ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 1 The Study of Economics Krugman Wells How scarcity and choice are central to the study of economics The importance of opportunity cost in individual choice and decision making The difference between positive economics and normative economics 3 of 18 When Economists agree and why they sometimes disagree What makes macroeconomics different from microeconomics 4 of 18 Individual Choice The Core of Economics Individual choice is the decision by an individual of what to do which necessarily involves a decision of what not to do 5 of 18 Individual Choice The Core of Economics Basic principles behind the individual choices include 1 Resources are scarce 2 The real cost of something is what you must give up to get it 3 How much is a decision at the margin 4 People usually take advantage of opportunities to make themselves better off 6 of 18 Resources Are Scarce A resource is anything that can be used to produce something else Ex Land labor capital entrepreneurship Resources are scarce the quantity available isn t large enough to satisfy all productive uses Ex Petroleum lumber intelligence 7 of 18 Opportunity Cost The Real Cost of Something Is What You Must Give Up to Get It The real cost of an item is its opportunity cost what you must give up in order to get it Opportunity cost is crucial to understanding individual choice 8 of 18 Got a Penny Sixty years ago a penny was equivalent to 30 seconds worth of work it was worth saving Wages have risen along with overall prices Today a penny is therefore equivalent to just over 2 seconds of work and so it s not worth the opportunity cost of the time it takes to worry about a penny more or less The rising opportunity cost of time in terms of money has turned a penny from a useful coin into a nuisance 9 of 18 Macroeconomics vs Microeconomics Let s begin by looking more carefully at the difference between microeconomic and macroeconomic questions MICROECONOMIC QUESTIONS Go to business school or take a job MACROECONOMIC QUESTIONS How many people are employed in the economy as a whole What determines the salary offered by Citibank to Cherie Camajo a new Columbia MBA What determines the overall salary levels paid to workers in a given year 10 of 18 Macroeconomics vs Microeconomics MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS What determines the cost to a university or college of offering a new course What determines the overall level of prices in the economy as a whole What government policies should be adopted to make it easier for low income students to attend college What government policies should be adopted to promote full employment and growth in the economy as a whole What determines whether Citibank opens a new office in Shanghai What determines the overall trade in goods services and financial assets between the U S and the rest of the world 11 of 18 Macroeconomics vs Microeconomics Microeconomics focuses on how decisions are made by individuals and firms and the consequences of those decisions 12 of 18 Macroeconomics vs Microeconomics Macroeconomics examines the aggregate behavior of the economy Macroeconomics examines how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole In macroeconomics the behavior of the whole macroeconomy is indeed greater than the sum of individual actions and market outcomes 13 of 18 Positive v Normative Economics Positive economics is the branch of economic analysis that describes the way the economy actually works Normative economics makes prescriptions about the way the economy should work 14 of 18 When and Why Economists Disagree There are two main reasons economists disagree Which simplifications to make in a model Values 15 of 18 Many economists agreed on their responses to statements such as Tariffs and import quotas usually reduce general economic welfare and A ceiling on rents reduces the quantity and quality of housing available What is interesting is that many non economists disagree with economists on these statements 16 of 18 1 Everyone has to make choices about what to do and what not to do Individual choice is the basis of economics 2 The reason choices must be made is that resources anything that can be used to produce something else are scarce 3 Because you must choose among limited alternatives the true cost of anything is what you must give up to get it all costs are opportunity costs 4 Macroeconomics is the study of the behavior of the economy as a whole Macroeconomics differs from microeconomics in the type of questions it tries to answer and in its strong policy focus 17 of 18 5 Economists use economic models both for positive economics which describes how the economy works and for normative economics which prescribes how the economy should work 6 There are two main reasons economists disagree One they may disagree about which simplifications to make in a model Two economists may disagree like everyone else about values 18 of 18