Chapter 1 The Nature of Economics The Power of Economic Analysis o Incentives Rewards for engaging in a particular activity The nature of self interested responses to incentives is the starting point for economic analysis o The economic way of thinking is a framework to analyze solutions to economic problems How much time to study Choosing which courses to take Whether the U S govt should encourage or discourage immigration o The economic way of thinking gives you the power to reach informed conclusions about what is happening in the world o Economic analysis helps you make better decisions and increases your understanding when watching or reading the news on the Web o Economic analysis is a way of thinking about all decisions Education career or financing a home Involvement in the business world Voting Defining Economics o Economics The study of how people allocate their limited resources to satisfy their unlimited wants o Resources o Wants The study of how people make choices Things used to produce other things to satisfy people s wants What people would buy if their incomes were unlimited o With limited income people must make choices to satisfy their wants o Economics studies how these choices are made Microeconomics vs Macroeconomics o Microeconomics firms The study of decision making undertaken by individuals or households and by Like looking through a microscope to focus on the smaller parts of the economy The effects of changes in gas prices A family s choice of having a baby An individual firm s decision to advertise o Macroeconomics The study of the behavior of the economy as a whole Deals with economywide phenomena The national unemployment rate The rate of inflation The yearly output of goods and services in a nation o Macroeconomics deals with aggregates or totals such as total output in an economy o Modern economic theory blends micro and macro concepts The Economic Approach Systematic Decisions o Economists assume that individuals act as if motivated by self interest and respond predictably to opportunities for gain The assumption that people do not intentionally make decisions that would leave o Rationality Assumption themselves worse off o Responding to incentives Rationality and the use of incentives Positive incentives Negative incentives Making choices Balancing cost and benefits o Defining self interest The pursuit of one s goals does not always mean increasing one s wealth Economics as a Science Prestige friendship love o Economics is a social science that employs the same kinds of methods used in other sciences such as biology o Economics uses models to explain economic phenomena in the real world o Models or Theories Simplified representations of the real world used as the basis for predictions or explanations Should capture only the essential relationships that are sufficient to analyze a problem Cannot be faulted as unrealistic simply because they do not capture all details of the real world o Assumptions o Ceteris Paribus Assumption Nothing changes except the factor or factors being studied Other things constant Other things equal o Economics is an empirical science o Behavioral Economics Approach to the study of consumer behavior o Bounded Rationality Hypothesis that people are nearly not fully rational Positive vs Normative Economics o Positive Economics Purely descriptive statements or scientific predictions such as If A then B A statement of what is o Normative Economics Analysis involving value judgments relates to whether things are good or bad A statement of what ought to be Chapter 2 Scarcity and the World of Trade Offs Scarcity o The most basic concept in all of economics o Occurs when the ingredients for producing things that people desire are insufficient to satisfy all wants o Means we never have enough of everything including time to satisfy our every desire What scarcity is NOT o It is not a shortage o It is not the same thing as poverty Production consumption Resources or Factors of Production o Any activity that results in the conversion of resources into products that can be used in o Inputs that are used to produce things that people want Land Natural resources or the gifts of nature Labor The human resource Physical Capital All manufactured resources Human Capital Accumulated training and education of works Entrepreneurship Person who organizes manages and assembles the other resources risk taker maker of basic business policy decisions Goods vs Economic Goods o Goods are all things from which individuals derive satisfaction or happiness o Economic goods are scarce goods for which the quantity demanded exceeds the quantity supplied at zero price Services o Tasks that are performed for someone else o Can be referred to as intangible goods Recall o Scarcity occurs when the ingredients resources for producing things that people desire are insufficient to satisfy all wants Wants and Needs o Needs Not definable to economists o Wants Goods and services on which we place a positive value People have unlimited wants Scarcity Choice and Opportunity Cost obtain something or to satisfy a want The next highest ranked alternative not all alternatives o In economics cost is always a forgone opportunity The World of Trade Offs o Opportunity Cost The highest valued next best alternative that must be sacrificed to o Whenever you engage in any activity using any resource you are trading off the use of that resource for one or more alternative uses o The value of the trade off is represented by the opportunity cost that which you give up to obtain something else o Graphical analysis of opportunity cost Production Possibilities Curve PPC Represents all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quality The Choices Society Faces o PPC is used to demonstrate related concepts of scarcity choice and trade offs At an individual and societal level o Production possibilities assumptions Resources are fully employed Production takes place over a specific time period Resources are fixed for the time period Technology does not change over the time period o Technology Society s pool of applied knowledge concerning how goods and services can be produced o Efficiency resources o Inefficient Point Productive efficiency is producing the maximum output with given technology and Alternatively the situation in which a given output is produced at minimum cost Any point below the production