Transcript The Nature & Method of Economics

The Nature & Method of
Economics
Chapter One
Definition of Economics
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Social science concerned with the efficient
use of limited resources to achieve
maximum human satisfaction of human
material wants
Wants are unlimited, means by which to
satisfy those wants are however
Economic Perspective
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Scarcity – Limited resources
Scarcity forces us to make economic decisions
that will provide the greatest benefit. This can
be determined by understanding the cost of
such a decision.
Marginal Benefit vs. Marginal Cost
Marginalism - A change in an existing condition
Scarcity in the Real World
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What are some examples?
Are their limits to which countries or
people will not go to secure natural
resources?
If not, are they justified?
Why Study Economics?
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Extremely beneficial to understand basic
economic principles
Allows us to make better decisions in
terms of our own lives as well as the lives
of all Americans
Economic responsibility is absolutely
crucial if the U.S. plans to maintain global
influence
Economic Methodology
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Economists will use the scientific method
to establish laws, principles, and theories.
1. Observation of facts
2. Create a hypotheses
3. Test the hypotheses
4. Accept or reject, modify if necessary
Theoretical Economics
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System of arranging facts, interpreting
facts, then making generalizations
Always remember that there is almost
always an exception to the rule, and
competing opinions are commonplace
among economists.
Ceteris Paribus
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“Other things equal” – When comparing
two different variables and examining the
effect each has on each other, it is
essential to hold all other variables
constant
The laws or principles that are derived are
also known as abstractions
Policy Economics
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Application of specific economic principles
in order to achieve a stated goal.
Utilized by both private and public sector
Must consider the impact of policy both
direct and indirect
Economic Goals
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1. Growth (GDP & GDP per capita)
2. Full employment (94-96%)
3. Efficiency
4. Price stability
5. Freedom
6. Equitable distribution of Income
7. Security
8. Balance of Trade
Micro vs. Macro
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Macro - The economy as a whole
Micro - Concerned w/ either a specific industry,
household, or firm and the price of specific
products and resources
Positive Economics – Fact based statements
(Unemployment is at 10%)
Normative Economics - Value Based Statements
(Greater funding of education will provide a
stronger economy)
Pitfalls to Objective Thinking
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Political and social bias is rampant within
the media and other sources of
information. You must consider this when
gathering information to answer economic
questions.
MSNBC vs. Fox News
Drudge Report vs The Huffington Post
Fallacy of Composition
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What may be true for the individual may
not be true for the group.
EX – Farmer that produces a large harvest
yields a higher income. All farmers will not
experience the same success.
Causation Fallacies
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Post hoc fallacy – when two events occur
in sequence, the first event is not always
the cause of the 2nd event
Events may be related without a causal
relationship
Income & Education
Freakonomics – Crime in the 1990’s