Copyright (c) 2000 by Harcourt Inc. All rights reserved. Next page Slides to Accompany “Economics: Public and Private Choice 9th ed.” James Gwartney, Richard Stroup, and Russell Sobel The Economic Approach Chapter 1

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 1. What is Economics About?

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Goods are scarce because desire for them far outstrips their availability from nature. n Scarce goods are called economic goods. n Scarcity forces us to choose among available alternatives. n Scarcity and choice are the two essential ingredients of an economic topic. Scarcity and Choice

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Scarcity and Choice E CONOMIC G OODS Food (bread, milk, meat, eggs, vegetables, coffee, etc.) Clothing (shirts, pants, blouses, shoes, socks, coats, sweaters, etc.) Household (tables, chairs, rugs, beds, Goods dressers, television sets, etc.) Space exploration Education National defense Recreation Leisure time Entertainment Clean air Pleasant (trees, lakes, rivers, Environment open spaces, etc.) Pleasant working conditions L IMITED R ESOURCES Land (various degrees of fertility) Natural (rivers, trees, minerals, Resources oceans, etc.) Machines and other human-made physical resources Non-human animal resources Technology (physical and scientific “recipes” of history) Human (the knowledge, skill, Resources and talent of individual human beings) History is a record of our struggle to transform available, but limited resources... into things that we would like to have, which we call economic goods.

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Scarcity and poverty are not the same thing. Scarcity and Poverty u Absence of poverty implies some basic level of need has been met. u An absence of scarcity would imply that all of our desires for goods are fully satisfied. n We may someday eliminate poverty, but scarcity will always be with us.

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Various factors can be used to ration (e.g. first-come, first served). u In a market setting, price is used to ration goods and resources. u When price is used, the good or resource is allocated to those willing to give up “other things” in order to obtain ownership rights. n Every society must have a means to ration scarce resources among competing uses. Scarcity Necessitates Rationing

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Changing the rationing method used will change the form of competition, but it will not eliminate competitive tactics. n Competition is a natural outgrowth of the need to ration scarce goods. Competition Results from Scarcity

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 2. The Economic Way of Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. u Someone must give up something if we are to have more scarce goods. u The highest valued alternative that must be sacrificed is the opportunity cost of the choice. n The use of scarce resources to produce a good is always costly. Guideposts to Economic Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. u Economizing: gaining a specific benefit at the least possible cost. n Incentives Matter u As personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option. n Individuals choose purposefully; therefore they will economize. Guideposts to Economic Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. u Decisions will be based on marginal costs and marginal benefits (utility). n Since information is scarce, uncertainty is a fact or life. n In addition to their initial impact, economic events often generate secondary effects that may be felt only with the passage of time. n Economic reasoning focuses on the impact of marginal changes. Guideposts to Economic Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n The test of an economic theory is its ability to predict and explain events in the real world. n The value of a good is subjective and varies with individual preferences. Guideposts to Economic Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 3.Positive and Normative Economics

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Positive economic statements can be proved either true or false. u Ex: The inflation rate rises when the money supply is increased n Positive Economics: - The scientific study of “what is” among economic relationships. Positive Economics

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Normative statements reflect subjective values. They cannot be proved true or false. u Ex: The inflation rate should be lower. n Normative Economics: - Judgements about “what ought to be” in economic matters. Normative Economics

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 4. Pitfalls to Avoid in Economic Thinking

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. n Violation of the the ceteris paribus condition. Pitfalls u Ceteris paribus is a Latin term meaning “other things constant.” u When describing the effect of a change, the outcome may be influenced by changes in other things. n Association is not causation. u Statistical association alone cannot establish causation.

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. u The fallacy of composition is the erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole). u Microeconomics focuses on narrowly defined units, while macroeconomics is focused on highly aggregated units. F One must beware of the fallacy of composition when shifting from micro- to macro-units. n Fallacy of composition Pitfalls

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 1. Why is scarcity a key economic concept, even in an affluent economy? Questions for Thought: 2. “The government should provide goods such as health care, education, and highways because it can provide them free.” Is this true or false? 3. Indicate how each of the following changes would influence your incentive to undertake the action described: (a) A change in the meeting time of the introductory economics course from 11:00 a.m. to 7:30 a.m. on your decision to attend the lectures. (b) A reduction in the number of exam questions that relate directly to the text on the your decision to read the text. (c) A reduction in the prices of off-campus apartments on your decision to live on-campus.

Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. End Chapter 1