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ECONOMICS? 1
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Objectives
Scarcity
All economic questions arise because we are unable to
satisfy all our wantsbecause we face scarcity.
Economics is the social science that studies the choices
that individuals, businesses, governments, and societies
make as they cope with scarcity.
Definition of Economics
Microeconomics
Microeconomics is the study of choices made by
individuals and businesses, and the influence of
government on those choices.
Macroeconomics
Macroeconomics is the study of the effects on the
national and global economy of the choices that
individuals, businesses, and governments make.
Three Big Microeconomic Questions
Macroeconomics seeks to
explain differences in the
standard of living across
countries.
Macroeconomics also
seeks to explain the rate at
which the standard of
living changes.
Three Big Macroeconomic Questions
Microeconomic Tradeoffs
The three microeconomic questions become sharper
when we think in terms of tradeoffs.
What? Tradeoffs arise when people choose how to
spend their incomes, when governments choose how to
spend their tax revenues, and when businesses choose
what to produce.
The Economic Way of Thinking
Microeconomic Tradeoffs
How? Tradeoffs arise when businesses choose among
alternative production technologies.
For Whom? Tradeoffs arise when choices change the
distribution of buying power across individuals.
Government redistribution of income from the rich to the
poor creates the big tradeoffthe tradeoff between
equality and efficiency.
The Economic Way of Thinking
Macroeconomic Tradeoffs
Standard of Living Tradeoffs arise when we choose
between current consumption and activities that increase
our standard of living.
Activities such as saving and investing, education, and
research increase future production and consumption
possibilities, which increases the standard of living.
The Economic Way of Thinking
Macroeconomic Tradeoffs
An Output-Inflation Tradeoff arises when policymakers
choose how much inflation to endure in order to maintain a
high level of production.
An output-inflation tradeoff arises because a policy
action that lowers inflation also lowers output and a policy
action that boosts output increases inflation.
The Economic Way of Thinking
Opportunity Cost
Thinking about a choice as a tradeoff emphasizes cost as
an opportunity forgone.
The highest-valued alternative that we give up to get
something is the opportunity cost of the activity chosen.
The Economic Way of Thinking
Social Science
Economics is a social science.
Economists distinguish between two types of statements:
What ispositive statements
What ought to benormative statements
A positive statement can be tested by checking it against
facts
A normative statement cannot be tested.
Economics: A Social Science
Social science
The task of economic science is to discover positive
statements that are consistent with what we observe in the
world and that enable us to understand how the economic
world works.
This task is large and breaks into three steps:
Observation and measurement
Model building
Testing models
Economics: A Social Science
Model Building
An economic model is a description of some aspect of
the economic world that includes only those features of
the world that are needed for the purpose at hand.
Economics: A Social Science
Testing Models
An economic theory is a generalization that summarizes
what we think we understand about the economic choices
that people make and the performance of industries and
entire economies.
A theory is a bridge between a model and reality. It is a
proposition about which model works.
Economics: A Social Science
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