Ch. 1: What is Economics? Objectives Define economics and distinguish between microeconomics and macroeconomics Explain the big questions of economics Explain the key ideas that define the economic way of thinking Explain how economists go about their work as social scientists

Definition of Economics Social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Finished here in 2:15 section

Micro vs Macro Microeconomics study of choices made by individuals and businesses, and the influence of government on those choices. Macroeconomics study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.

Economic Questions What to produce? How to produce? Factors of production: Land earns rent Labor earns wages Capital earns interest/dividends Entrepreneurship earns profits For whom to produce?

Free market vs. Command Free market allows individuals and businesses to decide without government intervention. Command centralizes all decisions. Mixed market is a combination of extremes. Examples: Education Transportation Energy

Types of government intervention Direct control national defense, police, roads Price Controls Subsidies Ethanol, hybrid cars, crops, wind/solar energy, higher education Taxes Tariffs on imports Excise taxes on cigarettes, gasoline Income Property Sales Regulation Anti-trust Laws designed to encourage competition. Environmental

Views on government intervention Communists versus Capitalists Democrats versus Republicans Equity versus Efficiency

Economic Growth Economic growth is an expansion in an economy’s ability to produce goods and services. Economic growth is affected by: Capital goods vs consumer goods. Education and training. Research and development (new tech)

Why does income per capita vary so much around the world?

The Economic Way of Thinking Economists assume individuals compare costs and benefits in decision making. Cost is measured by opportunity cost. the highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen.

The Economic Way of Thinking Economists assume that people make decisions “on the margin” evaluate the consequences of making incremental changes in the use of their resources. Marginal Benefit (MB): the benefit from pursuing an incremental increase in an activity. Marginal Cost (MC): The opportunity cost of pursuing an incremental increase in an activity. If MB>MC  pursue more of the activity. If MB<MC  pursue less of the activity.

The Economic Way of Thinking Economists assume people respond to incentives. Incentives can affect MB or MC Taxes Subsidies Employer compensation methods. Incentives are key to reconciling self-interest and the social interest. Pollution Crime Fishing Water usage Finished here in 2:15 section.

The Economic Way of Thinking Two types of economic statements: positive statements normative statements A positive statement can be tested by checking it against facts A normative statement cannot be tested.

The Economic Way of Thinking Economic models a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. Testing Models Experiments Real world data

The Economic Way of Thinking Obstacles and Pitfalls in Economics Ceteris paribus (other things being the same): To isolate the effect of interest, economists use the logical device called ceteris paribus or “other things being equal”, or “other things being the same”. The fallacy of composition: The false conclusion that what is true for the parts is true for the whole what is true for the whole is true for the parts. The post hoc fallacy the error of reasoning that a first event causes a second event because the first occurs before the second