Sunday, October 5, 2008

Chapter 1

Chapter 1  - The Nature and Method of Economics

Economics The social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants (ie high standard of living)

Economic Perspective Economic way of thinking

Scarcity of Choice

No free lunch – ultimately there is a cost to society in terms of resources, labor etc

Opportunity costs are the goods and services that were sacrificed to produce an item/.do something

Rational Behavior

Individuals act in rational self-interest

Look to increase utility – pleasure, happiness, well being

May change when costs/benefits change

Marginalism – benefits and costs

Marginal analysis – comparing marginal benefits relative to marginal costs ie the marginal cost of buying a Honda over a Hyundai means that you won’t be driving a piece of shit (increased utitility)

Keep in mind the marginal cost includes the marginal cost of NOT buying something else.  Ie you could buy a Hyundai but take the money you saved and pimp it out and then you could possibly have a higher utility

If marginal costs outweigh marginal benefits then you are getting too much of a good thing

Theoretical Economics – process of deriving theories and principles

Use interrelated facts to develop a cause-effect hypothesis

From these theories you can derive principles that govern policy

Other things equal assumption

Assume that all other variables are controlled when making a generalization


Simplifications that omit irrelevant facts, mean that

Policy Economics

Creation of policies based on economic theories/laws.  The goal is stated , the policy options are decided and then it is implemented and evaluated

Economic Goals

1.       Economic Growth – Produce more/better goods and have a higher standing of living

2.      Full employment

3.       Economic efficiency – max fulfillment of wants using the available resources

4.       Price-level stability – avoid inflation/deflation

5.       Economic Freedom – Guarantee that businesses, workers  and consumers have a high degree of freedom in their economic activities

6.       Equitable distribution of Income – Insure that no people are extremely poor while other people are

7.       Economic Security – provide for sick/elderly/poor

8.       Balance of trade – seek a reasonable balance of trade among countries


The Economy as a whole or subdivisions thereof


Specific economic unites ie a specific company or product

Positive and    kmnl Economics

Positive Economics – focuses on the cause-effect relationships, avoids value judgements

Normative Economics – incorporates value judgements ie. Republican vs Democrat fiscal policy, what should be the end result

Pitfalls to Sound Reasoning

Biases, Loaded Terminology, Definitions (Econ definition of a word may be different from the common usage of a word), Fallacy of Composition (Assumption that what is true for one individual is true for the whole)

Causation Fallacies

Post Hoc fallacy – correlation does not indicate causation

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