Learning ObjectivesLearning Objectives  LO1: Define economics, microeconomics, and macroeconomics.  LO2: Identify John Maynard Keynes, Alfred Marshall, and Adam Smith, and their influence in economics.  LO3: State and explain the problem of scarcity and its relation to opportunity cost.  LO4: Explain how a rational decision maker applies the cost–benefit principle.  LO5: State how three pitfalls can undermine rational economic decisions.  LO6: Explain how data are used to evaluate economic theories.  LO7: Distinguish positive economics from welfare economics.  LO8: Define an economic naturalist. © 2012 McGraw-Hill Ryerson Limited Ch1 -1

LO7: Distinguish positive economics from normative or welfare economics  Positive economics model has two dimensions  It offers cause-and-effect explanations of economic relationships  It has an empirical dimension  Other economic models are examples of normative or welfare economics.  Such models overlap with positive economic models  But they incorporate valuation of different possible outcomes. They lead to normative statements about what "ought" to be: say, what is best, what is most socially efficient, or what is optimal  Hence they have an element which cannot be tested with empirical evidence © 2012 McGraw-Hill Ryerson Limited Ch1 -2 LO7: Positive and Normative Economics

LO7: Distinguish positive economics from normative or welfare economics  What will be produced, how much and for whom?  Since each person’s income helps determine his or her demand for the goods and services a society produces, the type and amount of goods produced depends on the distribution of incomes.  Production and distribution are thus simultaneously determined.  But what distribution of income would be fair?  Could we reallocate rewards so as to produce a fairer distribution of consumption? © 2012 McGraw-Hill Ryerson Limited Ch1 -3 LO7: Positive and Normative Economics

LO7: Distinguish positive economics from normative or welfare economics  What will be produced, how much and for whom?  Command is another possibility as it can be implemented on a small scale, as in ancient kingdoms or modern family enterprises; on a somewhat larger scale within corporations; or on an immense scale, such as in the central planning of the former Soviet Union.  Although central planning is rare today, so are pure market economies.  Modern industrial countries are more properly described as mixed economies, meaning that goods and services are allocated by a combination of markets, regulation, and other forms of collective control. © 2012 McGraw-Hill Ryerson Limited Ch1 -4 LO7: Positive and Normative Economics

LO7: Distinguish positive economics from normative or welfare economics  What will be produced, how much and for whom?  Efficiency: Obtaining the maximum possible output from a given amount of inputs  Equity: A state of impartiality and fairness  Economist tries to balance between efficiency and equity. © 2012 McGraw-Hill Ryerson Limited Ch1 -5 LO7: Positive and Normative Economics