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.