01 introducing the economic way of thinking

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01 introducing the economic way of thinking

  1. 1. Chapter 1Introducing the Economic Way of Thinking • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles: Howwould you there the Why you Can can prove purchase we explain is relationship between the more Coca-Cola when the no person worth a Super Bowl winner and price increases? trillion dollars?changes in the stock market? 2
  3. 3. What is the Economic Problem? Providing for people’s wants and needs in a world of scarcity* Return to previous slide while in slide show 3
  4. 4. What is meant by Scarcity?The condition in which wants are forever greater than the available supply of time, goods, and resources 4
  5. 5. What does Scarcity force us to do? It forces us to make choices 5
  6. 6. What are Resources?The basic categories of inputs used to produce goods and services 6
  7. 7. What are the threecategories of Resources? Land Labor Capital 7
  8. 8. What is a Land Resource?A shorthand expression for any natural resource provided by nature 8
  9. 9. What is Labor?The mental and physical capacity of workers to produce goods and services 9
  10. 10. What is Capital?The physical plants, machinery, and equipment used to produce other goods 10
  11. 11. What isFinancial Capital?The money used to purchase capital 11
  12. 12. What isEntrepreneurship?The creative ability of individuals to seek profits by combining resources to produce innovative products 12
  13. 13. Labor LaborLandLand Capital Capital Entrepreneurshiporganizes Entrepreneurship organizes resourcesto produce goods resources to produce goods andservices and services 13
  14. 14. What is Economics?The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants 14
  15. 15. What is Macroeconomics?The branch of economics that studies decision- making for the economy as a whole 15
  16. 16. What is Microeconomics?The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government 16
  17. 17. What is the Scientific Method?• Problem identification• Model development• Testing a theory 17
  18. 18. What is the purpose ofan Economic Model? To forecast or predict the results of various changes in variables 18
  19. 19. Identify the problem Identify the problem Develop a model based Develop a model basedon simplified assumptionson simplified assumptions Collect data and Collect data and test the model test the model 19
  20. 20. What assumption isalways made when testing a model? Ceteris Paribus 20
  21. 21. What is Ceteris Paribus?A Latin phrase that means that while certain variables can change, “all other things remain unchanged” 21
  22. 22. What is the difference between Association and Causation?We cannot always assume that when one event follows another, the first caused the second 22
  23. 23. What isPositive Economics? An analysis limited to statements that are verifiable 23
  24. 24. What isNormative Economics? An analysis based on value judgement 24
  25. 25. Key Concepts 25
  26. 26. • What is the Economic Problem?• What is meant by Scarcity?• What are resources?• What are the three categories of Resources?• What is Entrepreneurship?• What is Economics?• What is Macroeconomics?• What is Microeconomics? 26
  27. 27. • What is the Scientific Method?• What assumption is always made when testin• What is Ceteris Paribus?• What is the purpose of model building?• What is Positive Economics?• What is Normative Economics? 27
  28. 28. Summary 28
  29. 29. Scarcity is the fundamentaleconomic problem that human wantsexceed the availability to time,goods, and resources. Individuals andsociety therefore can never haveeverything they desire. 29
  30. 30. Resources are factors ofproduction classified as land, labor,and capital. Entrepreneurship is aspecial type of labor. Anentrepreneur combines resources toproduce innovative products. 30
  31. 31. Economics is the study of howindividuals and society choose toallocate scarce resources. In order tosatisfy unlimited wants. Faced withunlimited wants and scarce resources,we must make choices amongalternatives. 31
  32. 32. Society Chooses Resources ScarcityUnlimited wants 32
  33. 33. Macroeconomics applies aneconomy wide perspective that focuseson such issues as inflation,unemployment, and the growth rate ofthe economy. 33
  34. 34. Microeconomics examinesindividual decision-making unitswithin an economy. Microeconomicsstudies such topics as a consumer’sresponse to changes in the price ofcoffee and the reasons for changes inthe market price of personalcomputers. 34
  35. 35. Models are simplified descriptionsof reality used to understand andpredict economic events. An economicmodel can be stated verbally or in atable, graph, or equation. If theevidence is not consistent with themodel, the model is rejected. 35
  36. 36. Microeconomics examinesindividual decision-making unitswithin an economy.Microeconomics studies such topicsas a consumer’s response to changesin the price of coffee and the reasonsfor changes in the market price ofpersonal computers. 36
  37. 37. Microeconomics examinesindividual decision-making unitswithin an economy. Microeconomicsstudies such topics as a consumer’sresponse to changes in the price ofcoffee and the reasons for changes inthe market price of personalcomputers. 37
  38. 38. Collect data and test the model Develop a model based on assumptionsIdentify theproblem 38
  39. 39. Ceteris paribus holds “all otherfactors unchanged” that might affect aparticular relationship. If thisassumption is violated, a modelcannot be tested. Another reasoningpitfall is to think association meanscausation. 39
  40. 40. Use of positive versus normativeeconomic analysis is a major reason fordisagreement among economists.Positive economics uses testablestatements. Often a positive argument isexpressed as an “if-the” statement.Normative economics is based on valuejudgments or opinions and uses wordssuch as good, bad, ought to, and oughtnot to. 40
  41. 41. Chapter 1 Quiz ©2000 South-Western College Publishing 41
  42. 42. 1. Scarcity exists a. when people consume beyond their needs. b. only in rich nations. c. in all countries in the world. d. only in poor nations.C. No matter what economic system a country has, it is always faced with the problem of scarcity. 42
  43. 43. 2. Which of the following would eliminate scarcity as an economic problem? a. Moderation of people’s competitive instincts. b. Discovery of large new energy reserves. c. Resumption of steady productivity growth. d. None of the above because scarcity can not be eliminated.D. Because it is impossible to provide everyone with everything they want, we will always have scarcity. 43
  44. 44. 3. Which of the following is not a resource? a. Land. b. Labor. c. Money. d. Capital.C. Money is not a resource because it has no intrinsic value. Money that is used to make an investment is called financial capital. 44
  45. 45. 4. Economics is the study of a. how to make money. b. how to operate a business. c. people making choices because of the problem of scarcity. d. the government decision-making process.C. Economics is the study of how people must decide among alternatives to meet their wants and needs in this world of scarcity. 45
  46. 46. 5. Microeconomics approaches the study of economics from the viewpoint of a. individuals or specific markets. b. the operation of the Federal Reserve. c. economy wide effects d. the national economy.A. Microeconomics is the study of the decision- making process for individuals, business owners, and government. 46
  47. 47. 6. A review of the performance of the U.S. economy during the 1990’s is primarily the concern of a. macroeconomics. b. microeconomics. c. both macroeconomics and microeconomics. d. neither macroeconomics nor microeconomics.A. Macroeconomics is the study of the economy as a whole. 47
  48. 48. 7. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means thata. other relevant factors like consumer incomes must be held constant. b. the gasoline prices must first be adjusted for inflation. c. the theory is widely accepted, but cannot be accurately tested. d. consumers need for gasoline remains the same regardless of price. A. Anytime price changes we always make the assumption that nothing else changes. 48
  49. 49. 8. An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has a. confused association with and causation. b. misunderstood the ceteris paribus assumption. c. Used normative economics to answer a positive question. d. built an untestable model.A. Just because one action follows another, does not mean that the first caused the second. 49
  50. 50. 9. Which of the following is a statement of positive economics? a. The income tax system collects a lower percentage of the incomes of the poor. b. A reduction in the tax rates of the rich makes the tax system more fair. c. Taxes ought to be raised to finance health care. d. All of the above are primarily statements of positive economics. A. Positive economic statements are testable by facts and explain the world as it is without making value judgements. 50
  51. 51. 10. Which of the following is a statement of positive economics? a. An unemployment rate of greater than 8 percent is good because prices will fall. b. An unemployment rate of 7% is a serious problem. c. If the overall unemployment rate is 7%, black unemployment rates will average 15%. d. Unemployment is a more severe problem than inflation.C. Other answers are based on a value judgement concerning the relationship between black and white unemployment rates. 51
  52. 52. 11. Which of the following is a statement of normative economics? a. A minimum wage is good because it raises wages for the working poor. b. The minimum wage is supported by unions. c. The minimum wage reduces jobs for unskilled workers. d. The minimum wage encourages firms to substitute capital for labor.A. Even though the minimum wage reduces jobs for some working poor, it is a value judgement that the minimum wage is good for the economy overall. 52
  53. 53. 12. Select the normative statement that completes the following sentence: If the minimum wage is raised rapidly, then a. inflation increases. b. workers will gain their rightful share of total income. c. profits will fall. d. unemployment will rise. B. To say that workers have right to a certain part of total income entails a value judgement. 53
  54. 54. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 54
  55. 55. END 55

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