1 / 15

Section 1

Section 1. Thinking like an economist. Why is economics important?. Scarcity : limited nature of society’s resources Economics : the study of how society manages its scarce resources An economic model is a simplified version of reality used to analyze real world economic situations.

aimee-william
Download Presentation

Section 1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Section 1 Thinking like an economist

  2. Why is economics important? • Scarcity: limited nature of society’s resources • Economics: the study of how society manages its scarce resources • An economic model is a simplified version of reality used to analyze real world economic situations. Economy: one who manages household

  3. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 1) People are rational • Individuals and firms use all available information as they act to achieve their goals. • We act if the benefits of our actions outweigh the costs.

  4. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 2) People respond to incentives • Moral incentives • Social incentives • Economic incentives

  5. Economics and Individual Decision • People (buyers and sellers) interact in markets. • When studying their interactions we apply 3 important ideas: • 3) Optimal decisions are made at the margin • Marginal decision vs. all or nothing decisions • Optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost.

  6. The fundamental problem • Economics is the study of how human beings coordinate their wants and desires. • 1) What and how much to produce? • Butter or guns? • 2) How to produce? • Locally or offshore? • 3) Who should consume what is produced? • Income distribution • Planned vs. Market Economics

  7. Efficiency and Equity • Productive efficiency • When production takes place at the lowest possible cost • Allocative efficiency • When production reflects consumer preferences • Equity • The fair distribution of economic benefits

  8. ECONOMICS • Is it a science? • Economics uses scientific methods • Using assumptions we develop economic models • we collect data • using the data we test hypotheses • we then revise our models if necessary.

  9. Microeconomics vs Macroeconomics • Microeconomics: the study of how households and firms make decisions • Macroeconomics: The study of economy-wide phenomena (inflation, unemployment…) • Positive statement vs Normative statement • Positive: Claims that attempt to describe the world as it is. • Normative: Claims that attempt to prescribe how the world should be.

  10. Positive or Normative Statements? • An increase in the minimum wage will cause a decrease in employment among the least-skilled. ? ?

  11. Positive or Normative Statements? ? • Higher federal budget deficits will cause interest rates to increase. ? ?

  12. Positive or Normative Statements? ? ? • The income gains from a higher minimum wage are worth more than any slight reductions in employment. ? ?

  13. Positive or Normative Statements? ? ? • State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor. ?

  14. Why economists disagree? • Different values  different normative views • they may disagree on theories about how the world works

  15. Problems • 20/8 • 20/14 • 20/18

More Related