Learning ObjectivesLearning Objectives

LO1: Define economics, microeconomics, and macroeconomics.

LO2: Identify John Maynard Keynes, Alfred Marshall, and Adam Smith, and their influence in economics.

LO3: State and explain the problem of scarcity and its relation to opportunity cost.

LO4: Explain how a rational decision maker applies the cost–benefit principle.

LO5: State how three pitfalls can undermine rational economic decisions.

LO6: Explain how data are used to evaluate economic theories.

LO7: Distinguish positive economics from welfare economics.

LO8: Define an economic naturalist.

© 2012 McGraw-Hill Ryerson Limited Ch1 -1

LO7: Distinguish positive economics LO7: Distinguish positive economics from normative or welfare economicsfrom normative or welfare economics

Positive economics model has two dimensions

It offers cause-and-effect explanations of economic relationships

It has an empirical dimension

Other economic models are examples of normative or welfare economics.

Such models overlap with positive economic models

But they incorporate valuation of different possible outcomes. They lead to normative statements about what "ought" to be: say, what is best, what is most socially efficient, or what is optimal

Hence they have an element which cannot be tested with empirical evidence

© 2012 McGraw-Hill Ryerson Limited Ch1 -2LO7: Positive and Normative Economics

LO7: Distinguish positive economics LO7: Distinguish positive economics from normative or welfare economicsfrom normative or welfare economics

What will be produced, how much and for whom?

 Since each person’s income helps determine his or her demand for the goods and services a society produces, the type and amount of goods produced depends on the distribution of incomes.

Production and distribution are thus simultaneously determined.

But what distribution of income would be fair?

Could we reallocate rewards so as to produce a fairer distribution of consumption?

© 2012 McGraw-Hill Ryerson Limited Ch1 -3LO7: Positive and Normative Economics

LO7: Distinguish positive economics LO7: Distinguish positive economics from normative or welfare economicsfrom normative or welfare economics

What will be produced, how much and for whom?

 Command is another possibility as it can be implemented on a small scale, as in ancient kingdoms or modern family enterprises; on a somewhat larger scale within corporations; or on an immense scale, such as in the central planning of the former Soviet Union.

 Although central planning is rare today, so are pure market economies.

Modern industrial countries are more properly described as mixed economies, meaning that goods and services are allocated by a combination of markets, regulation, and other forms of collective control.

© 2012 McGraw-Hill Ryerson Limited Ch1 -4LO7: Positive and Normative Economics

LO7: Distinguish positive economics LO7: Distinguish positive economics from normative or welfare economicsfrom normative or welfare economics

What will be produced, how much and for whom?

Efficiency: Obtaining the maximum possible output from a given amount of inputs

Equity: A state of impartiality and fairness

Economist tries to balance between efficiency and equity.

© 2012 McGraw-Hill Ryerson Limited Ch1 -5LO7: Positive and Normative Economics