1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics by Fred M Gottheil Chap. 1, Introduction to Economics

2 What is Economics?? A social science that deals with how people use scarce resources to produce and distribute goods and services

3 Scarcity, the Central Theme of Economics Scarcity means that while we have unlimited wants, our resources are limited

4 Due to Scarcity, Choices must be made Economics deals with how we make such choices

5 What are the Factors of Production? (resources) Land and natural resources Labor Capital Entrepreneurship © ©1999 South-Western College Publishing

6 What is received for resources? rent for land wages for labor interest for capital profit for entrepreneurship © ©1999 South-Western College Publishing

7 What is a Natural Resource? The lands, water, metals, minerals, animals, and other gifts of nature that are available for producing goods and services © ©1999 South-Western College Publishing

8 What is a Renewable Resource? Resources that can be replenished © ©1999 South-Western College Publishing

9 What is a Nonrenewable Resource? Resources that cannot be replenished © ©1999 South-Western College Publishing

10 What is Labor? The physical and intellectual effort of people engaged in producing goods and services © ©1999 South-Western College Publishing

11 What is Capital? Manufactured goods used to make and market other goods and services © ©1999 South-Western College Publishing

12 Note the difference between physical capital and financial capital (money)

13 What is Human Capital? The knowledge and skills acquired by labor, principally through education and training © ©1999 South-Western College Publishing

14 Who is an Entrepreneur? A person who alone assumes the risks and uncertainties of a business © ©1999 South-Western College Publishing

15 Assumptions about making choices Self interest motivation Rationality, weighing the benefits and costs of actions

16 Costs include the opportunity costs Opportunity costs, the highest valued option given up when a choice is made

17 What are the benefits and costs of taking economics?

18 BenefitsBenefits The economy is a part of our lives Better understanding of human behavior More informed voter Relates to other fields of study Its fun!!!!

19 CostsCosts Its Difficult!!! Less precision in the social sciences Can be mathematical

20 What are the two ways of looking at Economics? Macroeconomics Microeconomics © ©1999 South-Western College Publishing

21 What is Macroeconomics? Analyzes the behavior of the economy as a whole © ©1999 South-Western College Publishing

22 What is Microeconomics? Analyzes the behavior of firms and households © ©1999 South-Western College Publishing

23 Economics as a “Science” Social sciences, difficult to perform lab experiments of theories Important to understand the difference between positive and normative economics

24 What is Positive Economics? A subset of economics that analyzes the way the economy actually operates © ©1999 South-Western College Publishing

25 What is Normative Economics? A subset of economics founded on the value judgements and leading to assertions of what ought to be © ©1999 South-Western College Publishing

26 BEWARE of the following pitfalls as you study economics (added material not in text) Correlation vs. causation Fallacy of composition

27 Correlation vs. Causation  Two variables are correlated if one variable changes when the other variable changes.  This does NOT mean that changes in one variable CAUSE changes in the other.

28 Examples: Correlation vs. causation  A war breaks out in Timbuktu today and the U.S. stock market falls—did the war cause the market to fall?  The economy began growing in 1992 about the same time Clinton was elected president. Does this mean that the Clinton election improved the economy?

29 The Fallacy of Composition The often mistaken belief that what is true for a part is necessarily true for the whole

30 Examples of the Fallacy of Composition  If one student stands up in class, they can see the board better—so if all students stand up will they all see better?  If I had a million dollars, I am rich, so if we all had a million dollars, would be all be rich?

31 What is an Economic Model? An abstraction of an economic reality expressed in various ways © ©1999 South-Western College Publishing

32 What is the purpose of an Economic Model? To simplify the complexity of our world © ©1999 South-Western College Publishing

33 What is Econometrics? The use of statistics to quantify and test economic models © ©1999 South-Western College Publishing

34 What is one of the most important assumptions in model building? Ceteris paribus © ©1999 South-Western College Publishing

35 What does Ceteris Paribus mean? After a variable changes we assume that nothing else will change © ©1999 South-Western College Publishing

36 What are the central issues in economics? What gets produced? How is it produced? Who consumes what is produced? © ©1999 South-Western College Publishing

37 2 major ways that economies attempt to answer these questions Command economies Market economies

38 Command Economy A central authority or agency draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution.

39 Market Economy Individual people and firms pursue their own self-interests without any central direction or regulation. The central institution in these economies: markets!

40 Markets The institutions through which buyers and sellers interact and engage in exchange Prices are determined in markets; prices reflect what society is willing to pay for something.

41 What is the Resource Market? A market where people supply their resources - land, labor, capital and entrepreneurship © ©1999 South-Western College Publishing

42 What is the Product Market? The market where people buy goods and services © ©1999 South-Western College Publishing

43 Important aspects of market economies: Consumer sovereignty Free enterprise Distribution of output decentralized Prices coordinate behavior

44 What is Consumer Sovereignty? Our choices as consumers guide what gets produced © ©1999 South-Western College Publishing

45 Most modern economies are mixed systems A mixture of free markets with government involvement

46 46 © ©1999 South-Western College Publishing or/econ_indicator.html

47 What is Economics? What is the Resource Market? What is the Product Market? What is Macroeconomics? What is Microeconomics? What is Positive Economics? What is Normative Economics?

48 What is the Fallacy of Composition?What is the Fallacy of Composition? What does Ceteris Paribus mean?What does Ceteris Paribus mean? What is consumer sovereignty?What is consumer sovereignty?