household12Positive Economics (“What is”)Positive economics focuses on facts and cause-and-effect relationshipsAvoids value judgmentsTries to establish scientific statements about economic behaviorDeals w/ what economy is actually like.13Normative Economics (“What ought to be”)Incorporates value judgments about what economy should be like or what particular policy actions should be recommended to achieve desired goal.Most of the disagreement among economists involves normative, value-based policy questions.14Pitfalls to Sound ReasoningBiasesLoaded TerminologyDefinitionsFallacy of CompositionCausation Fallacies1. Post Hoc Fallacy2. Correlation v. Causation (p. 11)15Chapter 1 Study


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