The Earth

Chapter 1: The Nature and Method of Economics

Econ 10LS

Jan. 25th 2006

What is Economics?

Economics:

Social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants

Economic perspective

Economic way of thinking

Economic Perspective

Three elements

Scarcity (limited) and Choice

Opportunity cost

Rational Behavior

Individuals look for and pursue opportunities to increase UTILITY.

Marginalism: Benefits and Cost

Decision makers must compare two different options.

Example: shopping for engagement rings.

Can there be too much?

Yes,

This happens when Marginal Costs exceeds Marginal Benefits.

When this happens we sacrifice alternative goods and services that are more valuable.

Why Study Economics

Adam Smith

David Ricardo

John Stuart Mill

Karl Marx

John Maynard Keynes

Helps government leaders to decide on monetary policies.

Unemployment, inflation, economic growth, taxation, poverty, international trade, health care, pollution, regulations

Economics for Citizenship

Economics effects everyone…

Political problems

How aggressive should we purse the war on terrorism?

What level of taxes should we have?

How can we increase the rate of economic growth?

As voters we can influence these decisions.

Economics makes us more informed.

Professional and Personal Applications

Economics is very analytical

This helps students build up their analytical styles for the workplace

The understanding of the economic system enables business to increase profits.

Example: when to increase production, hire, reduce size

Economic Methodology

Economic relies on scientific method

Observe facts

Form a hypothesis: possible explanation

Test the hypothesis

Accept, reject or modify

Continue testing the hypothesis against the facts

Hypothesis evolves into a theory

Well tested and widely accepted theory is a law or principle.

Combinations of such laws are incorporated into a model.

Theories, Laws, and models help explain reality and predict the various outcomes of actions.

Theoretical Economics

Theoretical Economics: the process of deriving theories and principles

Theoretical Economics

Terminology:

Ceteris Paribus

Other-things-equal assumption

Assume that all other variables except those under immediate consideration are held constant for a particular analysis.

Macroeconomics

Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household,