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Introducing the Economic Way of

Thinking

Economics for Today by Irvin Tucker, 6th edition©2009 South-Western College Publishing

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What will I discover in this book?

The world is full of economics problems requiring more powerful tools than just common sense

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What will I learn in this chapter?

You will be acquainted with the foundation of the economic way of thinking

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What is the economic way of thinking?

A logical framework for organizing thoughts and understanding economics

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What are some examples?

Can you prove there is no person worth a trillion dollars?

Why would you purchase more Coca-Cola when the price increases?

How can you explain the relationship between the Super Bowl winner and changes in the stock market?

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What are the 3 building blocks in the economic

way of thinking?• scarcity & choice• model building• pitfalls of economic reasoning

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What is theeconomic problem?

Providing for people’s wants and needs in a

world of scarcity

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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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What does scarcity force me to do?It forces you to make choices

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What are resources?The basic categories of inputs used to produce goods and services

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What are the three categories of resources?

LandLaborCapital

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What is aland resource?

A shorthand expression for any natural resource provided by nature

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What is labor?

The mental and physical capacity of workers to produce goods and services

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What is capital?The physical plants, machinery, and equipment used to produce other goods

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What isfinancial capital?The money used to purchase capital

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What is entrepreneurship?

Creative labor of individuals that enables them to seek profits by combining 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 economics?The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs

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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 government

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What is an economic model?

A simplified description of reality used to understand and predict the relationships 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 is thescientific method?• 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

Test the model and formulate a conclusionTest the model and

formulate a conclusion

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What conclusion can I make?

If evidence supports the model, the conclusion is accepted, if not, the model is rejected

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What assumption is always made when I

test a model?

ceteris paribus

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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 an example of ceteris paribus?

If the price of new Ford cars decrease, and everything else stays the same, consumers will buy more, but if other variables change, we cannot make a prediction

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What is the difference between association

and causation?You cannot always assume that when one event follows another, the first caused the second

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What are some pitfalls I could fall into?

You could fail to understand the ceteris paribus assumption

You could confuse association with causation

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What conclusion can I make?

You cannot test a theory unless its ceteris paribus assumption is satisfied

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Why do economists forecasts differ?

Because using the same methodology, economists can agree that event A causes event B, but disagree over the assumption that event A will occur

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Why do some economists disagree?Because of the difference between positive and normative economics

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What ispositive economics?

An analysis limited to statements that are verifiable

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What isnormative economics?

An analysis based on value judgement

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What conclusion can I make?

When opinions or points of view are not based on facts, they are scientifically untestable

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END