Chapter 1

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Transcript Chapter 1

I can’t believe that I failed out of AP Economics.
Mr. Walton is the best teacher at Memorial High.
Economic Policy & Goals
Why study Economics?
1. Economics helps make us better- informed
citizens and voters.
2. Economics helps improve a students
analytical skills, which are in great demand
in the workplace.
3. Understanding economics enables
businesses to increase profits.
4. Economics helps consumers and workers
make buying and employment decisions.
When President Obama saw
the Eiffel Tower, he asked
The French President,
“Did BP build that oil
derrick you have there?”
Like the physical and life sciences economics relies on
the scientific method.
1. The observation of facts, based on real-world data.
Example: When looking at the recent housing
slump we would gather facts on the relation
between housing and interest rates.
2. Based on those facts we formulate a hypothesis, a
theory for fixing a problem. Because it is unproven
hypothesis implies the least degree of confidence in an
economic generalization.
Example: If interest rates were lowered, more
houses would be sold.
“Only the
When you are looking for
Mr. or Miss. Right,
you can concentrate on 3 billion choices.
But you wouldn’t concentrate on all the
characteristics you are not going to Want.
“There is the woman I
You look at the few qualities
She want.
doesn’t even
have to like sports.”
“We’re looking for
the perfect man.”
Economists do the same thing. In constructing
Theories (economic models) they make simplifying
assumptions using the principle of Ceteris paribus
[other things-equal].
By using this assumption economists can reason
about the relationship between “X” and “Y”
without the intrusion of “Z”.
(There are too many Z variables in the world to test
them all in a single model.)
“Real World”
3. If the hypothesis stands up to continuous testing then
it evolves into a theory. A well tested and widely
accepted theory is referred to as a law or principle. A
principle implies the greatest degree of confidence in
an economic generalization.
Example: If interest rates were lowered, more houses
would be sold.
An economic principle or law is still just a
generalization of what will occur. Because they are
imprecise economic principles are simply the
tendencies of consumers, workers, and businesses to
follow a certain action. This tendency towards a certain
action falls under the perspective of economic
principles. So, Economists use both the scientific
method and economic perspective to arrive at
4. Finally economic principles are used to create
economic policy – course of action based on
economic principles and intended to resolve
a specific economic problem or further an
economic goal. This is where politics comes
into the picture. Economic policy usually deals
with who get public funds, so policy is the
bases for 90% of all political battles. In
formulating economic policy it is important to
consider the benefits and costs of the various
policy options for reaching desired goals.
Example: Make policy by lowering interest rates or giving tax
deductions to help the housing industry.
Policy Economics
Whether you are Republican or
Democrat, either poor or rich, all agree
that economic policy should enhance
certain goals for our society.
Eight Economic Goals
1. Economic Growth; An increase in GDP or per capita
wealth. The U.S strives for 3% annual GDP growth.
2. Full Employment – meaning that everyone who wants a
job can find a job. But full employment means that
only about 95-96% of the U.S. labor force is
3. Economic Efficiency – obtaining the maximum output
from available resources or maximum benefits at
minimum cost.
“Mustang Athlete.”
Eight Economic Goals
4. Stable Price Levels – avoid sizable inflation or
deflation. Maintain about 3% annual inflation rates.
We had 13% inflation in 79.
Today, it takes $10 to buy what $1 bought in 1945.
HYPERINFLATION in Brazil 1988-1994
Prices in 1994 were 4 million times higher than in 1988.
If we had Brazil’s inflation:
1. $35 Blue jeans would increase to $140 million per pair.
2. Gas would increase from $1.25 to $5 million per gallon.
3. $20 for a pizza and movie would increase to $80 million.
Eight Economic Goals
5. Equitable Distribution of Income. One group
shouldn’t have extreme luxury while another is in stark poverty.
The richest 1%(3 million people) have greater wealth
than the bottom 90% of the population.
6. Economic Freedom – businesses, and consumers should be
free to use their recourse in order to satisfy their own needs.
The market determines the use and cost of resources.
7. Economic Security – resources should be used to help
those in need. There is an economic benefit to
providing for those not able to take care of themselves
(handicapped, disabled, old age, chronically ill, orphans,
lay-offs [unemployment insurance]).
8. Balance of Trade – we should sell as much to the
rest of the world as we buy from them.
Our balance of trade was $690 billion for 2008. But
it has declined since then.
The End