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 makedecisions 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 andcomplications that may interfere with rational decision making e. Bounded Rationality a. Bounded rationality- hypothesis that assumes that people are nearly, but notfully, rational so they cannot examine every possible choice available to thembut instead use simple rules of thumb to sort among the alternatives that happen to occur to them b. 3 unrealistic characteristics of bounded rationalitya. 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 relevantchoice 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