Chapter 1

Definition of economics the study of how individuals and

societies use limited resources to satisfy unlimited wants.

Fundamental economic problem

scarcity. individuals and societies must

choose among available alternatives.

Economic goods, free goods, and economic bads economic good (scarce good) - the

quantity demanded exceeds the quantity supplied at a zero price.

free good - the quantity supplied exceeds the quantity demanded at a zero price.

economic bad - people are willing to pay to avoid the item

Economic resources land

natural resources, the “free gifts of nature”

labor the contribution of human beings

capital plant and equipment this differs from “financial capital”

entrepreneurial ability

Resource payments

Economic Resource Resource payment

land rent

labor wages

capital interest

entrepreneurial ability profit

Rational self-interest individuals select the choices that

make them happiest, given the information available at the time of a decision.

self-interest vs. selfishness

Positive and normative analysis

positive economics attempt to describe how the economy

functions relies on testable hypotheses

normative economics relies on value judgements to

evaluate or recommend alternative policies.

Economic methodology scientific method

observe a phenomenon, make simplifying assumptions and

formulate a hypothesis, generate predictions, and test the hypothesis.

Simplifying assumptions ceteris paribus – holding

everything else constant abstraction in economics

used to simplify reality

Logical fallacies fallacy of composition

occurs when it is incorrectly assumed that what is true for each and every individual in isolation is true for an entire group.

post hoc, ergo propter hoc fallacy (association as causation) occurs when one incorrectly assumes

that one event is the cause of another because it precedes the other.

Microeconomics vs. macroeconomics

microeconomics - the study of individual economic agents and individual markets

macroeconomics - the study of economic aggregates

Algebra and graphical analysis direct relationship

Direct relationship

Inverse relationship

Linear relationships A linear relationship possesses a

constant slope, defined as:

Linear relationships (continued) If an equation can be written in the

form: Y=mX+b, then:m = slope, andb = Y - intercept.