Chapter 1- The Nature and Method of Economics Objective – Students will be able to answer questions regarding how to see the world as an economist. SECTION © 2001 by Prentice Hall, Inc.

The Economic Perspective Economists view the world through the lens of scarcity- mankind has unlimited wants, but limited resources- How are these scarce resources going to be distributed? That is the fundamental question of economics. Economics is based on the idea that people are rational and act in their self interest.

Is this person’s decision irrational? Most of the students will say that this person is NOT rational. Go to the next slide. http://www.humoroftheday.com/gallery/images/Pierced1.jpg 4

Margin—the weighing of additional costs and additional benefits of a specific change in the current situation. 3. Decisions are made at the margin. Margin--the weighing of the additional benefits and the additional costs of a specific change in the current situation. (give the students time to write this definition down) Let's work this definition backwards--THE CURRENT SITUATION is you are walking along the sidewalk. There is A SPECIFIC CHANGE IN THE SITUATION; you see a penny lying on the ground. A decision has to be made. Do you pick up the penny or keep on walking? First off, how many of you in the classroom would pick up the penny? (A couple to a few hands will be raised--point out one of them) How many of you would only pick up the penny if it were heads up? (One or two students will probably raise their hands--poiint out one of them) How many of you would never pick up a penny? (A couple to a few will raise their hands--point out one of them) Ask the students if there are any costs in picking up a penny. Wait for some answers and then demonstrate--first you have to stop and everyone knows that time is money, then you have to stoop, then you have to scrap your fingers on the ground, then you have to get back up. Ask the person who 9 out of 10 times picks up a penny, why he or she would stop, stoop, scrap, and get back up all for just one penny? (The student's answers might be "a penny saved is a penny earned," or "if I pick up 100 of them then I will have a $1." Whatever the answer, did this person feel that the additional costs of picking up the penny were at least equal to the penny itself. YES. Marginal Costs = Marginal Benefits. Student #2 (heads up)--Let's say that it took you the same time and energy to stop, stoop, scrap, and get back up. You have all of these costs and you get a penny in return. Is there anything else you get if the penny is heads up? (The student will answer--good luck). Does this person believe at least that his or her MARGINAL COSTS are AT LEAST = his or her MARGINAL BENEFITS? YES. Student #3 (Never picks up a penny) Ask why not? (The student will answer it is not worth it) Ask what he or she means? (Go to the next slide) http://www.new2usa.com/nova/english/00000226/penny.jpg 5

Economists use marginal analysis- comparing marginal benefits and marginal costs. When you make a decision to do something, you do it because the marginal benefit > marginal cost.

Who in here would NOT pick this $100 bill up Why would you pick this up if it were lying on the ground? The MB are AT LEAST = MC. I am willing to bet the the MB are GREATER than the MC of picking this bill up. If you saw someone drop this out of their back pocket, how many of you would yell to the person that they dropped $100 bill so that you could return it to that person? Here is where you as a teacher can determine what value students place on honesty. Ask the students who would return the bill? What if it were a $20 bill? A $10? A $5? A $1? At whatever denomination they stop at, that is the value the student places on honesty. Who in here would NOT pick this $100 bill up if you saw it lying on the ground? Why would you pick it up? MB are at least = MC 7

Economic Methodology Economists will use the scientific method to describe economic phenomena. They will form a hypothesis and test it by comparing the outcomes of specific events. The process of deriving theories and principles is called theoretical economics. The goal of this theorizing is to arrange facts and to generalize, thus creating economic principles/laws!

Economic theories, principles, and laws are generalizations and can be imprecise in that they are expressed as tendencies of typical consumers, workers, or firms. They are also abstractions- simplifications that can omit irrelevant facts. Economists love ceteris paribus, or the all other things being equal assumption.

STATING GOALS POLICY OPTIONS EVALUATION Policy Economics- STATING GOALS POLICY OPTIONS EVALUATION

Economic Goals Economic growth Full employment Economic efficiency Price level stability Economic freedom Equitable distribution of income Economic security Balance of Trade These goals may entail tradeoffs, meaning to achieve one goal you must sacrifice another.

Macro vs. Microeconomics Macroeconomics looks at the economy as a whole. It sees the economy as aggregates, a collection of economic units. Microeconomics looks at specific, individual economic units.

Positive vs. Normative Statements Positive statements look at the ways things are. They focus on facts not value judgements. Normative economics looks at the way things should be, it incorporates value judgments.

Pitfall to Objective Thinking Biases Loaded terminology Definitions The fallacy of composition- that if something is true of one in a group it must be true of all in the group. Post-hoc fallacy- If A precedes B, A is the cause of B. Correlation does NOT prove causation!

Section 1 Assessment 1. Describe the ceteris paribus assumption. 2. Explain the difference between macro and micro economics.

Summary: In a paragraph, describe what you have learned today.