Introducing the Economic

• MICROECONOMICS
•The study of individual units in the
economy
• MACROECONOMICS
•The study of economy as a whole or
aggregate.

©2005 South-Western College Publishing

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 BASIC ECONOMIC
CONCEPTS

• Scarcity
• Choice
• Opportunity cost

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 What is the
economic problem?
1.What to produce
2.How to produce
3.How much to produce
4.For whom to produce

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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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What are resources?
The basic categories
of inputs used to
produce goods and
services

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What are the four
categories of
resources?
Land
Labor
Capital
Entrepreneurship
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 Labor
Land Capital

Entrepreneurship organizes
resources to produce goods
and services

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What is economics?
The study of how
society chooses to
allocate its scarce
resources to the
production of goods
and services in order to
satisfy unlimited wants9
 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 level of
government 11
What is the purpose of
an economic model?
To forecast or predict
the results of various
changes in variables

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What assumption is
always made when
testing a model?
ceteris paribus

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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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 Why do some
economists disagree?
The answer lies in
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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 What is
normative economics?
An analysis based on
value judgement

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Key Concepts

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• What are the three building blocks in the
economic way of thinking?
• What is the economic problem?
• What is meant by scarcity?
• What are resources?
• What are the four categories of resources?
• What is entrepreneurship?
• What is economics?
• What is macroeconomics?
• What is microeconomics?
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• What is the scientific method?
• What assumption is always made
when testing a model?
• What is ceteris paribus?
• What is positive economics?
• What is normative economics?

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Summary

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Scarcity is the fundamental
economic problem that human
wants exceed the availability to time,
goods, and resources. Individuals
and society therefore can never
have everything they desire.

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Resources are factors of
production classified as land,
labor, and capital.
Entrepreneurship is a special
type of labor. An entrepreneur
combines resources to produce
innovative products.

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Economics is the study of how
individuals and society choose to
allocate scarce resources in order
to satisfy unlimited wants. Faced
with unlimited wants and scarce
resources, we must make choices
among alternatives.

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 Society
Chooses
Resources

Scarcity

Unlimited
wants
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Macroeconomics applies an
economy wide perspective that
focuses on such issues as inflation,
unemployment, and the growth rate
of the economy.

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Microeconomics examines
individual decision-making units
within an economy.
Microeconomics studies such
topics as a consumer’s response
to changes in the price of coffee
and the reasons for changes in the
market price of personal
computers.
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Models are simplified descriptions
of reality used to understand and
predict economic events. An
economic model can be stated
verbally or in a table, graph, or
equation. If the evidence is not
consistent with the model, the
model is rejected.

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 Collect data
and test
the model

Develop
a model based
on assumptions
Identify
the
problem 29
Ceteris paribus holds “all other
factors unchanged” that might
affect a particular relationship. If
this assumption is violated, a
model cannot be tested. Another
reasoning pitfall is to think
association means causation.

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Positive economics uses testable
statements. Often a positive
argument is expressed as an “if-the”
statement.
Normative economics is based on
value judgments or opinions and
uses words such as good, bad,
ought to, and ought not to.

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END
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