Chapter 1

1. Chapter 1 The Nature of Economics

2. Chapter Outline • The Power of Economic Analysis • Defining Economics • Microeconomics vs. Macroeconomics • Rational Self-Interest Assumption • Economics as a (Social) Science • Positive versus Normative Economics

3. Did You Know That ... • Economics is one of the fastest-growing college majors? • During the past 10 years, the number of students majoring in economics at U.S. colleges has increased by 40%? • Economics majors typically land higher paying jobs than other majors?

4. Economics as a major 2008 college grad starting salary Question: Why some degrees pay more than others? • 2010 college grad starting salary • Engineering • Economics http://www.walletpop.com/blog/2010/05/10/the-10-most-profitable-college-majors/

5. The Power of Economic Analysis • The economic way of thinking is a framework to analyze solutions to economic problems. • How much time to study • Choosing which courses to take • Whether troops should be sent abroad

6. The Power of Economic Analysis (cont'd) • The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world. • Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.

7. The Power of Economic Analysis (cont'd) • Economic analysis is a way of thinking about all decisions. • Your education, career, financing your home, family • Your involvement in the business world, or in politics as a voter • Why is an education a “decision”? What is a decision? • Incentives • Rewards for engaging in a particular activity

8. Defining Economics • Economics • The study of how people allocate their limited resources to satisfy their unlimited wants • The study of how people make choices • ECON 2301: Emphasizes critical thinking & quantitative analysis • Lee: Practical knowledge with real world applications

9. Defining Economics (cont'd) • Resources • Things used to produce other things to satisfy people’s wants • Wants • What people would buy if their incomes were unlimited • Economics focuses on this contrast

10. Defining Economics (cont'd) • With limited income (resources), people must make choices to satisfy their wants. • We never have enough of everything, including time, to satisfy our every desire.

11. Microeconomicsversus Macroeconomics • Microeconomics • The study of decision making undertaken by individuals (or households) and by firms • Like looking though a microscope to focus on the smaller parts of the economy • Decision of a worker to work overtime or not • A family’s choice of having a baby • An individual firm advertising

12. Microeconomicsversus Macroeconomics (cont'd) • Macroeconomics • The study of the behavior of the economy as a whole • Deals with economywide phenomena • The national unemployment rate • The level of national income • The national government’s budget deficit • Macroeconomics deals with aggregates, or totals—such as total output in an economy. • Modern economic theory blends micro and macro concepts.

13. The Economic Person:Rational Self-Interest • Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain. • Rationality Assumption • The assumption that people do not intentionally make decisions that would leave them worse off

14. The Economic Person:Rational Self-Interest (cont'd) • Questions • Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics? • Drink & drive • Fail a test • Skip classes • Commit suicide

15. The Economic Person:Rational Self-Interest (cont'd) • Responding to incentives • Rationality and the use of incentives • Positive incentives (gold stars; “better life”) • Negative incentives (penalties) • Making choices • Balancing cost and benefits

16. The Economic Person:Rational Self-Interest (cont'd) • Defining self-interest • The pursuit of one’s goals, does not always mean increasing one’s wealth • Prestige • Friendship • Love

17. Example: The Perceived Value of Gifts • The perceived value of gifts • Often, the recipient of the gift places a value on it far less than the market value. • Should we substitute gift certificates ($$$) for physical gifts?

18. Economics as a Science • Models or Theories • Simplified representations of the real world used as the basis for predictions or explanations • A map is the quintessential model • Models we will use: • Production possibilities curve (Chapter 2) • Supply and demand diagram (Chapter 3)

19. Which would you prefer if you want to find your way to the Curlew parking lot? Simple Map view Real Arial View Or: Drive 2 miles, turn right on Ocean Dr.; drive 2,400 ft., turn right on Sand dollar Blvd.; drive 300 ft., turn right on Curlew Dr.; hit the brake

20. Economics as a Science (cont'd) • Ceteris Paribus Assumption[KAY-ter-us PEAR-uh-bus] • Nothing changes except the factor or factors being studied. • “Other things constant” • “Other things equal”

21. Economics as a Science (cont'd) • Economics is an empirical science. • A “science” with a Nobel prize. • We try to understand the real world. • Real-world data is used to evaluate the usefulness of a model. • “Life is not what it first seems …” so economics • Trains our critical thinking skill • Requires some quantitative skills in addition to verbal

22. Positive versus Normative Economics • Positive Economics • Purely descriptive statements or scientific predictions; “If A, then B,” a statement of what is • We focus mostly positive economics in this course • Normative Economics • Analysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be

23. Myth #1: Economics stinks • Economics is about explaining why and how things happen the way they do. • Things are often NOT they seem to be. • Can you handle the (hidden) truth? Many can’t…