1. The Nature & Method of Economics Chapter One

2. Definition of Economics Social science concerned with the efficient use of limited resources to achieve maximum human satisfaction of human material wants Social science concerned with the efficient use of limited resources to achieve maximum human satisfaction of human material wants Wants are unlimited, means by which to satisfy those wants are however Wants are unlimited, means by which to satisfy those wants are however

3. Economic Perspective Scarcity – Limited resources Scarcity – Limited resources Scarcity forces us to make economic decisions that will provide the greatest benefit. This can be determined by understanding the cost of such a decision. Scarcity forces us to make economic decisions that will provide the greatest benefit. This can be determined by understanding the cost of such a decision. Marginal Benefit vs. Marginal Cost Marginal Benefit vs. Marginal Cost Marginalism - A change in an existing condition Marginalism - A change in an existing condition

4. Scarcity in the Real World What are some examples? What are some examples? Are their limits to which countries or people will not go to secure natural resources? Are their limits to which countries or people will not go to secure natural resources? If not, are they justified? If not, are they justified?

5. Why Study Economics? Extremely beneficial to understand basic economic principles Extremely beneficial to understand basic economic principles Allows us to make better decisions in terms of our own lives as well as the lives of all Americans Allows us to make better decisions in terms of our own lives as well as the lives of all Americans Economic responsibility is absolutely crucial if the U.S. plans to maintain global influence Economic responsibility is absolutely crucial if the U.S. plans to maintain global influence

6. Economic Methodology Economists will use the scientific method to establish laws, principles, and theories. Economists will use the scientific method to establish laws, principles, and theories. 1. Observation of facts 1. Observation of facts 2. Create a hypotheses 2. Create a hypotheses 3. Test the hypotheses 3. Test the hypotheses 4. Accept or reject, modify if necessary 4. Accept or reject, modify if necessary

7. Theoretical Economics System of arranging facts, interpreting facts, then making generalizations System of arranging facts, interpreting facts, then making generalizations Always remember that there is almost always an exception to the rule, and competing opinions are commonplace among economists. Always remember that there is almost always an exception to the rule, and competing opinions are commonplace among economists.

8. Ceteris Paribus “Other things equal” – When comparing two different variables and examining the effect each has on each other, it is essential to hold all other variables constant “Other things equal” – When comparing two different variables and examining the effect each has on each other, it is essential to hold all other variables constant The laws or principles that are derived are also known as abstractions The laws or principles that are derived are also known as abstractions

9. Policy Economics Application of specific economic principles in order to achieve a stated goal. Application of specific economic principles in order to achieve a stated goal. Utilized by both private and public sector Utilized by both private and public sector Must consider the impact of policy both direct and indirect Must consider the impact of policy both direct and indirect

10. Economic Goals 1. Growth (GDP & GDP per capita) 1. Growth (GDP & GDP per capita) 2. Full employment (94-96%) 2. Full employment (94-96%) 3. Efficiency 3. Efficiency 4. Price stability 4. Price stability 5. Freedom 5. Freedom 6. Equitable distribution of Income 6. Equitable distribution of Income 7. Security 7. Security 8. Balance of Trade 8. Balance of Trade

11. Micro vs. Macro Macro - The economy as a whole Macro - The economy as a whole Micro - Concerned w/ either a specific industry, household, or firm and the price of specific products and resources Micro - Concerned w/ either a specific industry, household, or firm and the price of specific products and resources Positive Economics – Fact based statements (Unemployment is at 10%) Positive Economics – Fact based statements (Unemployment is at 10%) Normative Economics - Value Based Statements (Greater funding of education will provide a stronger economy) Normative Economics - Value Based Statements (Greater funding of education will provide a stronger economy)

12. Pitfalls to Objective Thinking Political and social bias is rampant within the media and other sources of information. You must consider this when gathering information to answer economic questions. Political and social bias is rampant within the media and other sources of information. You must consider this when gathering information to answer economic questions. MSNBC vs. Fox News MSNBC vs. Fox News Drudge Report vs The Huffington Post Drudge Report vs The Huffington Post

13. Fallacy of Composition What may be true for the individual may not be true for the group. What may be true for the individual may not be true for the group. EX – Farmer that produces a large harvest yields a higher income. All farmers will not experience the same success. EX – Farmer that produces a large harvest yields a higher income. All farmers will not experience the same success.

14. Causation Fallacies Post hoc fallacy – when two events occur in sequence, the first event is not always the cause of the 2 nd event Post hoc fallacy – when two events occur in sequence, the first event is not always the cause of the 2 nd event Events may be related without a causal relationship Events may be related without a causal relationship Income & Education Income & Education Freakonomics – Crime in the 1990’s Freakonomics – Crime in the 1990’s