Chapter 1
The Nature
of Economics
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Chapter Outline
• The Power of Economic Analysis
• Defining Economics
• Microeconomics vs. Macroeconomics
• Rational Self-Interest Assumption
• Economics as a (Social) Science
• Positive versus Normative Economics
1-2
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Did You Know That ...
• Economics is one of the fastest-growing
college majors?
• During the past 10 years, the number of
students majoring in economics at U.S.
colleges has increased by 40%?
• Economics majors typically land higher
paying jobs than other majors?
1-3
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Economics as a major
2008 college grad starting salary
Question: Why some degrees pay more
than others?
2010 college grad starting salary
1. Engineering
2. Economics
http://www.walletpop.com/blog/2010/05/10/the-10-most-profitablecollege-majors/
1-4
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The Power of Economic Analysis
• The economic way of thinking is a
framework to analyze solutions to economic
problems.
– How much time to study
– Choosing which courses to take
– Whether troops should be sent abroad
1-5
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The Power of Economic
Analysis (cont'd)
• The economic way of thinking gives you the
power—the power to reach informed
conclusions about what is happening in the
world.
• Economic analysis helps you make better
decisions, and increases your understanding
when watching or reading the news on the
Web.
1-6
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The Power of Economic
Analysis (cont'd)
• Economic analysis is a way of thinking
about all decisions.
– Your education, career, financing your home,
family
– Your involvement in the business world, or in
politics as a voter
– Why is an education a “decision”? What is a
decision?
• Incentives
– Rewards for engaging in a particular activity
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1-7
Defining Economics
• Economics
– The study of how people
allocate their limited
resources to satisfy their
unlimited wants
– The study of how people
make choices
– ECON 2301: Emphasizes critical
thinking & quantitative analysis
– Lee: Practical knowledge with
real world applications
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1-8
Defining Economics (cont'd)
• Resources
– Things used to produce other things to satisfy
people’s wants
• Wants
– What people would buy if their incomes were
unlimited
– Economics focuses on this contrast
1-9
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Defining Economics (cont'd)
• With limited income (resources), people
must make choices to satisfy their wants.
• We never have enough of everything,
including time, to satisfy our every desire.
1-10
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Microeconomics
versus Macroeconomics
• Microeconomics
– The study of decision making undertaken by
individuals (or households) and by firms
– Like looking though a microscope to focus on the
smaller parts of the economy
• Decision of a worker to work overtime or not
• A family’s choice of having a baby
• An individual firm advertising
1-11
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Microeconomics
versus Macroeconomics (cont'd)
• Macroeconomics
– The study of the behavior of the economy as a
whole
– Deals with economywide phenomena
• The national unemployment rate
• The level of national income
• The national government’s budget deficit
• Macroeconomics deals with aggregates, or totals—such as
total output in an economy.
• Modern economic theory blends micro and macro concepts.
1-12
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The Economic Person:
Rational Self-Interest
• Economists assume that individuals act as
if motivated by self-interest and respond
predictably to opportunities for gain.
• Rationality Assumption
– The assumption that people do not intentionally
make decisions that would leave them worse off
1-13
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The Economic Person:
Rational Self-Interest (cont'd)
• Questions
– Does the fact that some people make apparently
irrational choices invalidate the rationality
assumption in economics?
• Drink & drive
• Fail a test
• Skip classes
• Commit suicide
1-14
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The Economic Person:
Rational Self-Interest (cont'd)
• Responding to incentives
– Rationality and the use of incentives
• Positive incentives (gold stars; “better life”)
• Negative incentives (penalties)
– Making choices
• Balancing cost and benefits
1-15
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The Economic Person:
Rational Self-Interest (cont'd)
• Defining self-interest
– The pursuit of one’s goals, does not always
mean increasing one’s wealth
• Prestige
• Friendship
• Love
1-16
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Example:
The Perceived Value of Gifts
• The perceived value of gifts
– Often, the recipient of the gift places a value on
it far less than the market value.
– Should we substitute gift certificates ($$$) for
physical gifts?
1-17
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Economics as a Science
• Models or Theories
– Simplified representations of the real world used
as the basis for predictions or explanations
• A map is the quintessential model
– Models we will use:
• Production possibilities curve (Chapter 2)
• Supply and demand diagram (Chapter 3)
1-18
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Which would you prefer if you want to find
your way to the Curlew parking lot?
Simple Map view
Real Arial View
Or: Drive 2 miles, turn right on Ocean Dr.; drive 2,400 ft., turn right on Sand
dollar Blvd.; drive 300 ft., turn right on Curlew Dr.; hit the brake
1-19
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Economics as a Science (cont'd)
• Ceteris Paribus Assumption
[KAY-ter-us PEAR-uh-bus]
– Nothing changes except the factor or factors
being studied.
– “Other things constant”
– “Other things equal”
1-20
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Economics as a Science (cont'd)
• Economics is an empirical science.
– A “science” with a Nobel prize.
– We try to understand the real world.
– Real-world data is used to evaluate the
usefulness of a model.
– “Life is not what it first seems …” so economics
• Trains our critical thinking skill
• Requires some quantitative skills in addition to verbal
1-21
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Positive versus
Normative Economics
• Positive Economics
– Purely descriptive statements or scientific
predictions; “If A, then B,” a statement of what
is
– We focus mostly positive economics in this
course
• Normative Economics
– Analysis involving value judgments; relates to
whether things are good or bad, a statement of
what ought to be
1-22
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Myth #1: Economics stinks
• Economics is about explaining why and how
things happen the way they do.
• Things are often NOT they seem to be.
• Can you handle the (hidden) truth? Many
can’t…
1-23
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