Transcript Economics Defined - Ajadaf

Economics Defined
The social science concerned with the
efficient use of limited or scarce
resources to achieve maximum
satisfaction of human wants and needs.
 Wants are unlimited
 Resources are limited so satisfying wants
can be a problem

Perspectives in Economics
Scarcity and choice
 Resources can only be used for one purpose at
a time
 Scarcity thus requires that choices must be
made
 The cost of any good, service, or activity is the
value of what must be given up to get it. This is
opportunity cost. This is a most important
concept which we will refer to over and over.

Rational Behavior
Rational self interest means you make decisions
to achieve the maximum fulfillment of your
goals
 Different preferences (personal wants and
needs) and circumstance lead to different
choices for individuals
 Rational self interest is not to be equated with
selfishness although an argument could be made
to do so. (Also known as the invisible hand)

Marginalism: How much wood..
In economics marginalism refers to extra. If you
talk about marginal benefit or marginal cost you
are talking about extra or added to the original.
 Most decisions concern a change in current
conditions: so the focus of choice is based on
marginal analysis or is the benefit of the choice
greater than the cost of the choice. This is true
for each additional choice involved with this
decision.

Marginalism
Economics uses certain short cuts to
refer to marginalism:
 MB= marginal benefit. That is the added
benefit one receives for making or doing a
particular thing.
 MC= marginal cost. That is the added cost
one receives for making or doing a
particular thing.

Marginalism cont.
This applies to individuals, firms, and
government. The principle is the same.
 If the marginal cost of an action or
decision exceeds the marginal benefit
then it should not be done or chosen.
 TINSTAAFL-this is no such thing as a free
lunch. Learn this acronym!!!!!!
 Let’s look at this to see if it is true.

Methodology of the Science of
Economics
Observation
 Formulation of explanations for the cause
and effect relationships(hypotheses)
 Testing hypotheses
 Accepting, rejecting, or modifying the
hypotheses

continued
Many economic principles are embodied
in
 Theories
 Laws
 Models
 You can usually tell who has studied
economics too long because they have a
law named after them.

Ceteris Paribus
This assumption is all important when working
with assumptions and information in economics.
Essentially, what it means is “ all other things
being equal” or “we are going to keep all factors
the same except one which we are going to
change” and see what happens.
 In most circumstances only ONE condition is
changed at a time allowing us to look at its
effect. If asked for then another condition would
change and we would do the same thing.

Theoretical versus Policy

Theory economics is intellectual and
academic. It is used to test abstractions
and connections of hypotheses, models,
usually in the most simple way. In this
economics models scientific experiment.
Policy Economics

Policy economics uses economic facts and
principles to resolve specific problems
and achieve certain goals in a specific
economic function.
Formulating Policy
State goals for policy
 Recognize options that may be used to
achieve goals
 Evaluate the options on the basis of
criteria specific and important to those
who are in power. (decision makers)

Economic Goals common to Western
Capitalist Democracies
Economic growth
 Full Employment (low unemployment)
 Economic Efficiency
 Price Level Stability (low inflation)
 Economic Freedom
 Equitable Distribution of Income
 Economic Security
 Economic Justice

Issues with goals
Some are contradictory
 Some are complementary
 Some are wishes and unfulfillable
 Not all goals can be attained at the same
time or with the scarce resources we
have so choices must be made

There are two schools of economics
Macroeconomics is the study of the
economy as a whole by looking at large
segments known as aggregates such as
GDP, unemployment, inflation, etc.
 Microeconomics is the study of specific
economic units such as households, firms,
and specific markets and products

Positive and normative
Positive economics describes the economy as it
actually is, avoids value judgment and bias, and
attempts to establish scientific statements about
economic behavior.
 Normative economics involves value judgments
and bias in which the economy is seen as it
SHOULD be according to the perspective of
that person and what needs to be done to get it
to that point. Most political economic
statements are normative.

Pitfalls for economic students
Bias and preconceptions should be limited
 Loaded terminology enhances bias and
should be used as little as possible.
 Not knowing the correct economic
language to use. Terms are important and
should be learned as appropriate.
 Fallacies: Post Hoc Fallacy and Correlation
versus Causation. I will give examples.
