Chapter 1
Introducing the Economic
Way of Thinking
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Lecture Slides
Economics for Today
Irvin B. Tucker
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What will you learn in this chapter?
- You will be introduced to fundamental concepts of the economic way of thinking
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What is the economic way of thinking?
- A logical reasoning process for organizing your 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 is the
economic 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 us to do?
- It forces us to make choices
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Unlimited wants
Scarcity
Society Chooses
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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?
Land
Labor
Capital
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Land
Labor
Capital
Entrepreneurship organizes
resources to produce goods
and services
Exhibit 1 Three Categories of Resources
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What is a
land 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 entrepreneurship?
- Creative ability of individuals to seek profits by taking risks and combining resources to produce innovative products
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What is capital?
- The physical plants, machinery, and equipment used to produce other goods, that do not directly satisfy human wants
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What is
financial capital?
- The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital
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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 the
model-building process?
- Problem identification
- Model development
- Testing a theory
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Identify the problem
Develop a model based
on simplified assumptions
Collect data, test the model, and
formulate a conclusion
Exhibit 2 The Steps in the Model-Building Process
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What conclusion can we make?
- If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What are two common pitfalls in understanding how the economy works?
failing to understand the ceteris paribus assumption
confusing association with causation
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What is
ceteris paribus?
- A Latin phrase that means that while certain variables can change, “all other things remain unchanged”
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What assumption is always made when testing a model?
- ceteris paribus
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What conclusion can we make?
- a theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied
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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?
- We cannot always assume that when one event follows another, the first caused the second
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Why can economists disagree?
- The answer requires understanding the difference between positive and normative economics
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What is
positive economics?
- An analysis limited to statements that are verifiable
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How can economists disagree using positive analysis?
- Economists can agree that event A causes event B, but disagree over the assumption that event A will occur
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What is
normative economics?
- An analysis based on value judgment
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What conclusion can we make?
- When opinions or points of view are not based on facts, they are scientifically untestable
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Exhibit 3 Average Yearly Salary Offers for Selected Majors, 2014
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