NH

Chapter 1: The Economic Approach

Chapter 1: The Economic Approach

What is Economics About?

  • Economics deals with decisions about scarcity and choice.
  • Scarcity leads to the need for choices among alternatives.

Scarcity and Choice

  • Scarcity: Occurs when the demand for goods exceeds their availability.
    • Forces individuals and societies to make choices.
Scarce Goods Examples:
  • Food: Bread, milk, meat, eggs, vegetables, coffee, etc.
  • Clothing: Shirts, pants, blouses, shoes, socks, coats, etc.
  • Household Goods: Tables, chairs, beds, dressers, electronics, etc.
  • Education
  • National Defense
  • Leisure Time
  • Clean Air
  • Pleasant Environment: Trees, lakes, rivers.
  • Pleasant Working Conditions
Limited Resources:

  • Land: Varying fertility levels.

  • Natural Resources: Rivers, trees, minerals.

  • Machines/Physical Resources: Human-made resources.

  • Non-human Animal Resources

  • Technology: Devices and knowledge.

  • Human Resources: Skills and talents of individuals.

  • History depicts our efforts to convert limited resources into wanted goods.

Distinction Between Scarcity and Poverty

  • Scarcity remains, even if poverty is alleviated.
  • Poverty is defined as an unmet basic need.
  • Eliminating poverty doesn't eliminate scarcity;
    scarcity persists as desires are infinite.

Rationing of Scarcity

  • Societal systems must ration resources among various needs.
  • Methods of rationing:
    • Allocation by price (market systems).
    • First-come, first-served, etc.
  • Price Rationing: Goods allocated based on willingness to pay.
    • Encourages income generation for purchasing goods.

Competition and Scarcity

  • Competition rises from the need to allocate scarce resources.
  • Changing rationing methods alters competition but doesn’t remove it.

Guideposts to Economic Thinking

  1. Production of goods incur costs; opportunity cost is the highest-valued alternative sacrificed.
  2. Individuals make purposeful choices to economize: obtaining benefits at lower costs.
  3. Incentives Matter: Increased personal benefit makes choices more likely.
  4. Economic reasoning focuses on marginal (additional) costs and benefits.
  5. Acquiring information to make better choices incurs costs.
  6. Secondary Effects: Economic events lead to long-term effects; overlooking them can cause misjudgments.
  7. The value of goods is subjective and based on individual preferences.
  8. Economic theories are validated by their predictive power in real-world scenarios.

Positive vs. Normative Economics

  • Positive Economics: Scientific study of “what is,” focusing on verifiable statements about economic conditions.
    • Example: “The inflation rate rises with increased money supply.”
  • Normative Economics: Judgments about “what ought to be,” based on subjective values; cannot be proven true or false.
    • Example: “The inflation rate should be lower.”

Pitfalls to Avoid in Economic Thinking

  1. Ceteris Paribus Violation: Assuming other factors remain constant can lead to false conclusions.
  2. Good Intentions vs. Outcomes: Well-intended policies can lead to negative outcomes.
  3. Association ≠ Causation: Statistical correlation does not imply causative relationships.
  4. Fallacy of Composition: Belief that what is true for one part is true for the whole.

Questions for Thought

  1. Examine the method of how grades are awarded in class; discuss its influence on student behavior.
  2. Explore the implications of gas mileage regulations by Congress—consider potential secondary effects on conservation and safety.
  3. Assess whether government-provided services like healthcare can be genuinely free.
  4. Debate if eliminating pollution emissions to zero is feasible or practical.