economics is a social science that studies human behavior and institutional arrangements in societies that influence the processes by which relatively scarce resources are allocated to alternative uses
social science and decision science components of economics
positive analysis Answers the question “What is?” or “ What will be? ”
Positive Versus Normative Analysis
normative analysis Answers the question “What ought/should/ could/would to be ?”
Table 1.1 COMPARING POSITIVE AND NORMATIVE QUESTIONS Positive Questions Normative Questions • If the government increases the minimum wage, how many workers will lose their jobs? • Should the government increase the minimum wage? • If two office-supply firms merge, will the price of office supplies increase? • Should the government block the merger of two office-supply firms? • How does a college education affect a person’s productivity and earnings? • Should the government subsidize a college education? • How do consumers respond to a cut in income taxes? • Should the government cut taxes to stimulate the economy? • If a nation restricts shoe imports, who benefits and who bears the cost? • Should the government restrict imports?
THE ECONOMIC WAY OF THINKING Four elements of the economic way of thinking: 1 Use Assumptions to Simplify Economists use assumptions to make things simpler and focus attention on what really matters. 2 Isolate Variables— Ceteris Paribus Economic analysis often involves variables and how they affect one another.
A measure of something that can take on different values.
The Latin expression meaning other variables being held fixed.
THE ECONOMIC WAY OF THINKING 3 Think at the Margin Economists often consider how a small change in one variable affects another variable and what impact that has on people’s decision making.
A small, one-unit change in value.
4 Rational People Respond to Incentives A key assumption of most economic analysis is that people act rationally, meaning that they act in their own self-interest .
Building a Foundation: Economics and Individual Decisions Market : An arrangement or institution that brings together buyers and sellers of a good or service.
Marginal analysis : Analysis that involves comparing marginal benefits and marginal costs.
Three important ideas:
People are rational
People respond to economic incentives
Microeconomics and Macroeconomics Microeconomics The study of how households and businesses make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, economic growth National income etc.
FIGURE 2.5 Corn and Wheat Production in Ohio and Kansas
TABLE 2.1 Production Possibility Schedule for Total Corn and Wheat Production in Ohio and Kansas POINT ON PPF TOTAL CORN PRODUCTION (MILLIONS OF BUSHELS PER YEAR) TOTAL WHEAT PRODUCTION (MILLIONS OF BUSHELS PER YEAR) A 700 100 B 650 200 C 510 380 D 400 500 E 300 550
laissez-faire economy (free market) Literally from the French: “allow [them] to do.” An economy in which individual people and firms pursue their own self-interests without any central direction or regulation.
market The institution through which buyers and sellers interact and engage in exchange.
Some markets are simple and others are complex, but they all involve buyers and sellers engaging in exchange. The behavior of buyers and sellers in a laissez-faire economy determines what gets produced, how it is produced, and who gets it.