Chapter One Roadmap for Economics

Economics Social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human material wants.

Economics Economics studies the allocation of scarce resources in response to unlimited wants. Economics is about choice. Society is forced to choose because resources are scarce.

Why Study Economics? “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” John Maynard Keynes ( )

Economics for Citizenship √ Economics for Citizenship Well informed citizens will vote intelligently Well informed politicians will choose wisely among alternatives Well informed politicians will choose wisely among alternatives Professional and Personal Application √ Professional and Personal Application Businessmen need an understanding of economy Problems are examined from social rather than personal viewpoint Problems are examined from social rather than personal viewpoint Why Study Economics

Economic perspective: an unique way of thinking about economic issues Economic perspective: an unique way of thinking about economic issues √ Scarcity and Choice √ Rational Behavior √ Marginal Thinking: Costs and Benefits

Scarcity

Scarcity - When There Is Not Enough For Everyone – Someone Suffers

Theories Facts Policy Economics Theoretical Economics Economic Way of Thinking

Descriptive Economics √ Based on facts—observable and verifiable behavior of certain data or subject matter √ Economists examine behavior of individuals and institutions engaged in the production, exchange, and consumption of goods and services. Economic Way of Thinking

Economic Principles (laws, models) √ Task of analysis is to systematically arrange, interpret, and generalize upon facts √ Principles and theories bring order and meaning to facts by tying them together, putting them in correct relationship to one another and generalizing. √ Principles are expressed as the tendencies of typical, or average consumers, workers, or business firms √ Three Generalizations “Other things equal” assumption—controlling all variables except one Abstractions—do not mirror the complexity of real world Graphic Expressions—models used to show theory Economic Way of Thinking

Policy Economics √ Applied Economics that recognizes the principles and data which can be used to formulate policies. √ Determining a course of action to resolve a problem or to further a nation’s economic goals Economic Way of Thinking

Steps in Policy Economics-an example 1. State the goal A clear, specific statement Every able-bodied individual should have opportunity to work Every able-bodied individual should have opportunity to work 3. Implement and Evaluate the policy selected Monitor steps in implementing the policy initiatives taken Monitor steps in implementing the policy initiatives taken Survey statistics on employment Survey statistics on employment Do follow-up on job placements and training programs Do follow-up on job placements and training programs 2. Determine the policy options List specific policies to achieve goal with an assessment of possible effects List specific policies to achieve goal with an assessment of possible effects Fund vocational training programs in high schools and junior colleges Fund vocational training programs in high schools and junior colleges Create job training and subsidy to business firms willing to take on new workers Create job training and subsidy to business firms willing to take on new workers

The Economic Landscape Principles Are Derived At Two Levels: Macroeconomics: economy as a whole and its basic subdivisions such as government, business and households. Macro looks at totals or aggregates to examine the “big picture”. Microeconomics: looks at specific units or segments of the economy, a particular firm or household. Micro looks at the “trees not the forest”.

POSITIVE Economics collects and presents facts. It avoids value judgments—”just the facts, madam”! Positive economics concerns WHAT IS—what the economy is really like. NORMATIVE Economics involves value Judgments. It is concerned with HOW IT SHOULD BE! ECONOMIC GOALS

Economic GrowthEconomic Growth Full EmploymentFull Employment Economic EfficiencyEconomic Efficiency Price-Level StabilityPrice-Level Stability Economic FreedomEconomic Freedom Equitable DistributionEquitable Distribution Economic SecurityEconomic Security Balance of TradeBalance of Trade ECONOMIC GOALS

√ Bias preconceptions not based on facts √ Loaded Terminology slanted/distorted terms √ Definitions redefined words specific for economics √ Fallacy of Composition assuming that what is true for individual is true for the group √ Causation Fallacies post hoc—if A precedes B, it is not necessarily the cause of B Correlation—some association in a dependable way, but not necessarily the cause Pitfalls to Objective Thinking

Three Basic Questions 1. What? What goods and services will be produced and offered for sale, and in what quantities?

Three Basic Questions 2. How? How will the goods and services be produced?

Three Basic Questions 3. For Whom? Who will consume the goods and services which are produced?

Two Primary Economic Objectives è Equity-fairness è Efficiency-best use

4Technological or productive efficiency: getting the greatest quantity of output from the resources that are being used —least cost! 4 Allocative efficiency:choosing the most valuable mix of outputs to produce—what society wants! 4 Allocative efficiency: choosing the most valuable mix of outputs to produce—what society wants! Efficiency

The Spectrum of Economic Systems CommandandControlLaissez-Faire Free Markets Mixed

“The Invisible Hand” Adam Smith described in The Wealth of Nations, how the invisible hand of the marketplace leads the economy to produce an efficient variety of goods and services, with efficient production methods as well.