Unit 1—Introductory Materials Sections 1 and 2 2 weeks

The Nature and Methods of Economics

Economics:  Social science concerned with how people satisfy unlimited wants w/ limited resources.

Scarcity and choice  Scarcity requires that choices be made  There are always trade-offs when decisions are made  The cost of any good, service or activity is the value of what must be given up to obtain it = opportunity cost

Rational behavior  Rational self-interest entails making decisions to achieve maximum fulfillment of goals  Different preferences lead to different choices  Rational self-interest is not the same as selfishness

Marginalism:  = extra, additional or a change in  Each option considered weighs the marginal benefit against the marginal cost  Whether the decision is personal or one made by business or gov’t, the principle is the same  The marginal cost should not exceed the marginal benefit  mb > mc

Why study Economics?  For citizenship --most political problems have an economic aspect --voters and elected officials can fulfill their role more effectively if they have an understanding of economic principles

 Professional and personal applications --understand TINSTAAFL --develop analytical skills --make intelligent decisions

Economic Methodology  Scientific method  Theoretical economics  Terminology  Generalizations  Ceteris paribus --“other things equal” (one thing at a time)  Graphs (models)

Our 8 economic GOALS  Economic growth  Full employment  Economic efficiency  Price level stability  Economic freedom  Equitable distribution of income  Economic security  Balance of trade

Macroeconomics  Examines the economy as a whole  Includes measures of total output, total employment, total income, aggregate expenditures and general price level  Think of it as examining the forest—not the trees

Microeconomics  Looks at specific economic units  Concerned with the individual industry, firm or household and the price of specific products and resources  Think of it as examining the trees, not the forest

Positive and Normative Economics  Positive = FACTS describes the economy as it actually is, avoiding value judgments and attempting to establish scientific statements and economic behavior  Normative = OPINION involves value judgments about what the economy should be like  --loaded terminology  --biases—preconceptions that are not based on facts

Micro or Macro?  The unemployment rate in the US was 4% in  Kraft Inc. laid off 3,000 workers last month.  The Consumer Price Index rose by 5%.  Aggregate demand was larger than aggregate supply creating a shortage.  The Dow Jones Industrial Average dropped 10 points today.

Positive or Normative?  It was too cold in Duez’s classroom today.  The temperature is currently 98 degrees.  The fat cats at Exxon are making all kinds of money while gas prices go up.  The CEO of Exxon received a 25 million dollar bonus.  Higher interest rates reduce the amount of money borrowed.  I will not borrow money at 10% interest—that is just too high for me.