ECONOMICS 5e
Michael Parkin
CHAPTER
1
What is Economics?
Learning Objectives
• Define Economics
• Explain the five big questions that
economists seek to answer
• Explain eight ideas that define the economic
way of thinking
• Describe how economists go about their
work
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Learning Objectives
• Define Economics
• Explain the five big questions that
economists seek to answer
• Explain eight ideas that define the economic
way of thinking
• Describe how economists go about their
work
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A Definition of Economics
Define Economics
Society’s wants exceed the resources
available to satisfy them.
Rich and poor alike are faced with scarcity.
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A Definition of Economics
Economics is the science of choice — the
science that explains the choices that we
make and how those choices change as we
cope with scarcity.
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Learning Objectives
• Define economics
• Explain the five big questions that
economists seek to answer
• Explain eight ideas that define the economic
way of thinking
• Describe how economists go about their
work
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Five Big Economic Questions
What?
How?
When?
Where?
Who?
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What?
What goods and services are produced and
in what quantities?
Do we produce houses or camping vehicles?
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How?
How are goods and services produced?
Do we use humans or machines to produce the
goods we want?
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When?
When are goods and services produced?
Do we increase or decrease production?
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Where?
Where are goods and services produced?
Do we produce the goods in the United States
or in Canada?
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Who?
Who consumes the goods and services that
are produced?
Do we sell our goods to the wealthy, or the nonwealthy?
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Learning Objectives
• Define economics
• Explain the five big questions that
economists seek to answer
• Explain eight ideas that define the economic
way of thinking
• Describe how economists go about their
work
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Big Ideas of Economics
The questions give you a sense of what
economics is about.
The Big Ideas of Economics describe how
economists think about these questions and
seek answers to them.
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Big Ideas of Economics
IDEA 1
A choice is a tradeoff — we give up something
to get something else — and the highest valued
alternative we give up is the opportunity cost of
the activity chosen.
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Big Ideas of Economics
IDEA 2
We make choices in small steps, or at the
margin, and choices are influenced by
incentives.
• Marginal Benefit vs. Marginal Cost
• Incentives are inducements to take particular actions
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Big Ideas of Economics
IDEA 3
Voluntary exchange makes both buyers and
sellers better off, and markets are an efficient
way to organize exchange.
• Buyers receive goods or services.
• Sellers receive money.
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Big Ideas of Economics
IDEA 3 (cont.)
Markets are efficient because they ensure that
resources will be used where they are valued
most highly.
Alternative to Market Economy
Command Economy
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Big Ideas of Economics
IDEA 4
The market does not always work efficiently
and sometimes, government action is necessary
to overcome market failure and to lead to a
more efficient use of resources.
Market failure is a state in which the market
does not use resources efficiently.
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Big Ideas of Economics
IDEA 5
For the economy as a whole, expenditure equals
income equals the value of production.
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Big Ideas of Economics
IDEA 6
Living standards improve when production per
person increases.
This increase in output per person will enable more
people to own goods and services.
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Big Ideas of Economics
IDEA 7
Inflation occurs when the quantity of money
increases faster than production.
Inflation results from “too much money chasing too
few goods.”
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Big Ideas of Economics
IDEA 8
Unemployment can result from market failure
but some unemployment is productive.
• Unemployment rates vary.
• Some unemployment results from employees
searching for a suitable job and employers searching
for suitable workers.
• This unemployment improves productivity.
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Learning Objectives
• Define economics
• Explain the five big questions that
economists seek to answer
• Explain eight ideas that define the economic
way of thinking
• Describe how economists go about their
work
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What Economists Do
The economy can be looked at with either a
micro or a macro view.
Microeconomics vs. Macroeconomics
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What Economists Do
Microeconomics and Macroeconomics
Microeconomics is the study of individual
people and businesses and the interaction of
those decisions in markets.
Studies:
• Prices and Quantities
• Effects of government regulation and taxes
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What Economists Do
Microeconomics and Macroeconomics
Macroeconomics is the study of the national
economy and the global economy as a whole.
Studies:
• Average prices and total employment, income, and
production
• Effects of taxes, government spending, a budget
deficits on total jobs and incomes
• Effects of money and interest rates
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Economic Science
Economists attempt to discover an
explanation for how economic systems
work.
Economists distinguish between Positive
Statements and Normative Statements.
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Economic Science
Positive statements are about what is.
• Can be proven right or wrong.
• Can be tested by comparing it to facts.
Normative statements are about what ought
to be.
• Depend upon personal values and cannot be
tested.
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Economic Science
Objective
Discover and catalog positive statements that
are consistent with what we observe in the
world and that enable us to understand how the
economic world works.
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Economic Science
Steps
• Observation and Measurement
• Model Building
• Testing
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Obstacles and Pitfalls
in Economics
Unscrambling Cause and Effect
Ceteris Paribus
Fallacy of Composition
The statement that what is true of the parts is
true of the whole or what is true of the whole is
true of the parts.
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Obstacles and Pitfalls
in Economics
Post Hoc Fallacy
The error or reasoning that a first event causes a
second event because the first occurred before
the second.
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The End
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