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Principles of Economics by Fred M Gottheil. PowerPoint Slides prepared by Ken Long. Chap. 1, Introduction to Economics. © 1999 South-Western College Publishing. What is Economics??. A social science that deals with how people use scarce resources to produce and distribute goods and services.
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Principles of Economicsby Fred M Gottheil PowerPoint Slides prepared by Ken Long Chap. 1, Introduction to Economics ©1999 South-Western College Publishing
What is Economics?? • A social science that deals with how people use scarce resources to produce and distribute goods and services
Scarcity, the Central Theme of Economics Scarcity means that while we have unlimited wants, our resources are limited
Due to Scarcity, Choices must be made Economics deals with how we make such choices
What are the Factors of Production? (resources) • Land and natural resources • Labor • Capital • Entrepreneurship ©1999 South-Western College Publishing
What is received for resources? • rent for land • wages for labor • interest for capital • profit for entrepreneurship ©1999 South-Western College Publishing
What is aNatural Resource? • The lands, water, metals, minerals, animals, and other gifts of nature that are available for producing goods and services ©1999 South-Western College Publishing
What is a Renewable Resource? • Resources that can be replenished ©1999 South-Western College Publishing
What is a Nonrenewable Resource? • Resources that cannot be replenished ©1999 South-Western College Publishing
What is Labor? • The physical and intellectual effort of people engaged in producing goods and services ©1999 South-Western College Publishing
What is Capital? • Manufactured goods used to make and market other goods and services ©1999 South-Western College Publishing
Note the difference between physical capital and financial capital (money)
What is Human Capital? • The knowledge and skills acquired by labor, principally through education and training ©1999 South-Western College Publishing
Who is an Entrepreneur? • A person who alone assumes the risks and uncertainties of a business ©1999 South-Western College Publishing
Assumptions about making choices • Self interest motivation • Rationality, weighing the benefits and costs of actions
Costs include the opportunity costs • Opportunity costs, the highest valued option given up when a choice is made
Benefits • The economy is a part of our lives • Better understanding of human behavior • More informed voter • Relates to other fields of study • Its fun!!!!
Costs • Its Difficult!!! • Less precision in the social sciences • Can be mathematical
What are the two ways of looking at Economics? • Macroeconomics • Microeconomics ©1999 South-Western College Publishing
What is Macroeconomics? • Analyzes the behavior of the economy as a whole ©1999 South-Western College Publishing
What is Microeconomics? • Analyzes the behavior of firms and households ©1999 South-Western College Publishing
Economics as a “Science” Social sciences, difficult to perform lab experiments of theories Important to understand the difference between positive and normative economics
What is Positive Economics? • A subset of economics that analyzes the way the economy actually operates ©1999 South-Western College Publishing
What is Normative Economics? • A subset of economics founded on the value judgements and leading to assertions of what ought to be ©1999 South-Western College Publishing
BEWARE of the following pitfalls as you study economics (added material not in text) • Correlation vs. causation • Fallacy of composition
Correlation vs. Causation • Two variables are correlated if one variable changes when the other variable changes. • This does NOT mean that changes in one variableCAUSE changes in the other.
Examples: Correlation vs. causation • A war breaks out in Timbuktu today and the U.S. stock market falls—did the war cause the market to fall? • The economy began growing in 1992 about the same time Clinton was elected president. Does this mean that the Clinton election improved the economy?
The Fallacy of Composition The often mistaken belief that what is true for a part is necessarily true for the whole
Examples of the Fallacy of Composition • If one student stands up in class, they can see the board better—so if all students stand up will they all see better? • If I had a million dollars, I am rich, so if we all had a million dollars, would be all be rich?
What is anEconomic Model? • An abstraction of an economic reality expressed in various ways ©1999 South-Western College Publishing
What is the purpose of an Economic Model? • To simplify the complexity of our world ©1999 South-Western College Publishing
What is Econometrics? • The use of statistics to quantify and test economic models ©1999 South-Western College Publishing
What is one of the most important assumptions in model building? • Ceteris paribus ©1999 South-Western College Publishing
What does Ceteris Paribus mean? • After a variable changes we assume that nothing else will change ©1999 South-Western College Publishing
What are the central issues in economics? • What gets produced? • How is it produced? • Who consumes what is produced? ©1999 South-Western College Publishing
2 major ways that economies attempt to answer these questions • Command economies • Market economies
Command Economy A central authority or agency draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution.
Market Economy Individual people and firms pursue their own self-interests without any central direction or regulation. The central institution in these economies: markets!
Markets The institutions through which buyers and sellers interact and engage in exchange Prices are determined in markets; prices reflect what society is willing to pay for something.
What is theResource Market? • A market where people supply their resources - land, labor, capital and entrepreneurship ©1999 South-Western College Publishing
What is theProduct Market? • The market where people buy goods and services ©1999 South-Western College Publishing
Important aspects of market economies: • Consumer sovereignty • Free enterprise • Distribution of output decentralized • Prices coordinate behavior
What is Consumer Sovereignty? • Our choices as consumers guide what gets produced ©1999 South-Western College Publishing
Most modern economies are mixed systems • A mixture of free markets with government involvement
http://www.yahoo.com http://www.excite.com http://www.lycos.com http://www.helsinki.fi/WebEc/WebEc.html http://www.bankamerica.com/econ_indicator/econ_indicator.html 46 ©1999 South-Western College Publishing
What is Economics? • What is the Resource Market? • What is the Product Market? • What is Macroeconomics? • What is Microeconomics? • What is Positive Economics? • What is Normative Economics?
What is the Fallacy of Composition? • What does Ceteris Paribus mean? • What is consumer sovereignty?