1. Chapter 1 Introducing the Economic Way of Thinking
Key Concepts
Summary
Practice Quiz
©2004 Thomson/South-Western

2. What do the first two chapters do?
They introduce you to a foundation of economic knowledge
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3. What is the economic problem?
Providing for people’s wants and needs in a world of scarcity

4. What is meant by scarcity?
The condition in which wants are forever greater than the available supply of time, goods, and resources

5. What does scarcity force us to do?
It forces us to make choices

6. What are resources?
The basic categories of inputs used to produce goods and services

7. What are the three categories of resources?
Land
Labor
Capital

8. What is a land resource?
A shorthand expression for any natural resource provided by nature

9. What is labor?
The mental and physical capacity of workers to produce goods and services

10. What is capital?
The physical plants, machinery, and equipment used to produce other goods

11. What is financial capital?
The money used to purchase capital

12. Labor Land Capital Entrepreneurship organizes
resources to produce goods
and services

13. What is entrepreneurship?
The creative ability of individuals to seek profits by combining resources to produce innovative products.

14. What is economics?
The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants

15. What is macroeconomics?
The branch of economics that studies decision-making for the economy as a whole

16. What is microeconomics?
The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government

17. What is an economic model?
A simplified description of reality used to understand and predict the relationship between variables

18. What is the purpose of an economic model?
To forecast or predict the results of various changes in variables

19. What are the steps in model building?
Problem identification
Model development
Testing a theory

20. Develop a model based on simplified assumptions
Identify the problem
Develop a model based on simplified assumptions
Collect data and test the model

21. What assumption is always made when testing a model?
ceteris paribus

22. What is ceteris paribus?
A Latin phrase that means that while certain variables can change, “all other things remain unchanged”

23. What is the difference between association and causation?
We cannot always assume that when one event follows another, the first caused the second

24. What is positive economics?
An analysis limited to statements that are verifiable

25. What is normative economics?
An analysis based on value judgement

26. Key Concepts

27. What is the economic problem?
What is meant by scarcity?
What are resources?
What are the three categories of resources?
What is entrepreneurship?
What is economics?
What is macroeconomics?
What is microeconomics?

28. What is the scientific method?
What assumption is always made when testing a model?
What is ceteris paribus?
What is the purpose of model building?
What is positive economics?
What is normative economics?

29. Summary

30. Scarcity is the fundamental economic problem that human wants exceed the availability to time, goods, and resources. Individuals and society therefore can never have everything they desire.

31. Resources are factors of production classified as land, labor, and capital.
Entrepreneurship is a special type of labor. An entrepreneur combines resources to produce innovative products.

32. Economics is the study of how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives.

33. Society
Chooses
Resources
Scarcity
Unlimited
wants

34. Macroeconomics applies an economy wide perspective that focuses on such issues as inflation, unemployment, and the growth rate of the economy.

35. Microeconomics examines individual decision-making units within an economy.
Microeconomics studies such topics as a consumer’s response to changes in the price of coffee and the reasons for changes in the market price of personal computers.

36. Models are simplified descriptions of reality used to understand and predict economic events. An economic model can be stated verbally or in a table, graph, or equation. If the evidence is not consistent with the model, the model is rejected.

37. Collect data
and test
the model
Develop
a model based
on assumptions
Identify
the
problem

38. Ceteris paribus holds “all other factors unchanged” that might affect a particular relationship. If this assumption is violated, a model cannot be tested. Another reasoning pitfall is to think association means causation.

39. Positive economics uses testable statements
Positive economics uses testable statements. Often a positive argument is expressed as an “if-the” statement.
Normative economics is based on value judgments or opinions and uses words such as good, bad, ought to, and ought not to.

40. END