Transcript Document

Introducing the
Economic Way of
Thinking
• Key Concepts
• Summary
©2005 South-Western College Publishing
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What will you learn
in this chapter?
You will be acquainted
with the foundation of
the economic way of
thinking
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2
What are the 3 building
blocks in the economic
way of thinking?
• scarcity & choice
• model building
• pitfalls of economic
reasoning
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What is the
economic problem?
Providing for people’s
wants and needs in a
world of scarcity
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What is meant by
scarcity?
The condition in which
wants are forever greater
than the available supply
of time, goods, and
resources
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What does scarcity
force us to do?
It forces us to
make choices
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What are resources?
The basic categories
of inputs used to
produce goods and
services
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What are the three
categories of
resources?
Land
Labor
Capital
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What is a
land resource?
A shorthand expression
for any natural resource
provided by nature
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What is labor?
The mental and physical
capacity of workers to
produce goods and services
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What is capital?
The physical plants,
machinery, and
equipment used to
produce other goods
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What is
financial capital?
The money used to
purchase capital
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What is
entrepreneurship?
The creative ability of
individuals to seek profits
by combining resources
to produce innovative
products.
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Land
Labor
Capital
Entrepreneurship organizes
resources to produce goods
and services
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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
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What is
macroeconomics?
The branch of economics
that studies decisionmaking for the economy
as a whole
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What is
microeconomics?
The branch of economics
that studies decisionmaking by a single
individual, household,
firm, industry, or level of
government
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What is the purpose of
an economic model?
To forecast or predict
the results of various
changes in variables
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What is the
scientific method?
• Problem identification
• Model development
• Testing a theory
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Identify the problem
Develop a model based
on simplified assumptions
Collect data and
test the model
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What are the two
common pitfalls in
understanding how
the economy works?
• failing to understand the
ceteris paribus assumption
• confusing association with
causation
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What assumption is
always made when
testing a model?
ceteris paribus
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What is
ceteris paribus?
A Latin phrase that
means that while certain
variables can change,
“all other things remain
unchanged”
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What is the difference
between association
and causation?
We cannot always assume
that when one event
follows another, the first
caused the second
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Why do some
economists disagree?
The answer lies in
understanding the
difference between
positive and normative
economics
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What is
positive economics?
An analysis limited
to statements
that are verifiable
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What is
normative economics?
An analysis based on
value judgement
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Key Concepts
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• 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?
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• 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?
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Summary
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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.
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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.
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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.
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Society
Chooses
Resources
Scarcity
Unlimited
wants
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Macroeconomics applies an
economy wide perspective that
focuses on such issues as inflation,
unemployment, and the growth rate
of the economy.
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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.
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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.
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Collect data
and test
the model
Develop
a model based
on assumptions
Identify
the
problem
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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.
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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,
ought to, and ought not to.
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END
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