Ch. 1: What is Economics?  Objectives Define economics and distinguish between microeconomics and macroeconomics Explain the big questions of economics Explain the key ideas that define the economic way of thinking Explain how economists go about their work as social scientists

Definition of Economics Social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Micro vs Macro Microeconomics –study of choices made by individuals and businesses, and the influence of government on those choices. Macroeconomics –study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.

Economic Questions  What to produce?  How to produce?  Factors of production:  Land earns rent  Labor earns wages  Capital earns interest/dividends  Entrepreneurship earns profits  For whom to produce?

Organizing an Economy Free market Command Mixed market Types of government intervention –Taxes, subsidies –Regulations e.g. anti-trust, safety, environmental –Direct control e.g. military, police, highways, schools –Price controls

Views on government intervention Communists versus Capitalists Democrats versus Republicans Equity versus Efficiency

Economic Growth Economic growth is an expansion in an economy’s ability to produce goods and services. Economic growth is affected by: –Capital goods vs consumer goods. –Education and training. –Research and development (new tech)

Why does income per capita vary so much around the world?

The Economic Way of Thinking Economists assume people respond to incentives. –Incentives affect MB or MC Taxes Subsidies Employer compensation methods. –Incentives are key to reconciling self-interest and the social interest. Pollution Crime Fishing Water usage

The Economic Way of Thinking Two types of economic statements: positive statements normative statements –A positive statement can be tested by checking it against facts –A normative statement cannot be tested.

The Economic Way of Thinking Economic models –a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. Testing Models –Experiments –Real world data

The Economic Way of Thinking Obstacles and Pitfalls in Economics –Ceteris paribus (other things being the same): –Fallacy of composition: The false conclusion that –what is true for the parts is true for the whole –what is true for the whole is true for the parts.  Post hoc fallacy the error of reasoning that a first event causes a second event because the first occurs before the second