Chapter 1 Introducing the Economic Way of Thinking Microeconomics for Today Irvin B. Tucker © 2010 South-Western, a part of Cengage Learning

What will you learn in this chapter? You will be acquainted with the foundation of the economic way of thinking © 2010 South-Western, a part of Cengage Learning

What is the economic way of thinking? A logical framework for organizing your thoughts and understanding economics © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What are some examples? Can you prove there is no person worth a trillion dollars? Why would you purchase more Coca-Cola when the price increases? How can you explain the relationship between the Super Bowl winner and changes in the stock market? © 2010 South-Western, a part of Cengage Learning

What are the 3 building blocks in the economic way of thinking? scarcity & choice model building pitfalls of economic reasoning © 2010 South-Western, a part of Cengage Learning

What is the economic problem? Providing for people’s wants and needs in a world of scarcity © 2010 South-Western, a part of Cengage Learning

What is meant by scarcity? The condition in which wants are forever greater than the available supply of time, goods, and resources © 2010 South-Western, a part of Cengage Learning

What does scarcity force us to do? It forces us to make choices © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What are resources? The basic categories of inputs used to produce goods and services © 2010 South-Western, a part of Cengage Learning

What are the three categories of resources? Land Labor Capital © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What is a land resource? A shorthand expression for any natural resource provided by nature © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What is labor? The mental and physical capacity of workers to produce goods and services © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What is capital? The physical plants, machinery, and equipment used to produce other goods, they do not directly satisfy human wants © 2010 South-Western, a part of Cengage Learning

What is financial capital? The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital © 2010 South-Western, a part of Cengage Learning

What is entrepreneurship? Creative labor of individuals that enables them to seek profits by combining resources © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning Labor Land Capital Entrepreneurship organizes resources to produce goods and services © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What is economics? The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs © 2010 South-Western, a part of Cengage Learning

What is macroeconomics? The branch of economics that studies decision-making for the economy as a whole © 2010 South-Western, a part of Cengage Learning

What is microeconomics? The branch of economics that studies decision-making by a single individual, household, firm, industry, or government © 2010 South-Western, a part of Cengage Learning

What is an economic model? A simplified description of reality used to understand and predict the relationships between variables © 2010 South-Western, a part of Cengage Learning

What is the purpose of an economic model? To forecast or predict the results of various changes in variables © 2010 South-Western, a part of Cengage Learning

What is the scientific method? Problem identification Model development Testing a theory © 2010 South-Western, a part of Cengage Learning

Develop a model based on simplified assumptions Identify the problem Develop a model based on simplified assumptions Test the model and formulate a conclusion © 2010 South-Western, a part of Cengage Learning

What conclusion can we make? If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected © 2010 South-Western, a part of Cengage Learning

What assumption is always made when testing a model? ceteris paribus © 2010 South-Western, a part of Cengage Learning

What is ceteris paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged” © 2010 South-Western, a part of Cengage Learning

What is an example of ceteris paribus? If the price of new Ford cars decrease, and everything else stays the same, consumers will buy more, but if other variables change, we cannot make a prediction © 2010 South-Western, a part of Cengage Learning

What is the difference between association and causation? We cannot always assume that when one event follows another, the first caused the second © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning What are the two common pitfalls in understanding how the economy works? failing to understand the ceteris paribus assumption confusing association with causation © 2010 South-Western, a part of Cengage Learning

What conclusion can we make? A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied © 2010 South-Western, a part of Cengage Learning

Why do economists forecasts differ? Because using the same methodology, economists can agree that event A causes event B, but disagree over the assumption that event A will occur © 2010 South-Western, a part of Cengage Learning

Why do some economists disagree? The answer lies in understanding the difference between positive and normative economics © 2010 South-Western, a part of Cengage Learning

What is positive economics? An analysis limited to statements that are verifiable © 2010 South-Western, a part of Cengage Learning

What is normative economics? An analysis based on value judgement © 2010 South-Western, a part of Cengage Learning

What conclusion can we make? When opinions or points of view are not based on facts, they are scientifically untestable © 2010 South-Western, a part of Cengage Learning

© 2010 South-Western, a part of Cengage Learning END © 2010 South-Western, a part of Cengage Learning