2000 South-Western College Publishing

1
 In this chapter, you will
learn to solve these eco
nomic puzzles:
How
Whycan we
would
Can you explain the
youthere
prove relati
purchase
is n
onship
more between
Coca-Cola
o person the Super
worth awhen Bo
trilliothe
wl winner and
price changes
increases?
n dollars? in the
stock market?
2
 What is the
Economic Problem?
Providing for peoples wan
ts and needs in a world of
scarcity

* Return to previous slide while in slide show

3
What is meant by Scar
city?
The condition in which want
s are forever greater than th
e available supply of time,
goods, and resources
4
What does Scarcity for
ce us to do?
It forces us to
make choices

5
What are Resources?
The basic categories of i
nputs used to produce
goods and services

6
What are the three categ
ories of Resources?
Land
Labor
Capital
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 What is a
Land Resource?
A shorthand expression fo
r any natural resource pr
ovided by nature

8
 What is Labor?
The mental and physical cap
acity of workers to produce
goods and services

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What is Capital?
The physical plants, m
achinery, and equip
ment used to produc
e other goods

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 What is
Financial Capital?
The money used to
purchase capital

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What is Entrepreneurs
hip?
The creative ability of i
ndividuals to seek pro
fits by combining res
ources to produce inn
ovative products
12
 Labor
Land Capital

Entrepreneurship organizes
resources to produce goods
and services

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 What is Economics?
The study of how society c
hooses to allocate its scar
ce resources to the produc
tion of goods and services
in order to satisfy unlimit
ed wants
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What is Macroeconomi
cs?
The branch of economics
that studies decision-ma
king for the economy as
a whole
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 What is Microeconomi
cs?
The branch of economics that
studies decision-making by
a single individual, househo
ld, firm, industry, or level of
government
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 What is the
Scientific Method?
Problem identification
Model development
Testing a theory

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What is the purpose of
an Economic Model?
To forecast or predict
the results of various
changes in variables

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 Identify the problem

Develop a model based

on simplified assumptions

Collect data and

test the model
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What assumption is al
ways made when testin
g a model?
Ceteris Paribus

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 What is
Ceteris Paribus?
A Latin phrase that means t
hat while certain variables
can change, all other thin
gs remain unchanged

21
What is the difference
between Association an
d Causation?
We cannot always assume t
hat when one event follow
s another, the first caused t
he second
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 What is
Positive Economics?
An analysis limited
to statements that a
re verifiable

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 What is
Normative Economics?
An analysis based on
value judgement

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Key Concepts

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 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?

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 What is the Scientific Method?
What assumption is always made whe
n testing a model?
What is Ceteris Paribus?
What is the purpose of model building
?
What is Positive Economics?
What is Normative Economics?

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Summary

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 Scarcity is the fundamental econ
omic problem that human wants exc
eed the availability to time, goods, an
d resources. Individuals and society t
herefore can never have everything t
hey desire.

29
 Resources are factors of produ
ction classified as land, labor, and c
apital. Entrepreneurship is a special
type of labor. An entrepreneur com
bines resources to produce innovati
ve products.

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 Economics is the study of how indi
viduals and society choose to allocate s
carce resources. In order to satisfy unli
mited wants. Faced with unlimited wan
ts and scarce resources, we must make
choices among alternatives.

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 Society
Chooses
Resources

Scarcity

Unlimited
wants
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 Macroeconomics applies an econo
my wide perspective that focuses on su
ch issues as inflation, unemployment, a
nd the growth rate of the economy.

33
 Microeconomics examines indivi
dual decision-making units within an
economy. Microeconomics studies su
ch topics as a consumers response to
changes in the price of coffee and the
reasons for changes in the market pric
e of personal computers.

34
 Models are simplified descriptions
of reality used to understand and predi
ct economic events. An economic mod
el can be stated verbally or in a table, g
raph, or equation. If the evidence is no
t consistent with the model, the model
is rejected.

35
 Microeconomics examines indi
vidual decision-making units within
an economy. Microeconomics studie
s such topics as a consumers respon
se to changes in the price of coffee a
nd the reasons for changes in the ma
rket price of personal computers.

36
 Microeconomics examines indivi
dual decision-making units within an
economy. Microeconomics studies su
ch topics as a consumers response to
changes in the price of coffee and the
reasons for changes in the market pric
e of personal computers.

37
 Collect data
and test
the model

Develop
a model based
on assumptions
Identify
the
problem 38
 Ceteris paribus holds all other fa
ctors unchanged that might affect a p
articular relationship. If this assumpti
on is violated, a model cannot be teste
d. Another reasoning pitfall is to think
association means causation.

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 Use of positive versus normative ec
onomic analysis is a major reason for di
sagreement among economists. Positive
economics uses testable statements. Oft
en a positive argument is expressed as a
n if-the statement. Normative econom
ics is based on value judgments or opini
ons and uses words such as good, bad,
ought to, and ought not to.

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Chapter 1 Quiz

2000 South-Western College Publishing 41

1. Scarcity exists
a. when people consume beyond their nee
ds.
b. only in rich nations.
c. in all countries in the world.
d. only in poor nations.
C. No matter what economic system a co
untry has, it is always faced with the p
roblem of scarcity.

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2. Which of the following would eliminate sc
arcity as an economic problem?
a. Moderation of peoples competitive insti
ncts.
b. Discovery of large new energy reserves.
c. Resumption of steady productivity grow
th.
d. None of the above because scarcity can
not be eliminated.
D. Because it is impossible to provide ev
eryone with everything they want, we
will always have scarcity.
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 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 in

trinsic value. Money that is used to make an i
nvestment is called financial capital.

44
 4. Economics is the study of
a. how to make money.
b. how to operate a business.
c. people making choices because of the p
roblem of scarcity.
d. the government decision-making proce
ss.
C. Economics is the study of how people must
decide among alternatives to meet their want
s and needs in this world of scarcity.

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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 decisi
on- making process for individuals, busin
ess owners, and government.

46
6. A review of the performance of the U.S. e
conomy during the 1990s is primarily the
concern of
a. macroeconomics.
b. microeconomics.
c. both macroeconomics and microeconom
ics.
d. neither macroeconomics nor microecon
omics.
A. Macroeconomics is the study of the ec
onomy as a whole.

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7. An economic theory claims that a rise in gas
oline prices will cause gasoline purchases to
fall, ceteris paribus. The phrase ceteris par
ibus means that
a. other relevant factors like consumer income
s must be held constant.
b. the gasoline prices must first be adjusted f
or inflation.
c. the theory is widely accepted, but cannot
be accurately tested.
d. consumers need for gasoline remains the s
ame regardless of price.
A. Anytime price changes we always make t
he assumption that nothing else changes.
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 8. An economist notices that sunspot activity
is high just prior to recessions and conclud
es that sunspots cause recessions. The econ
omist has
a. confused association with and causation.
b. misunderstood the ceteris paribus assum
ption.
c. Used normative economics to answer a p
ositive question.
d. built an untestable model.

A. Just because one action follows another, does

not mean that the first caused the second.
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9. Which of the following is a statement of po
sitive economics?
a. The income tax system collects a lower p
ercentage of the incomes of the poor.
b. A reduction in the tax rates of the rich m
akes the tax system more fair.
c. Taxes ought to be raised to finance healt
h care.
d. All of the above are primarily statement
s of positive economics.
A. Positive economic statements are testable
by facts and explain the world as it is with
out making value judgements.
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10. Which of the following is a statement of positi
ve economics?
a. An unemployment rate of greater than 8 per
cent is good because prices will fall.
b. An unemployment rate of 7% is a serious pr
oblem.
c. If the overall unemployment rate is 7%, blac
k unemployment rates will average 15%.
d. Unemployment is a more severe problem tha
n inflation.
C. Other answers are based on a value judgemen
t concerning the relationship between black an
d white unemployment rates.
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11. Which of the following is a statement of
normative economics?
a. A minimum wage is good because it rais
es wages for the working poor.
b. The minimum wage is supported by uni
ons.
c. The minimum wage reduces jobs for uns
killed workers.
d. The minimum wage encourages firms to
substitute capital for labor.
A. Even though the minimum wage reduces j
obs for some working poor, it is a value ju
dgement that the minimum wage is good fo
r the economy overall.
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12. Select the normative statement that comp
letes the following sentence: If the minimu
m 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.

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END

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