Introducing the Economic Way of Thinking

1. Introducing the Economic Way of Thinking • Key Concepts • Summary ©2005 South-Western College Publishing

2. What will you learn in this chapter? You will be acquainted with the foundation of the economic way of thinking * Return to previous slide while in slide show mode

3. What are the 3 building blocks in the economic way of thinking? • scarcity & choice • model building • pitfalls of economic reasoning

4. What is theeconomic problem? Providing for people’s wants and needs in a world of scarcity

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

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

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

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

9. What is aland resource? A shorthand expression for any natural resource provided by nature

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

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

12. What isfinancial capital? The money used to purchase capital

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

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

15. 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

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

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

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

19. What is thescientific method? • Problem identification • Model development • Testing a theory

20. Identify the problem Develop a model basedon simplified assumptions Collect data andtest the model

21. What are the two common pitfalls in understanding how the economy works? • failing to understand the ceteris paribus assumption • confusing association with causation

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

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

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

25. Why do some economists disagree? The answer lies in understanding the difference between positive and normative economics

26. What ispositive economics? An analysis limited to statements that are verifiable

27. What isnormative economics? An analysis based on value judgement

28. Key Concepts

29. What are the three building blocks in the economic way of thinking? • 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?

30. What is the scientific method? • What are the two common pitfalls in understanding how the economy works? • Why do some economists disagree? • 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?

31. Summary

32. 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.

33. 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.

34. 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.

35. Society Chooses Resources Scarcity Unlimited wants

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

37. 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.

38. 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.

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

40. 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.

41. 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, oughtto, and ought not to.

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