Chapter 1: The Nature and Method of
Economics
Objectives of chapter 1:
• Economic perspective
• Economic goals
• Differences between microeconomics and
macroeconomics
• Positive and normative analysis
• Resource categories
• Three basic economic decisions
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I. Economic Perspective
• Scarcity
– Resources are limited.
• Find 10 resources which are limited.
– Human needs are unlimited.
•
• Choice
Tell your 3 most important needs to the class.
– People make choices because they can not choose everything they
want.
• Tell 2 cases in which you want to choose two things but you can choose only one
thing.
– When you choose one thing, you must abandon another thing.
• Tell the class what you have abandoned to be here.
• Opportunity cost
– The cost of something is what you give up to get it.
There is no free lunch!
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II. Economic Goals (a)
• Economic growth
– To produce more and better goods & services, which means to
develop higher standard of living.
– What is GDP? How is it measured? What does the number
indicate?
• Full employment
– To provide stable jobs for all citizens who are willing and able to
work.
– What is unemployment rate? How is it measured? What does the
number indicate?
• Economic efficiency
– Achieve the maximum full filament of wants using the available
productive resources.
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II. Economic Goals (b)
• Price level stability
– To avoid large upswing and downswing in the general price level,
that is avoid inflation and deflation.
• Economic freedom
– To guarantee that business, worker, and customers have high
degree of freedom in their economic activities.
• Equitable distribution of income
– To ensure that no group of citizen faces poverty while most
others enjoy abundance.
• Economic security
– To provide for those who are chronically ill, disable, laid off,
aged, or otherwise unable to earn minimal levels of income.
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II. Economic Goals (c)
• Balance of trade
– To seek a reasonable overall balance with the rest of the world
in international trade and financial transactions.
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III. Macroeconomics and
Microeconomics
• Macroeconomics
– To examine the economy as a whole or its basic subdivisions or
aggregates sectors.
– To speak of such economic measures as total output, total
employment, total income, aggregate expenditures and the
general level of prices in analyzing various economic problems.
• Microeconomics
– To look at specific economic units, the economist observe the
detail of an economic unit or very small segment of the economy.
– To talk about individual industry, firm, household.
– To measure the price of specific product, the revenue of
particular firm, government entity or family.
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IV. Positive and Normative Economics
• Positive economics
– To focus on facts and cause-effect relationships.
– Try to establish scientific statements about economic behavior
and deal with what the economic is actually like.
– Avoid value judgments and include description, theory
development and theory testing.
• Normative economics
— Value judgments about what the economy should be like.
— Expression of support for particular economic policies.
— Source of debate among economists and policy makers.
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V. Resource Categories (a)
There are 4 important resources as the following:
1. Land: include all natural resources such as arable
land, forests, mineral and oil deposits and water
resources.
2. Capital (capital goods or investment goods): include
all manufactured aids used in producing consumer
goods and services such as tools, machinery,
equipment, factory storage, transportation and
distribution facilities.
3. Labor: the physical and mental of individual available
and usable in producing goods and service such as
teacher, professional football player, accountant…
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V. Resource Categories (b)
There are 4 important resources as the following:
4. Entrepreneur ability: special human resource, distinct
from labor. The entrepreneur perform several
function as:
– To be an innovative person: take the initiative in
combining the resource of land, capital and
labor(factor of production).
– To be a decision maker: make basic business
policy decision.
– To be an innovator: commercialize new products,
new production technique or new form of
business organization.
– To be a risk bearer. `
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VI. Three Basic Economic Decisions
There are 3 main questions as the following:
1. What will be produced?: Decision must be made
about what to produce and how much of each item to
produce with the limited resources available. To
balance needs and want of various groups.
2. How will goods and services be produced?: Productive
methods that squeezed the most out of available
means allow the great possible material well-being
from limited resources.
3. To whom well goods and service be distributed?: to
know clearly about demand.
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Chapter 1 - Summary
Economic perspective: scarcity + unlimited wants = choice
-> opportunity cost
Economic goals: economic growth, full employment,
economic efficiency, price level stability, economic
freedom, equitable distribution of income, economic
security, balance of trade.
Macroeconomics and microeconomics
Positive and normative economics
Resource categories: land, capital, labor, entrepreneurial
ability
Three basic economic questions: What, How, To
Whom/where?
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