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Ch. 1: The Nature & Methods of Economics

Ch. 1: The Nature & Methods of Economics. What is Economics?. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction ( utility ) of human wants and needs . wants are unlimited, means to satisfy the wants are limited.

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Ch. 1: The Nature & Methods of Economics

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  1. Ch. 1: The Nature & Methods of Economics

  2. What is Economics? • The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction (utility) of human wants and needs. • wants are unlimited, means to satisfy the wants are limited. *economics derives from Greek “oikonomos;” (“oikos”=house and “nomo”=managing)

  3. The Economic Perspective: Scarcity & Rational Choice 1. Resources can only be used for one purpose at a time. 2. Scarcity requires that “rational” choices be made. 3. The cost of any good/service is the value of what must be given up to obtain it; the opportunity cost (i.e.: go party? or study for a Macro quiz?) Rational Choice: 1. decisions to achieve maximum fulfillment of goals. 2. not the same as selfishness. Marginal Utility: Costs and Benefits 1. Every decision involves a tradeoff. 2. We weigh the marginal benefit against the marginal cost. 3. Costs should not exceed benefits. 4. “No free lunches” and there CAN be “too much of a good thing.”

  4. Why Study Economics? Political Economy: political issues are economic issues (i.e.: budgeting, taxation, welfare, international trade, environmental regulation). *Economics is NOT to learn “how to make money,” rather understanding human decision-making. Why do different social and cultural groups produce and consume what they do?

  5. Economic Methodology • the scientific method 2. Ceteris Paribus:“other things equal” (all other variables are held constant) 3. graphing: many economic relationships are demonstrated quantitatively

  6. Pitfalls to Objective Thinking A. Biases— preconceptions not based on facts. B. Loaded terminology— terms that contain biases and value judgments. • Causation fallacies— post hoc fallacy: 1st event not necessarily cause of 2nd correlation does not necessarily prove causation(i.e.: education & income).

  7. Macro vs. Micro A. Macroeconomics = economy as a whole 1. output, unemployment, income, aggregate expenditures, price level. B. Microeconomics = specific decision-making • Positive and Normative Economics 1. positive describes the economy 2. normative involves value judgments

  8. Graphing Review x- and y- axis? slope? positive correlation? negative correlation?

  9. Ch. 2: The Economizing Problem *the “problem”: how resources are used to satisfy wants NEEDS(for survival)VS. WANTS(provide utility, satisfaction)

  10. I. Four types of scarce resources: The factors of production: a. Land (all natural resources; fields, forests, ocean, minerals) b. Labor (human resources used in production) c. Capital (means of production; tools, equipment, factories) d. Entrepreneurship (business person; risk-taker) Resource payments: Land-Rent Labor-wages Capital-Interest Entrepreneurship-Profit

  11. II. Economic Efficiency: *efficiency requires full employment of available resources and full production. full employment: all available resources should be employed (no idle land, labor, or capital). full production: allocative efficiency & productive efficiency

  12. III. Production possibilities curves (PPC’s) *PPC curves demonstrate opportunity costs and tradeoffs. Assumptions of PPC models: 1. full efficiency 2. fixed resources 3. fixed technology 4. focus on only two products. *society must choose the one good over another.

  13. *optimal mix? • Some point on the curve • The exact point depends on society’s wants

  14. IV. Law of Increasing Opportunity Costs: • opportunity cost: the amount of one product that must be given up to produce another. 2. more of a product produced, greater (marginal) opportunity cost.

  15. V. How to Achieve Economic Growth: A. Unemployment and productive inefficiency occur when the economy is producing less than full production or inside the PP curve. B. PPC curve shifts outward due to: 1. resource supply expansion 2. technological advances C. International trade? *comparative advantage

  16. TYPES OF ECONOMIC SYSTEMS: *Economic systems differ in two important ways: Who owns the factors of production? How is economic activity organized? I. “TRADITIONAL ECONOMY”: -hunters-gatherers Examples: Eskimos, ¡Kung bushmen, Pygmies) II. “COMMAND ECONOMY”: -central planners (decides jobs, wages, what to produce) -state ownership of resources (usually communist or socialist) Examples: North Korea and Cuba III. “THE MARKET SYSTEM”: -private ownership of resources. -markets and prices coordinate and direct economic activity. ­-in pure capitalism the government plays a very limited role. --- invisible hand IV. “MIXED MARKET ECONOMY”: -government plays an important role Examples: U.S., China, Japan, Sweden, Nazi-Germany

  17. VI. Circular Flow Model:

  18. * Money flows in one direction, while goods, services, and the factors of production flow in the opposite direction. Resource/Factor markets: a. Households sell resources (labor) b. Businesses buy resources (land, labor, and capital) Product markets: a. Households buy goods and services. b. Businesses sell products (profit). c. Interaction of buyers and sellers determines price.

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