copyright © 2010 pearson addison-wesley. all rights reserved. chapter 1 the nature of economics

Copyright © 2010 Pearson Addison-Wesley. All rights reserved.

Chapter 1

The Nature of Economics


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Chapter Outline

• The Power of Economic Analysis• Defining Economics• Microeconomics vs. Macroeconomics• Rational Self-Interest Assumption• Economics as a (Social) Science• Positive versus Normative Economics


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Did You Know That ...

• Economics is one of the fastest-growing college majors?

• During the past 10 years, the number of students majoring in economics at U.S. colleges has increased by 40%?

• Economics majors typically land higher paying jobs than other majors?


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Economics as a major

2008 college grad starting salaryQuestion: Why some degrees pay more

than others?

2010 college grad starting salary1. Engineering2. Economics

http://www.walletpop.com/blog/2010/05/10/the-10-most-profitable-college-majors/


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• The economic way of thinking is a framework to analyze solutions to economic problems.

– How much time to study

– Choosing which courses to take

– Whether troops should be sent abroad

The Power of Economic Analysis


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The Power of Economic Analysis (cont'd)

• The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world.

• Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.


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The Power of Economic Analysis (cont'd)

• Economic analysis is a way of thinking about all decisions.

– Your education, career, financing your home, family

– Your involvement in the business world, or in politics as a voter

– Why is an education a “decision”? What is a decision?

• Incentives– Rewards for engaging in a particular activity


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Defining Economics

• Economics

– The study of how people allocate their limited resources to satisfy their unlimited wants

– The study of how people make choices

– ECON 2301: Emphasizes critical thinking & quantitative analysis

– Lee: Practical knowledge with real world applications


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Defining Economics (cont'd)

• Resources– Things used to produce other things to satisfy

people’s wants

• Wants– What people would buy if their incomes were

unlimited

– Economics focuses on this contrast


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Defining Economics (cont'd)

• With limited income (resources), people must make choices to satisfy their wants.

• We never have enough of everything, including time, to satisfy our every desire.


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Microeconomicsversus Macroeconomics

• Microeconomics

– The study of decision making undertaken by individuals (or households) and by firms

– Like looking though a microscope to focus on the smaller parts of the economy

• Decision of a worker to work overtime or not

• A family’s choice of having a baby

• An individual firm advertising


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Microeconomicsversus Macroeconomics (cont'd)

• Macroeconomics

– The study of the behavior of the economy as a whole

– Deals with economywide phenomena• The national unemployment rate

• The level of national income

• The national government’s budget deficit

• Macroeconomics deals with aggregates, or totals—such as total output in an economy.

• Modern economic theory blends micro and macro concepts.


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The Economic Person:Rational Self-Interest

• Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain.

• Rationality Assumption

– The assumption that people do not intentionally make decisions that would leave them worse off


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The Economic Person:Rational Self-Interest (cont'd)

• Questions

– Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics?

• Drink & drive

• Fail a test

• Skip classes

• Commit suicide


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• Responding to incentives

– Rationality and the use of incentives• Positive incentives (gold stars; “better life”)

• Negative incentives (penalties)

– Making choices• Balancing cost and benefits


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• Defining self-interest

– The pursuit of one’s goals, does not always mean increasing one’s wealth

• Prestige

• Friendship

• Love


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Example: The Perceived Value of Gifts

• The perceived value of gifts

– Often, the recipient of the gift places a value on it far less than the market value.

– Should we substitute gift certificates ($$$) for physical gifts?


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Economics as a Science

• Models or Theories

– Simplified representations of the real world used as the basis for predictions or explanations

• A map is the quintessential model

– Models we will use:• Production possibilities curve (Chapter 2)

• Supply and demand diagram (Chapter 3)


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Which would you prefer if you want to find your way to the Curlew parking lot?

Real Arial ViewSimple Map view

Or: Drive 2 miles, turn right on Ocean Dr.; drive 2,400 ft., turn right on Sand dollar Blvd.; drive 300 ft., turn right on Curlew Dr.; hit the brake


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Economics as a Science (cont'd)

• Ceteris Paribus Assumption[KAY-ter-us PEAR-uh-bus]

– Nothing changes except the factor or factors being studied.

– “Other things constant”

– “Other things equal”


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Economics as a Science (cont'd)

• Economics is an empirical science.

– A “science” with a Nobel prize.

– We try to understand the real world.

– Real-world data is used to evaluate the usefulness of a model.

– “Life is not what it first seems …” so economics

• Trains our critical thinking skill

• Requires some quantitative skills in addition to verbal


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Positive versus Normative Economics

• Positive Economics– Purely descriptive statements or scientific

predictions; “If A, then B,” a statement of what is

– We focus mostly positive economics in this course

• Normative Economics– Analysis involving value judgments; relates to

whether things are good or bad, a statement of what ought to be


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Myth #1: Economics stinks

• Economics is about explaining why and how things happen the way they do.

• Things are often NOT they seem to be.• Can you handle the (hidden) truth? Many

can’t…

copyright © 2010 pearson addison-wesley. all rights reserved. chapter 1 the nature of economics

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