Chapter 1. Introducing the Economic Way of Thinking.

Chapter 1: Introducing the Economic Way of Thinking

Overview

• Source: South-Western, a part of Cengage Learning

• Author: Irvin B. Tucker

• Purpose: Introduction to fundamental concepts of economics.

What Will You Learn?

• Introduction to fundamental concepts of the economic way of thinking.

Understanding the Economic Way of Thinking

Definition

• A logical reasoning process for organizing thoughts and understanding economics.

Examples of Economic Thinking

• Assessing the impossibility of proving no person is worth a trillion dollars.

• Analyzing consumer behavior regarding purchasing more Coca-Cola when its price increases.

• Exploring the relationship between Super Bowl winners and stock market changes.

The Economic Problem

Fundamental Issue

• Providing for people’s wants and needs in a world of scarcity.

Scarcity Defined

• The condition where wants exceed the available supply of time, goods, and resources.

Implications of Scarcity

• Forces individuals and society to make choices due to unlimited wants.

Resources in Economics

Definition

• The basic categories of inputs used to produce goods and services.

Categories of Resources

1. Land: Natural resources provided by nature.

2. Labor: Mental and physical capacities of workers.

3. Capital: Physical plants, machinery, and equipment used to produce goods not directly satisfying human wants.

Entrepreneurship

Definition

• The creative ability of individuals to seek profits by combining resources and taking risks to produce innovative products.

Organizational Role

• Combines resources (land, labor, capital) to produce goods and services.

Financial Capital

Definition

• The money used to purchase capital; considered a paper claim on capital and not productive by itself.

The Study of Economics

Economics Defined

• The study of how society allocates its scarce resources to satisfy unlimited wants and needs.

Branches of Economics

1. Macroeconomics: Studies decision-making for the economy as a whole.

2. Microeconomics: Studies decision-making by individual entities (individuals, households, firms, industries, or governments).

Economic Models

Definition

• A simplified description of reality used to understand and predict relationships between variables.

Purpose of Economic Models

• Forecast or predict the results of various changes in variables.

Model-Building Process Steps

1. Identify the problem.

2. Develop a model based on simplified assumptions.

3. Collect data, test the model, and formulate a conclusion.

Conclusion on Models

• If evidence supports the model, it is accepted; if not, it is rejected.

Common Pitfalls in Economics

Key Concepts

1. Ceteris Paribus: A Latin phrase meaning "all other things remain unchanged."

2. Confusing association with causation.

Importance of Ceteris Paribus

• Assumption made during model testing; a theory cannot be legitimately tested unless this assumption is satisfied.

Ceteris Paribus Example

• If the price of new Ford cars decreases while other variables remain constant, consumer purchases will increase; however, changes in other conditions may invalidate predictions.

Association vs. Causation

Clarification

• One cannot always assume that when one event follows another, the first caused the second.

Disagreements Among Economists

Key Differences

• Understanding the difference between positive and normative economics.

Positive Economics

• Analysis limited to verifiable statements.

Normative Economics

• Analysis based on value judgments.

Conclusions on Opinions

• Opinions not based on facts are scientifically untestable.

Exhibit: Average Yearly Salary Offers for Selected Majors

End of Chapter 1