Chap 1

1.1 The Power of Econimics Analyis

All economic question arise because we want more than we can get.

Econimics is the study of the choices of individual, people, businesses, government.

Our inability to statisfy all our wants in called scarsity (does not not mean shortage). As well as unlimited sourse like energy,in called scarsity (does not not mean shortage). As well as unlimited sourse like energy, natrual, food, etc. Most things in economics are not scarsity.

In our everyday lives we face scarsity because it’s affected by ecom & time, its not something that’s unlimted. Beacuse we face scarsity, we all have to make choices.

An incentive is a reward that encourages an action or a penality that stops the action.

  • Econimics:

  • The Study of how we allocate our limited resources to statisfy their unlimted wants

  • The stufy of how people makes choices

Alternitive Defination: Econimics is the social science that studies the choices that individials, businesses, and the entire socities makes as they cope with scarsity and the incentivies that reconcile those choices.

Resourses: Things used to produce other things to statisfy people’s wants

Wants: What people would by if their income was unlimited

Why study Economics?

- Opportunity cost: the best alternative that we forgo, or give up, when we make a choice or decision. (this included rational and irational decisions)

Marginalism: The process of analyzing the additional or incremental costsor benifits arising from choices or decisons

Understanding Society:

  • Past and present econimic decisions have an enormous influnce on the character of life in a society. (pandemics, wars, political issues. etc.)

To be informed:

  • To be infromed citizen requires a basic understanding of economics

Economics divided into two parts:

Microeconmics: based on more smalls things, a particual industry, people, area, etc. (Ex. The effects of changes in gasoline prices or an individual firm’s decisions to advertise)

Macroeconimics: based on a bigger things, a wider spread including, the nation or global economic.( Ex. The national unemployment rate or the rate inflation)

Modern economics theory blends micro and macro concepts.

1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers

  • Economic System

    - The institutional merchanism through which resourses are utilized to statisfy human wants

Three economic questions:

  • What and how much will be produced?

  • How will items be produced?

  • For whom will items be produced?

Two Big Economic Questions:

How?

Goods and services are produced by using productive resources that economist call factor of productions

  • Land

  • Labor

  • Capital

  • Enterpreneurship

There’s two type of forms of economic systems which are central planning and market system

- Economic system of the world’s of the nations are mixed systems that incorporate aspects of both centralized command and control and a decentralized price system.

1.3 The Economic Approach Systematic Decisions

- Economist assume that individuals act as if motivated by self-interest and repond predictably to opportunities for gain

  • Rationality assumption

    -The assumption that people do not intentionally make decisions that would leave themselves worse off

- Responding to Incentives

  • Rationality and the use of Incentives

    • Postive Incentives

      • Schoolchildren getting gold stars, working to have a “better life” for yourself

    • Negative Incentives

      • Penalties, punishment, using credit cards to avoid check overdrafts

  • Making Choices

    • Balancing costs and benifits

- Defining self-interest

  • The pursuit of one’s goals:

    • Prestige

    • Friendship

    • Love

  • Does not always mean increasing one’s wealth

1.4 Economic as a Science

- Economic is a social science that employs the same kinds of methods used in other sciences, such as biology

- Econimics uses models to explain economic phenomena in the real wolrld

  • Models or Theories

    • Simplified representations of the real world used as the basis for predictions of explantions

    • Should capture only the essential relationships that are sufficient to analyze a problem

    • Cannot be faulted as unrealistic simply because they do noy capture all the details of thr real wolrd

      • A map is the quintessential models

  • Assumptions

    • The set of circumstance in which a model is applicable

    • Every model, or theory, must be based on a set of assumptions

  • Ceteris paribus assumptions

    • Nothing changes except the facts of factors beinf studied

    • “Other things constant”

    • “Other things equal”

  • Economic is a emperical science

    • Real-world data is used to eveluate the usefulness of a model.

    • Models are useful if they predict economic phenomena

    • Economic models predict how people react, not how they think.

  • Behavioral economics

    • An approach to the study of the consumer behavior:

      • Emphasizes psychological limitations and complications that may interfere with rational decison making

    • Proponents believe that is “unrealistic: to assume:

      • Unbounded selfishness

      • Unbounded willpower

      • Unbounded rationality

  • Bounded rationality

    • Hypothesis that people are nearly, not fully, rational:

      • They cannot examine every choice available to them

      • They appear to use rules of thumb to start alternatives

1.5 Positive Versus Normative Economics

  • Positive Economics

    • Purely descriptive statement or scientific predictions, such as “If A, then B”

    • A statement of what is

  • Normative economics

    • Analysis involving value judgments; relstes to whether things are good or bad

    • A statement of what ought to be

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