Chapter 1IntroductionLearning ObjectivesChapter OutlineDid You Know That ...The Power of Economic AnalysisThe Power of Economic Analysis (cont'd)Slide 8Slide 9Defining EconomicsDefining Economics (cont'd)Slide 12Slide 13Microeconomics versus MacroeconomicsMicroeconomics versus Macroeconomics (cont'd)Slide 16The Economic Person: Rational Self-InterestThe Economic Person: Rational Self-Interest (cont'd)Slide 19Example: “Neuroeconomics” Explores the Rationality AssumptionSlide 21Slide 22Slide 23E-Commerce Example: Playing the Float with Plastic Instead of ChecksSlide 25Example: The Perceived Value of GiftsEconomics as a ScienceEconomics as a Science (cont'd)Example: Getting DirectionsSlide 30Slide 31Slide 32Slide 33Positive versus Normative EconomicsIssues and Applications: Do People Engage in Conspicuous Consumption?Issues and Applications: Do People Engage in Conspicuous Consumption? (cont'd)Summary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 39Slide 40End of Chapter 1Chapter 1The Nature of EconomicsCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-2IntroductionRhesus monkeys are willing to forgo 10% of their “income” of cherry juice to examine photos of leading and attractive members of their group.This behavior mirrors our willingness to purchase celebrity magazines.Nevertheless, economists who study making choices in response to rewards or inducements, propose some are willing to pay to be viewed by others as leading and attractive members of our society.What can economists tell us about why people purchase items that attract attention such as flashy sports cars or designer clothing?Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-3Learning Objectives•Discuss the difference between microeconomics and macroeconomics•Evaluate the role that rational self-interest plays in economic analysis•Explain why the study of economics is a science•Distinguish between positive and normative economicsCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-4Chapter Outline•The Power of Economic Analysis•Defining Economics•Microeconomics versus Macroeconomics•The Economic Person: Rational Self-Interest•Economics as a Science•Positive versus Normative EconomicsCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-5Did You Know That ...•Six of seven main U.S. railroad lines meet in Chicago?•The bottlenecks these lines caused created incentives to lay more track?•Incentives are the underpinnings for all the decisions you and others make?Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-6The Power of Economic Analysis•IncentivesRewards for engaging in a particular activityCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-7•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 troops should be sent abroadThe Power of Economic Analysis (cont'd)Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-8The Power of Economic Analysis (cont'd)•The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world.•Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-9The Power of Economic Analysis (cont'd)•Economic analysis is a way of thinking about all decisions.Your education, career, financing your home, familyYour involvement in the business world, or in politics as a voterCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-10Defining Economics•EconomicsThe study of how people allocate their limited resources to satisfy their unlimited wantsThe study of how people make choicesCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-11Defining Economics (cont'd)•ResourcesThings used to produce other things to satisfy people’s wants•WantsWhat people would buy if their incomes were unlimitedCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-12Defining Economics (cont'd)•With limited income (resources), people must make choices to satisfy their wants.•We never have enough of everything, including time, to satisfy our every desire.Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-13Defining Economics (cont'd)•Individuals, businesses, and nations face alternatives, and choices must be made. •Economics studies how these choices are made.Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-14Microeconomicsversus Macroeconomics•MicroeconomicsThe study of decision making undertaken by individuals (or households) and by firmsLike looking though a microscope to focus on the smaller parts of the economyDecision of a worker to work overtime or notA family’s choice of having a babyAn individual firm advertisingCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-15Microeconomicsversus Macroeconomics (cont'd)•MacroeconomicsThe study of the behavior of the economy as a wholeDeals with economywide phenomenaThe national unemployment rateThe rate of growth in the money supplyThe national government’s budget deficitCopyright © 2008 Pearson Addison Wesley. All rights reserved.1-16Microeconomicsversus Macroeconomics (cont'd)•Macroeconomics deals with aggregates, or totals—such as total output in an economy.•Modern economic theory blends micro and macro concepts.Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-17The Economic Person:Rational Self-Interest •Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain.Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-18The Economic Person:Rational Self-Interest (cont'd)“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” —Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776Copyright © 2008 Pearson Addison Wesley. All rights reserved.1-19The Economic Person:Rational Self-Interest (cont'd)•Rationality AssumptionThe assumption that people do not intentionally make decisions that would leave them worse offCopyright © 2008 Pearson Addison Wesley. All