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Chapter 1: The Scope and Method of Economics

Introduction

• Principles of Economics, 7/e by Karl Case and Ray Fair.

• Prepared by Fernando Quijano and Yvonn Quijano.

The Study of Economics

• Economics Defined: The study of how individuals and societies use scarce resources.

Why Study Economics?

• Learn a way of thinking about choices and trade-offs.

• Fundamental Concepts:

  • Opportunity Cost: The best alternative forgone when making a decision.

  • Marginalism: Considering only the relevant costs and benefits of a decision.

  • Efficient Markets: Markets where profit opportunities are quickly realized.

Key Concepts in Economics

Opportunity Cost

• Definition: The sacrifice made when choosing one option over another.

• Relevance: Every decision involves trade-offs.

Marginalism

• Focus only on the additional costs and benefits.

• Ignore sunk costs—costs already incurred that cannot be recovered.

Efficient Markets

• Definition: Markets that swiftly eliminate profit opportunities.

• Importance of understanding that there are no 'free lunches'.

Importance of Economics

• Essential for understanding societal structures and decisions.

• Historical context: The Industrial Revolution transformed economic systems.

• Knowledge of economics aids understanding of global issues and informs voting decisions.

The Scope of Economics

Microeconomics

• Examines individual units like households and firms.

Macroeconomics

• Looks at aggregate phenomena such as national income, output, and employment.

Distinction Between Micro and Macro

• Microeconomic Concerns: Specific outputs and prices in individual markets.

  • Production: Industry-specific output.

  • Prices: Prices of specific services and goods, e.g., medical care, gasoline.

  • Employment: Job numbers in specific industries.

• Macroeconomic Concerns: National output and income metrics.

  • GDP growth, overall price levels, employment rates.

The Method of Economics

Positive vs. Normative Economics

• Positive Economics: Studies economic behavior objectively without judgments.

• Normative Economics: Evaluates outcomes and prescribes action based on values.

Key Features of Positive Economics

• Descriptive Economics: Collecting data on real-world phenomena.

• Economic Theory: Models relationships between variables and their consequences.

Theories and Models

• Models: Simplified representations of complex realities.

• Ockham’s Razor: The principle of not including unnecessary elements in models.

• Ceteris Paribus: Holding other variables constant to focus on specific relationships.

Common Pitfalls in Economic Theory

• Post Hoc Fallacy: Mistakenly correlating sequence with causation.

• Fallacy of Composition: Assuming what is true for a part is true for the whole.

Empirical Economics

• Definition: Using data to test economic theories.

• Data sources: Collected by government and private institutions.

Economic Policy Criteria

Key Criteria for Outcomes

• Efficiency: Producing what people want at minimal cost.

• Equity: Fairness in economic outcomes.

• Economic Growth: Increase in the total output of an economy.

• Stability: Steady output with low inflation and full resource employment.

Review Terms and Concepts

• Ceteris Paribus

• Descriptive Economics

• Economic Growth

• Economic Theory

• Economics

• Efficiency

• Efficient Market

• Empirical Economics

• Equity

• Fallacy of Composition

• Industrial Revolution

• Macroeconomics

• Microeconomics

• Model

• Normative Economics

• Ockham’s Razor

• Opportunity Cost

• Positive Economics

• Post Hoc, Ergo Propter Hoc

• Stability

• Sunk Costs

• Variable

Appendix: How to Read and Understand Graphs

Basic Concepts

• Graphs: Two-dimensional representations of data.

• Time Series Graph: Illustrates changes of a single variable over time.

• Cartesian Coordinate System: Represents relationships between two variables.

  • X-axis: Horizontal line.

  • Y-axis: Vertical line.

  • Origin: Point where axes intersect.

  • Y-intercept: Value of Y when X is 0.

Understanding Slope

• Positive Slope: Indicates a positive relationship.

• Negative Slope: Indicates a negative relationship between variables.

• Example: Upward slope signifies that consumption can exceed income.