Chapter 1 The Nature of Economics i What is Economics ii 3 Economic Questions iii Economic Systems iv Economic Assumptions v Bounded Rationality What is Economics a Economics the study of how people allocate their limited resources to satisfy their unlimited wats i Resources things used to produce goods and services to satisfy people s wants ii Wants the things people would buy if their income was unlimited 2 kinds of economics macroeconomics and microeconomics i Macroeconomics studies the behavior of the economy as a whole changes in employment general price levels national income ii Microeconomics study of decision making by individuals and firms This study focuses on the small parts of the economy Economic system society s institution for determining how scarce resources are used to satisfy human desires b 3 Economic Questions i What and how much will be produced ii How will the items be produced iii For whom will the items be produced c Economic Systems 1 Command and control when a specialized authority government monarch dictator decides what to produce and how much to produce 2 Price system individuals and families own all of the scarce resources used in production In this system private parties make production decisions and people choose how to allocate their income d Economic Assumptions i Rationality assumption assumption that people don t intentionally make decisions that would leave them worse off ii Ceteris paribus model assumption that nothing changes except for the factors being studied Models simplified representations of the real world used as the basis for factors being studied Empirical sciences rely on real world data in evaluating the usefulness of a model Behavioral economics examines consumer behavior in the face of psychological limitations and complications that may interfere with rational decision making e Bounded Rationality a Bounded rationality hypothesis that assumes that people are nearly but not fully rational so they cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them b 3 unrealistic characteristics of bounded rationality a Unbounded selfishness people are only interested in their self satisfaction b Unbounded willpower choices are consistent with long term goals c Unbounded rationality people are unable to consider every relevant choice Positive economics statement limited to making descriptive or predictive judgments or statements WHAT IS Normative economics involves value judgments about economic policies and says if it is good or bad WHAT OUGHT TO BE