Transcript The Nature and Methods of Economics

Unit 1—Introductory
Materials
Krugman Sections 1 and 2
2 weeks
The Nature and
Methods of Economics
Krugman Section 1 Module 1
Economics:
 Social science concerned with how
people satisfy unlimited wants w/ limited
resources.
Scarcity and choice
 Scarcity requires that choices be made
 There are always trade-offs when
decisions are made
 The cost of any good, service or activity
is the value of what must be given up to
obtain it = opportunity cost
Rational behavior
 Rational self-interest entails making
decisions to achieve maximum fulfillment
of goals
 Different preferences lead to different
choices
 Rational self-interest is not the same as
selfishness
Marginalism:
 = extra, additional or a change in
 Each option considered weighs the marginal
benefit against the marginal cost
 Whether the decision is personal or one made
by business or gov’t, the principle is the same
 The marginal cost should not exceed the
marginal benefit
 mb > mc
Why study Economics?
 For citizenship
--most political problems have an
economic aspect
--voters and elected officials can fulfill
their role more effectively if they have an
understanding of economic principles
 Professional and personal applications
--understand TINSTAAFL
--develop analytical skills
--make intelligent decisions
Economic Methodology
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Scientific method
Theoretical economics
Terminology
Generalizations
Ceteris paribus
--“other things equal” (one thing at a
time)
 Graphs (models)
Our 8 economic GOALS
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Economic growth
Full employment
Economic efficiency
Price level stability
Economic freedom
Equitable distribution of income
Economic security
Balance of trade
Macroeconomics
 Examines the economy as a whole
 Includes measures of total output, total
employment, total income, aggregate
expenditures and general price level
 Think of it as examining the forest—not
the trees
Microeconomics
 Looks at specific economic units
 Concerned with the individual industry,
firm or household and the price of
specific products and resources
 Think of it as examining the trees, not the
forest
Positive and Normative
Economics
 Positive = FACTS describes the
economy as it actually is, avoiding value
judgments and attempting to establish
scientific statements and economic
behavior
 Normative = OPINION involves value
judgments about what the economy
should be like
 --loaded terminology
 --biases—preconceptions that are not based
on facts
Micro or Macro?
 The unemployment rate in the US was
4% in 2002.
 Kraft Inc. laid off 3,000 workers last
month.
 The Consumer Price Index rose by 5%.
 Aggregate demand was larger than
aggregate supply creating a shortage.
 The Dow Jones Industrial Average
dropped 10 points today.
Positive or Normative?
 It was too cold in Duez’s classroom today.
 The temperature is currently 98 degrees.
 The fat cats at Exxon are making all kinds of money
while gas prices go up.
 The CEO of Exxon received a 25 million dollar
bonus.
 Higher interest rates reduce the amount of money
borrowed.
 I will not borrow money at 10% interest—that is just
too high for me.