Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 1 The Nature of Economics

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-2 Chapter Outline The Power of Economic Analysis Defining Economics Microeconomics vs. Macroeconomics Rational Self-Interest Assumption Economics as a (Social) Science Positive versus Normative Economics

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-3 Did You Know That... Economics is one of the fastest-growing college majors? During the past 10 years, the number of students majoring in economics at U.S. colleges has increased by 40%? Economics majors typically land higher paying jobs than other majors?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-4 Economics as a major 2008 college grad starting salary Question: Why some degrees pay more than others? 2010 college grad starting salary 1.Engineering 2.Economics college-majors/

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-5 The economic way of thinking is a framework to analyze solutions to economic problems. –How much time to study –Choosing which courses to take –Whether troops should be sent abroad The Power of Economic Analysis

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-6 The Power of Economic Analysis (cont'd) The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world. Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-7 The Power of Economic Analysis (cont'd) Economic analysis is a way of thinking about all decisions. –Your education, career, financing your home, family –Your involvement in the business world, or in politics as a voter –Why is an education a “decision”? What is a decision? Incentives –Rewards for engaging in a particular activity

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-8 Defining Economics Economics –The study of how people allocate their limited resources to satisfy their unlimited wants –The study of how people make choices –ECON 2301: Emphasizes critical thinking & quantitative analysis –Lee: Practical knowledge with real world applications

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-9 Defining Economics (cont'd) Resources –Things used to produce other things to satisfy people’s wants Wants –What people would buy if their incomes were unlimited –Economics focuses on this contrast

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Defining Economics (cont'd) With limited income (resources), people must make choices to satisfy their wants. We never have enough of everything, including time, to satisfy our every desire.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Microeconomics versus Macroeconomics Microeconomics –The study of decision making undertaken by individuals (or households) and by firms –Like looking though a microscope to focus on the smaller parts of the economy Decision of a worker to work overtime or not A family’s choice of having a baby An individual firm advertising

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Microeconomics versus Macroeconomics (cont'd) Macroeconomics –The study of the behavior of the economy as a whole –Deals with economywide phenomena The national unemployment rate The level of national income The national government’s budget deficit Macroeconomics deals with aggregates, or totals—such as total output in an economy. Modern economic theory blends micro and macro concepts.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved The Economic Person: Rational Self-Interest Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain. Rationality Assumption –The assumption that people do not intentionally make decisions that would leave them worse off

Copyright © 2010 Pearson Addison-Wesley. All rights reserved The Economic Person: Rational Self-Interest (cont'd) Questions –Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics? Drink & drive Fail a test Skip classes Commit suicide

Copyright © 2010 Pearson Addison-Wesley. All rights reserved The Economic Person: Rational Self-Interest (cont'd) Responding to incentives –Rationality and the use of incentives Positive incentives (gold stars; “better life”) Negative incentives (penalties) –Making choices Balancing cost and benefits

Copyright © 2010 Pearson Addison-Wesley. All rights reserved The Economic Person: Rational Self-Interest (cont'd) Defining self-interest –The pursuit of one’s goals, does not always mean increasing one’s wealth Prestige Friendship Love

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Example: The Perceived Value of Gifts The perceived value of gifts –Often, the recipient of the gift places a value on it far less than the market value. –Should we substitute gift certificates ($$$) for physical gifts?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Economics as a Science Models or Theories –Simplified representations of the real world used as the basis for predictions or explanations A map is the quintessential model –Models we will use: Production possibilities curve (Chapter 2) Supply and demand diagram (Chapter 3)

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Which would you prefer if you want to find your way to the Curlew parking lot? Real Arial ViewSimple Map view Or: Drive 2 miles, turn right on Ocean Dr.; drive 2,400 ft., turn right on Sand dollar Blvd.; drive 300 ft., turn right on Curlew Dr.; hit the brake

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Economics as a Science (cont'd) Ceteris Paribus Assumption [KAY-ter-us PEAR-uh-bus] –Nothing changes except the factor or factors being studied. –“Other things constant” –“Other things equal”

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Economics as a Science (cont'd) Economics is an empirical science. –A “science” with a Nobel prize. –We try to understand the real world. –Real-world data is used to evaluate the usefulness of a model. –“Life is not what it first seems …” so economics Trains our critical thinking skill Requires some quantitative skills in addition to verbal

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Positive versus Normative Economics Positive Economics –Purely descriptive statements or scientific predictions; “If A, then B,” a statement of what is –We focus mostly positive economics in this course Normative Economics –Analysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Myth #1: Economics stinks Economics is about explaining why and how things happen the way they do. Things are often NOT they seem to be. Can you handle the (hidden) truth? Many can’t…