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Introducing the

Economic Way of Thinking

Economics for Today by Irvine Tucker, 5 th edition2008 South-Western College Publishing

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What will you learnin this chapter?

You will be acquaintedwith the foundation of theeconomic way of thinking

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What is the economicway of thinking?

A logical framework for organizing your thoughtsand understandingeconomics

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What are some

examples?Can you prove there is noperson worth a trillion dollars?

Why would you purchasemore Coca-Cola when theprice increases?

How can you explain therelationship between theSuper Bowl winner and

changes in the stock market?

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What are the 3 buildingblocks in the economicway of thinking?

scarcity & choicemodel building

pitfalls of economicreasoning

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What is theeconomic problem?

Providing for peopleswants and needs in a

world of scarcity

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What is meantby scarcity?

The condition in whichwants are forever greater than the available supplyof time, goods, andresources

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What does scarcityforce us to do?

It forces us tomake choices

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What are resources?

The basic categoriesof inputs used toproduce goods andservices

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What are the threecategories of resources?

LandLabor Capital

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What is aland resource?

A shorthand expressionfor any natural resource

provided by nature

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What is labor?

The mental and physicalcapacity of workers toproduce goods and services

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What is capital?The physical plants,

machinery, andequipment used toproduce other goods,they do not directlysatisfy human wants

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What isfinancial capital?

The money used topurchase capital.Financial capital by itself

is not productive, it is apaper claim on capital

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What isentrepreneurship?

Creative labor of individuals that enablesthem to seek profits bycombining resources

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LandLand Labor Labor CapitalCapital

Entrepreneurship organizesresources to produce goodsand services

Entrepreneurship organizesresources to produce goodsand services

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What is economics?The study of how society

chooses to allocate itsscarce resources inorder to satisfy unlimitedwants and needs

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What ismacroeconomics?

The branch of economicsthat studies decision-making for the economyas a whole

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What ismicroeconomics?

The branch of economicsthat studies decision-making by a single

individual, household, firm,industry, or government

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What is aneconomic model? A

simplified description of reality used tounderstand and predictthe relationshipsbetween variables

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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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What is thescientific method?

Problem identificationModel development

Testing a theory

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What conclusioncan we make?

If the evidence supportsthe model, theconclusion is to acceptthe model. If not, themodel is rejected

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What assumption isalways made when

testing a model?ceteris paribus

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What isceteris paribus? A Latin phrase that

means that while certainvariables can change,all other things remainunchanged

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What is an example

of ceteris paribus?If the price of new Fordcars decrease, andeverything else stays thesame, consumers will

buy more, but if other variables change, wecannot make a prediction

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What is the differencebetween associationand causation?

We cannot always assumethat when one eventfollows another, the firstcaused the second

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What are the two

common pitfalls inunderstanding howthe economy works?failing to understand theceteris paribus assumptionconfusing association withcausation

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What conclusioncan we make?

A theory cannot be testedlegitimately unless itsceteris paribusassumption is satisfied

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Why do economistsforecasts differ?Because using the same

methodology,economists can agreethat event A causes

event B, but disagreeover the assumptionthat event A will occur

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Why do someeconomists disagree?

The answer lies inunderstanding thedifference betweenpositive and normativeeconomics

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What ispositive economics? A n analysis limited

to statements

that are verifiable

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What conclusioncan we make?

When opinions or points of view are not based onfacts, they arescientifically untestable

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END