What Economics Is About Del Mar College John Daly ©2002 South-Western Publishing, A Division of Thomson Learning

What Economics is About What is Economics? What do Economists Study? Is There an Economic Way of Thinking? Why Study Economics? Can the Study of Economics Help Us Understand Our World?

Thinking Like an Economist Scarcity and Effects Land Labor Capital Entrepreneurship Utility/Disutility Rationing Devices Scarcity and Competition Opportunity Cost

Opportunity Cost The Higher the opportunity cost of doing something, the less likely it will be done. Opportunity Costs and the American Revolutionary War Thinking in Terms of What Would Have Been.

What Would Have Been? Because the new interstate highway system was built, people had to give up the opportunity to buy more clothes, computers, books, and so on. The costs of the interstate highway system seem high. Does it follow that it would have been better if the federal government hadn’t built the new interstate highway system?

Decisions & Effects Decisions at the Margin “Marginal Benefits & Marginal Costs” Unintended Effects vs. Intended Effects

Economics and Statistics Number Of Accidents Fatalities Per Accident Total Number of Fatalities 200,000 0.10 20,000 0.08 16,000 Versus 250,000

Q & A What are the four factors of production? How does competition arise out of scarcity? Give an Example how a change in opportunity cost can effect behavior. What do people compare when deciding whether or not to do something?

Economists & Theories A theory is an abstract representation of the world. A theory emphasizes only those variables that the theorist believes are the critical variables that explain an activity or event.

Building and Testing A Theory Decide on what you want to explain or predict. Identify important variables State assumptions of the theory State the Hypothesis

More Theory Building Test the theory by comparing its predictions against real-world events. If the evidence supports the theory, reexamine the theory. If the evidence DOES NOT support the theory, reexamine the theory and collect even more evidence.

Even More Theory Building If the evidence rejects the theory, either revise the theory or amend the variables, assumptions or hypothesis.

Q & A What is the purpose of building a theory? How might a theory of the economy differ from a description of that economy. Why is it important to test a theory?

Scientific Thinking The Association-Causation Issue The Fallacy of Composition The Ceteris Paribus Assumption

Economic Categories Positive Economics Normative Economics Microeconomics Macroeconomics

Q & A Give an example to illustrate how a politician running for office can mislead the electorate by implying association is causation. Suppose it has been established that if X falls, Y falls. Then one day X falls and Y rises. Does it follow that the old relationship between X and Y no longer holds?

Q & A Your economics instructor says, “If the price of going to the movies goes down, people will go to the movies more often.” A student in class says, “Not if the quality of the movies goes down.” Who is right, the instructor or the student? Why?