Chapter 1: The Nature &
Method of Economics
Society uses resources to produce goods & services
Production satisfies many economic wants and occurs
through organizational mechanism called economic
system or the economy.
Our economic wants far exceed the productive
capacity of limited and scarce resources
Therefore, the complete satisfaction of our economic
wants is impossible
Economics is the social science concerned with
the problem of using scarce resources to attain
the maximum fulfillment of society’s unlimited
wants
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The Economic Perspective
The economic perspective is “the
economic way of thinking”
Human & property resources are scarce
Goods & services produced with those
resources are also scarce
Scarcity limits our options, we must
make choices.
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Rational Behavior
Economics is grounded on the assumption of
“rational self-interest”
Achieve greatest satisfaction
Rational behavior: individuals make different
choices under different circumstances
Rational decisions change as costs and
benefits change
Self-interest behavior enables a person to
achieve personal satisfaction.
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Marginalism: Benefits & Costs
Economic perspective focuses on marginal
analysis, the comparison of marginal benefits
and marginal costs.
Marginal: “Extra”, “Additional”
Choices & decisions involve changes in the
existing state of affairs (status quo)
When making choices rationally, compare
marginal benefits vs. marginal costs.
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Marginal Benefit > Marginal Cost
Marginal Benefit = Marginal Cost: “At the Margin”
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Why Study Economics?
Economic Issues
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Unemployment
Inflation
Economic Growth
Taxation
Poverty
International Trade
Health Care
Pollution
Discrimination
Immigration
Education
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Why Study Economics?
Vital to Business
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An understanding of how to make economic
decisions and the operation of the economic
system enables business managers & executives
to increase profit.
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New technology
Mergers & Acquisitions
Hire/Fire Employees
Recessions
Inflation
Economics helps consumers and workers make
better buying, employment, & financial decisions
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Economic Methodology
Economics relies on the Scientific Method
Theoretical Economics: Process of deriving
economic theories and principles is
systematic, involves fact-gathering and
analysis  generalize
Economic theories, principles, and laws are
generalizations relating to economic behavior
or the economy itself, expressed as
“tendencies” of the typical consumer, worker,
or firm
Ceteris Paribus = “Other things being equal”
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Policy Economics
Recognizes that theories and data can
be used to formulate policies
Policies are courses of action on
economic principles
Policies are intended to resolve a
specific economic problem or further an
economic goal
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Economic Goals
Economic Growth: Produce better goods & services;
Higher SOL
Full Employment: Suitable jobs
Economic Efficiency: Maximize wants w/ available
Resources
Price-level Stability: Avoid Inflation & Deflation
Economic Freedom
Equitable Distribution of Income: Reduce Disparity
between Poverty & Abundance
Economic Security: Minimum Levels of Income
Balance of Trade: Overall balance w/ ROW in Trade
& Financial Transactions
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Macroeconomics
Macroeconomics examines the economy as a
whole or aggregates
Government, Household, Business Sectors
Aggregate: Collection of specific economic
units treated as one.
Macro seeks to obtain an overview
E.g.: Total Output, Employment, or Income;
Aggregate Expenditures; and General Level of
Prices
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Microeconomics
Microeconomics focuses on specific
units of the economy, observing details
of an economic unit, or small segment
of the economy
Individual Industry, Firm, or Household
E.g.: Price of Single Product, EE at
Single Firm, Revenue/Income of Single
Household
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Positive Economics (“What is”)
Positive economics focuses on facts and
cause-and-effect relationships
Avoids value judgments
Tries to establish scientific statements
about economic behavior
Deals w/ what economy is actually like.
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Normative Economics (“What
ought to be”)
Incorporates value judgments about
what economy should be like or what
particular policy actions should be
recommended to achieve desired goal.
Most of the disagreement among
economists involves normative, valuebased policy questions.
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Pitfalls to Sound Reasoning
Biases
Loaded Terminology
Definitions
Fallacy of Composition
Causation Fallacies
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Post Hoc Fallacy
Correlation v. Causation (p. 11)
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Chapter 1 Study Questions
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