Homework – Day 1 • Read all of Chapter 1. As you read, answer the following questions. • 1. Define economics. • 2. Explain the “economic way of thinking,” including definitions of scarcity, opportunity cost, rational self-interest, utility, marginal benefits, marginal costs, marginal analysis, and the ways these concepts are used to understand decisionmaking. • 3. Describe how economists use the scientific method to create models of complex economic behaviors. • 4. Explain the ceteris paribus assumption and its importance in economics. • 5. List 8 widely accepted economic goals in the United States. • 6. Explain the difference between microeconomics and macroeconomics. • 7. Explain the difference between positive economics and normative economics. What is economics? • The study of how we use resources to achieve the maximum satisfaction of economic wants. • So what’s the problem? • Resources are scarce. • Economic wants are unlimited – we can’t have it all. Scarcity and Choice • Because resources are limited and have alternate uses, economists say that they are scarce, that is, we must make choices on how to use them. • Choosing to use them for one thing means we cannot use them for another. • Are there any resources that are not scarce? Scarcity and Choice • The cost of making theses choices (sacrificing the alternative use of the resources) is known as the opportunity cost of making that choice. It is the cost of the next best thing that you could have done with the same resources. • Opportunity costs include the actual monetary cost of a choice, but they also include time and forgone opportunities. Scarcity and Choice • Questions? • What is your opportunity cost for taking this class? • What is the opportunity cost of going to college? • What if you were Lebron James? Rational Behavior • Individuals seek to maximize their utility (satisfaction, well-being, etc.) • In doing so they behave rationally rather than randomly. • Does this mean that we are all selfish? – No! –Why not? Marginalism • Economists focus on activity on the margins. • Marginal analysis is the comparison of marginal benefits and marginal costs. • Marginal benefits and costs: the benefit (utility gained) or cost of consuming or producing one more of something. Marginalism • Marginal benefit always involves the marginal cost of forgoing something else. • We consume or produce too much of something when its marginal cost is greater than its marginal benefit. Economic Methodology • Economics relies on the scientific method. – Observation of facts – Formulation of hypotheses – Testing hypotheses – Hypothesis >>> theory >>> law (or principle). – Theories and laws are then combined to create models. – Models are intentionally simplified explanations of how the real world works that makes it easier for us to understand. Usually, when it seems like there’s something wrong with the theory (or the model), it’s because we don’t understand the theory fully, or we are lacking some information about it. Very occasionally, you have stumbled on an unresolved question in the theory. Once in a generation, it’s because the theory is incorrect. (These are your Einsteins.) Ceteris Paribus • “All other things unchanged.” • Key assumption in economics. • For example, the law of demand states that, as the price for a product goes up, the quantity of it that people will buy will go down. • “All other things unchanged” is assumed. Generalizations • Economic theories and principles enable us to predict the probable effects of certain actions or events. • Generalizations mean that these principles hold true when applied to a large group of consumers or producers, even if they are not true for every individual. • It turns out the same thing is true in quantum physics! Macroeconomics vs. Microeconomics • Macroeconomics examines the economy as a whole or large sectors of it: –Total output –Total employment –The general level of prices –Etc. Macroeconomics vs. Microeconomics • Microeconomics examines specific economic units or small parts of the economy –Individuals –Firms –Industries –Etc. Positive vs. Normative Economics • Positive: Statements about the way things are. • Normative: Statements about the way things should be. Homework • Answer Chapter 1 Study Questions #1, 2, 4, 10, & 11. • Read the Chapter 1 Appendix and answer Appendix Study Questions #2, 3, 4, 7, & 8.