Econ Ch1 Learning Objectives Explain how economic analysis can be used in decision making Distinguish between microeconomics and macroeconomics Describe how economists use models Describe the ceteris paribus assumption Discuss the difference between efficiency and equity Describe the key principles in economics Apply the key principles to situations faced in your daily routine WHAT IS ECONOMICS ABOUT Economics studies how individuals firms and societies make decisions to maximize their well being given limitations is about making choices Economics social science of how humans make decisions Takes things that we do on a regular basis and analyze them to know more ie don t need to know why a marker drops but with newtons laws you know how Scarcity Core problem of economics people have infinite wants but their resources are limited scarcity CATEGORIES OF ECONOMIC THEORY I for individual entities Microeconomics is concerned with decisions made by consumers workers and firms micro the little guys IE the study of how prices are determined in the automobile industry It looks at purchases made by consumers and decisions made by firms regarding the products brought to market Microeconomics also looks at how markets are structured Microeconomics study of the core economic problem at the individual level individual consumers and firms and their interactions Macroeconomics deals with the causes of unemployment CATEGORIES OF ECONOMIC THEORY a for aggregate entities Macroeconomics focuses on the broader issues we face as a nation Fluctuations of the business cycle create recessions unemployment and periods of inflation Monetary and fiscal policy measures are used to smooth out these fluctuations Macroeconomics same study but at a larger scale study of natl economies can t do controlled experiments on large group of ppl Ie cant just fo over to Uganda and say hey lets do an experiement by raising the minimum wage by 50 don t have much control over a lot of factors True An economic model cannot be faulted as unrealistic simply because it does not represent every detail of the real world MODEL BUILDING Economic analysis uses a stylized approach Models typically are accompanied by the ceteris paribus assumption conditions remaining the same The assumption that factors other than those being considered are held constant lololol Purpose of Ceteris Paribus Assumption used in economic analysis is to keep all other things equal or other things constant Models are crafted from new insights and they are tested against empirical realities EFFICIENCY VERSUS EQUITY Efficiency deals with how well resources are used and allocated This means producing the goods that people want at the lowest possible resource cost Equity deals with questions of fairness There are many divergent views about fairness CHECKPOINT WHAT IS ECONOMICS ABOUT Economists and policymakers often confront the tradeoff between efficiency and equity Economists have much to say about efficiency POSITIVE VERSUS NORMATIVE Positive questions Normative questions are questions that can be answered one way or another as long as the necessary information is available Positive questions can be answered with facts and information involve societal beliefs on what actions should be taken Differing opinions on an issue can sometimes make normative questions difficult to resolve IE raising min wage rep and dem Have differing views of what is right to do while normative questions ask how something should or ought to be The part of economics involving value judgements about what the economy should be like focused on which economic goals and policies should be implemented policy economics KEY PRINCIPLES OF ECONOMICS Principle 3 Specialization Leads to Gains for All Involved Tradeoffs of time and resources can lead to better outcomes if one is able to specialize in activities in which she or he is more proficient Principle 1 Economics Is Concerned w Making Choices w Limited Resources We examine decisions on allocating limited resources to maximize an individual or society s well being Many of these decisions involve things other than money Principle 2 When Making Decisions One Must Take Into Account Tradeoffs and Opportunity Costs Because our resources are limited we must make tradeoffs in nearly everything we do opportunity cost of any decision is the value of the next best alternative It is what you give up to do something or to make a purchase Principle 4 People Respond to Incentives Both Good and Bad The natural tendency for society to respond to incentives leads Principle 5 Rational Behavior Requires Thinking on the Margin A business uses marginal analysis to determine how much of Principle 6 Markets Are Generally Efficient but They Are Not Perfect Private markets and the incentives they provide are the best Principle 7 Institutions and Human Creativity Help Explain the Wealth of Nations Institutions include a Direct cost Accou nting cost Oppor tunity cost Econo mic cost