ECO2013 Lecture 3 Outline of Last Lecture I Eight guideposts to economic thinking Outline of Current Lecture I Eight guideposts to economic thinking II Positive and normative economics III Four pitfalls to avoid in economic thinking Current Lecture Chapter 1 Economic Approach continued Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but is costly 6 Beware of Secondary Effects economic actions generate both direct and indirect effects Secondary effects the indirect impact of event or policy that may not be easily and immediately observable 7 The value of a good or service is objective Because goods are subjective voluntary trade creates value Moving goods and services to those who value them most is a primary source of economic progress 8 The test of a theory is its ability to predict If real world events are consistent with a theory that theory is valid Positive v Normative Economics Positive economics the scientific study of what is testable Normative economics Judgments about what ought to be not testable 4 Pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principle Ceteris paribus other things constant 2 Good intentions don t guarantee desirable outcomes 3 Association is not causation Example superstitions 4 Fallacy of composition belief that what is true for one might not be true for all Microeconomics v Macroeconomics Microeconomics Focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms Macroeconomics Focuses on how human behavior affects outcomes in highly aggregated markets such as the nation s markets such as the nation s market for labor
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