1.

What is Economics

Economics is the study of choice under conditions of scarcity. As individuals, and as a society, we have
unlimited desires for goods and services. Unfortunately, the resources—land; labor, and capital—
needed to produce those goods and services are scarce. Therefore, we must choose which desires to
satisfy and how to satisfy them. Economics provides the tools that explain those choices. The field of
economics is divided into two major areas. Microeconomics studies the behavior of individual
households, firms, and governments as they interact in specific markets. Macroeconomics, by contrast,
concerns itself with the behavior of the entire economy. It considers variables such as total output, total
employment, and the overall price level. Economics makes heavy use of models—abstract
representations of reality. These models are built with words, diagrams, and mathematical statements
that help us understand how the economy operates. All models are simplifications, but a good model
will have just enough detail for the purpose at hand. When analyzing almost any problem, economists
follow a four-step procedure in building and using economic models. This four-step procedure will be
introduced at the end of Chapter 3.

Simplifying assumption Any assumption that makes a model simpler without affecting any of its
important conclusions. Critical assumption Any assumption that affects the conclusions of a model in an
important way.