Chapter 1
Exploring Economics
CoreEconomics 2nd edition by Gerald W. Stone
Slides By: Debbie
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
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Chapter Outline
• What is Economics About?
• Key Ideas of Economics
• Adam Smith (1723 – 1790)
• Nobel Prize: Paul A. Samuelson
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Learning Objectives
• At the end of this chapter, the student will be
able to:
– Explain the scope of economics and economic
analysis
– Distinguish between microeconomics and
macroeconomics
– Describe how economists use models
– Describe the ceteris paribus assumption
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Learning Objectives
• At the end of this chapter, the student will be
able to:
– Discuss the difference between efficiency and
equity
– Recognize fundamental concepts of the
economic approach
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Economic Growth
• Economic growth is the focus of
political debate and government policy.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Economic Growth
• Small improvements make a significant
difference over the long term.
• Reducing the rate of annual economic growth
by one percentage point for the past 75 years
would cut our current standard of living in
half.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
What is Economics About?
• Economics analyzes human behavior from
the perspective of rationality.
• We assume that people respond to
incentives.
• This frames the economic perspective as it is
used to understand how people react to costs
and benefits.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Categories of Economic Theory
• Microeconomics is concerned with decisions
made by consumers, workers, and firms.
– Decisions made within the marketplace usually
promote efficiency.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Categories of Economic Theory
• Macroeconomics focuses on the broader
issues we face as a nation.
– Fluctuations of the business cycle create
recessions, unemployment, and periods of
inflation.
– Monetary and fiscal policy
measures are used to
smooth out
these fluctuations.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Model Building
• Economic analysis uses a stylized approach.
• Models typically are accompanied by the
ceteris paribus assumption.
• Models are crafted from new insights, and
they are tested against empirical realities.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Equity vs. Efficiency
• Efficiency deals with
how well
resources are
used and allocated.
• Equity deals with
questions of fairness.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
What is Economics About?
• Economics is separated into two broad
categories: microeconomics and
macroeconomics.
• Microeconomics deals with individuals,
firms, and industries and how they
make decisions.
• Macroeconomics focuses on broader
economic issues such as inflation,
employment and unemployment, and
economic growth.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
What is Economics About?
• Economics uses a stylized approach,
creating simple models holding all other
relevant factors constant.
• Economists and policymakers often
confront the tradeoff between efficiency
and equity. Economists have much to
say about efficiency.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Try It!
• Economists would say that governments are
concerned with economic growth because:
– A. this is the primary way that countries compete
with one another.
– B. it is only through economic growth that
countries can increase the amount of money they
have.
– C. economic growth is the primary determinant of
the overall standard of living.
– D. it is possible for political leaders to claim that
economic growth is always strong, since there is
no way of measuring it.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Try It!
• Economists would say that governments are
concerned with economic growth because
– A. this is the primary way that countries compete
with one another.
– B. it is only through economic growth that
countries can increase the amount of money they
have.
– C. economic growth is the primary determinant of
the overall standard of living.
• Correct!
– D. it is possible for political leaders to claim that
economic growth is always strong, since there is
no way of measuring it.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Key Ideas of Economics
• Choice and scarcity force tradeoffs.
• Opportunity costs dominate our lives.
• Rational thinking
requires thinking
at the margin.
– Even hummingbirds
demonstrate the behavior
of comparing costs and
benefits.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Key Ideas of Economics
• People follow incentives.
• Markets are efficient.
– They encourage the provision of goods at the
lowest possible opportunity cost.
• Government must deal with market failure.
• Information is important.
• Specialization and trade improve our wellbeing.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Key Ideas of Economics
• Productivity determines our standard of
living.
– The wealth of the economy is determined not by
the number of jobs, but by the value of what
people produce when they are on the job.
• Government can smooth fluctuations in the
overall economy.
– Macroeconomic policy is designed to address the
problems of recession, unemployment, and
inflation.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Chapter Summary
• What Is Economics About?
• Economics is about almost everything.
Economic analysis
can be usefully applied
to the process of
decision-making.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Chapter Summary
• What Is Economics About?
• Microeconomics deals with consumers,
workers, and firms.
• Macroeconomics focuses on the broader
economic issues confronting the nation.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Chapter Summary
• What Is Economics About?
- Economists build models using a stylized
approach.
- This usually incorporates the ceteris paribus
assumption.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone
Chapter Summary
What Is Economics About?
 Policymakers confront a
tradeoff between
efficiency and equity.
 Economists rely on the
framework of rational behavior
to analyze how people respond to
incentives and to relative costs and benefits.
© 2011 Worth Publishers ▪ CoreEconomics
▪ Stone