Ch01 Introduction To Economics
Ch01 Introduction To Economics
Ch01 Introduction To Economics
CHAPTER
Objectives
After studying this chapter, you will be able to:
Definition of Economics
Scarcity
All economic questions arise because we are unable to satisfy all our wantsbecause we face scarcity.
Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity.
Definition of Economics
Microeconomics
Microeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices.
Macroeconomics Macroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.
Microeconomics seeks to understand what determines: What goods and services are produced How goods and services are produced For whom goods and services are produced Goods and services are the objects that people value and produce to satisfy wants.
Figure 1.2 shows the trends in what the U.S. economy has produced over the past 60 years.
It shows the decline of agriculture, mining, construction, and manufacturing, and the expansion of services.
Factors of production are the resources that businesses use to produce goods and services.
They are grouped into four categories:
Land
The gifts of nature that we use to produce goods and services are land. The work time and effort that people devote to producing goods and services is labor. The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.
The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are capital. The human resource that organizes land, labor, and capital is entrepreneurship.
Figure 1.3 shows a measure of the growth of human capital in the United States over the last centurythe percentage of the population that has completed different levels of education.
For Whom are Goods and Services Produced? Who gets the goods and services depends on the incomes that people earn. Land earns rent.
Labor earns wages. Capital earns interest.
The richest 20 percent earn almost 50 percent of total income while the poorest 20 percent earn only 4 percent of total income.
What Determines the Standard of Living? The standard of living is the level of consumption that people enjoy on the average and is measured by average income per person.
The cost of living is the amount of money it takes to buy the goods and services that a typical family consumes.
The cost of living in the United States is the number of dollars it takes to buy the goods and services that a typical family consumes.
Table 1.1 shows the price of a Big Mac in ten countries. The number of money units varies a lot, but the cost is similar in each country.
Country U.K U.S. Brazil S. Africa China France Russia Japan Chile Italy
Currency Pound Dollar Real Rand Yuan Franc Ruble Yen Peso Lira
Price 1.90 2.50 2.95 9.00 9.90 18.50 39.50 294 1,260 4,500
A rising cost of living is called inflation. A falling cost of living is called deflation.
Inflation brings a shrinking value of the dollar and deflation brings a rising value of the dollar.
Macroeconomics seeks to explain the forces that determine the cost of living and the inflation (or deflation) rate.
Why Does Our Economy Fluctuate? The business cycle is the periodic but irregular up-anddown movement in production and jobs in an economy.
During 2001, the U.S. economy entered a mild recessionproduction and jobs shrank.
During the 1990s, the U.S. economy enjoyed a prolonged expansionproduction and jobs increased. Figure 1.6 on the next slide illustrates the phases and turning points of a business cycle.
Why Does Our Economy Fluctuate? Economists remain unsure about the sources of economic fluctuations and about the actions that might be taken to smooth the economy. But in your study of macroeconomics, you will learn what economists have discovered about economic fluctuations.
Choices and Tradeoffs The economic way of thinking places scarcity and its implication, choice, at center stage.
You can think about every choice as a tradeoffan exchangegiving up one thing to get something else. The classic tradeoff is guns versus butter.
The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works.
This task is large and breaks into three steps:
Observation and measurement
Economists observe and measure economic activity, keeping track of such things as:
Quantities of resources Wages and work hours Prices and quantities of goods and services produced Taxes and government spending Quantities of goods and services bought from and sold to other countries
An economic model is a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand.
An economic theory is a generalization that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies.
A theory is a bridge between a model and reality. It is a proposition about which model works.
Economists cannot easily do experiments and most economic behavior has many simultaneous causes.
To isolate the effect of interest, economists use the logical device called ceteris paribus or other things being equal. Economists try to isolate cause-and-effect relationships by changing only one variable at a time, holding all other relevant factors unchanged.
Page 14 of the textbook lists twelve economic propositions that at least 70 percent of all economists polled agreed on.
WHAT IS ECONOMICS?
CHAPTER
THE END