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Chapter 1 Introducing the Economic
Way of Thinking• Key Concepts• Summary• Practice Quiz
©2004 Thomson/South-Western
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What do the first two chapters do?
They introduce you to a foundation of
economic knowledge
* Return to previous slide while in slide show mode
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What is meant by scarcity?
The condition in which wants are forever greater than the available supply of time, goods, and resources
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LandLandLaborLabor
CapitalCapital
Entrepreneurship organizesresources to produce goodsand services
Entrepreneurship organizesresources to produce goodsand services
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What is entrepreneurship?
The creative ability of individuals to seek profits by combining resources to produce innovative products.
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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
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What is macroeconomics?
The branch of economics that studies decision-making for the economy as a whole
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What is microeconomics?
The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government
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What is aneconomic model?
A simplified description of reality used to understand and predict the relationship between 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 are the steps in model building?• Problem identification• Model development• Testing a theory
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Identify the problemIdentify the problem
Develop a model basedon simplified assumptionsDevelop a model based
on simplified assumptions
Collect data andtest the model
Collect data andtest the model
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What isceteris paribus?
A Latin phrase that means that while certain variables can change, “all other things remain unchanged”
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What is the difference between association
and causation?We cannot always assume that when one event follows another, the first caused the second
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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
when 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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Scarcity is the fundamental economic problem that human wants exceed the availability to time, goods, and resources. Individuals and society therefore can never have everything they desire.
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Resources are factors of production classified as land, labor, and capital.
Entrepreneurship is a special type of labor. An entrepreneur combines resources to produce innovative products.
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Economics is the study of how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives.
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Macroeconomics applies an economy wide perspective that focuses on such issues as inflation, unemployment, and the growth rate of the economy.
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Microeconomics examines individual decision-making units within an economy.
Microeconomics studies such topics as a consumer’s response to changes in the price of coffee and the reasons for changes in the market price of personal computers.
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Models are simplified descriptions of reality used to understand and predict economic events. An economic model can be stated verbally or in a table, graph, or equation. If the evidence is not consistent with the model, the model is rejected.
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Ceteris paribus holds “all other factors unchanged” that might affect a particular relationship. If this assumption is violated, a model cannot be tested. Another reasoning pitfall is to think association means causation.
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Positive economics uses testable statements. Often a positive argument is expressed as an “if-the” statement.
Normative economics is based on value judgments or opinions and uses words such as good, bad, ought to, and ought not to.