Principles of Economics
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
Chap. 1, Introduction to Economics
©1999 South-Western College Publishing
1
What is Economics??
A social science that deals
with how people use
scarce resources to
produce and distribute
goods and services
2
Scarcity, the Central
Theme of Economics
Scarcity means that
while we have
unlimited wants, our
resources are limited
3
Due to Scarcity, Choices
must be made
Economics deals with
how we make such
choices
4
What are the Factors of
Production? (resources)
• Land and natural
resources
• Labor
• Capital
• Entrepreneurship
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What is received
for resources?
• rent for land
• wages for labor
• interest for capital
• profit for entrepreneurship
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What is a
Natural Resource?
The lands, water, metals,
minerals, animals, and
other gifts of nature that are
available for producing
goods and services
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What is a
Renewable Resource?
Resources that can be
replenished
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What is a
Nonrenewable Resource?
Resources that cannot
be replenished
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What is Labor?
The physical and
intellectual effort of people
engaged in producing
goods and services
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What is Capital?
Manufactured goods used
to make and market
other goods and services
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Note the difference
between physical capital
and financial capital
(money)
12
What is Human Capital?
The knowledge and skills
acquired by labor,
principally through
education and training
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13
Who is an Entrepreneur?
A person who alone
assumes the risks and
uncertainties of a business
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14
Assumptions about
making choices
• Self interest motivation
• Rationality, weighing the
benefits and costs of
actions
15
Costs include the
opportunity costs
Opportunity costs, the
highest valued option
given up when a choice
is made
16
What are the benefits
and costs of taking
economics?
17
Benefits
• The economy is a part of our lives
• Better understanding of human
behavior
• More informed voter
• Relates to other fields of study
• Its fun!!!!
18
Costs
Its Difficult!!!
Less precision in the social sciences
Can be mathematical
19
What are the two ways of
looking at Economics?
Macroeconomics
Microeconomics
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What is
Macroeconomics?
Analyzes the behavior of
the economy as a whole
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What is
Microeconomics?
Analyzes the behavior of
firms and households
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22
Economics as a
“Science”
•Social sciences, difficult to
perform lab experiments of
theories
•Important to understand the
difference between positive
and normative economics
23
What is Positive
Economics?
A subset of economics that
analyzes the way the
economy actually operates
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24
What is Normative
Economics?
A subset of economics
founded on the value
judgements and leading
to assertions of what
ought to be
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25
BEWARE of the following pitfalls
as you study economics (added
material not in text)
• Correlation vs. causation
• Fallacy of composition
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Correlation vs. Causation
Two variables are correlated if
one variable changes when the
other variable changes.
 This does NOT mean that
changes in one variable
CAUSE changes in the other.
27
Examples: Correlation vs.
causation
A war breaks out in Timbuktu today
and the U.S. stock market falls—did
the war cause the market to fall?
The economy began growing in 1992
about the same time Clinton was
elected president. Does this mean that
the Clinton election improved the
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economy?
The Fallacy of Composition
The often mistaken belief that what
is true for a part is necessarily true
for the whole
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Examples of the Fallacy of
Composition
If one student stands up in class, they
can see the board better—so if all
students stand up will they all see
better?
If I had a million dollars, I am rich, so
if we all had a million dollars, would
be all be rich?
30
What is an
Economic Model?
An abstraction of an
economic reality
expressed in various ways
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What is the purpose of an
Economic Model?
To simplify the
complexity of our world
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What is Econometrics?
The use of statistics to
quantify and test
economic models
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What is one of the most
important assumptions in
model building?
Ceteris paribus
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What does Ceteris
Paribus mean?
After a variable changes
we assume that nothing
else will change
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What are the central
issues in economics?
• What gets produced?
• How is it produced?
• Who consumes what is
produced?
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2 major ways that
economies attempt to
answer these questions
• Command economies
• Market economies
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Command Economy
A central authority or agency
draws up a plan that establishes
what will be produced and when,
sets production goals, and
makes rules for distribution.
38
Market Economy
Individual people and firms
pursue their own self-interests
without any central direction or
regulation.
The central institution in these
economies: markets!
39
Markets
The institutions through which
buyers and sellers interact and
engage in exchange
Prices are determined in markets;
prices reflect what society is
willing to pay for something. 40
What is the
Resource Market?
A market where people
supply their resources land, labor, capital and
entrepreneurship
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What is the
Product Market?
The market where people
buy goods and services
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Important aspects of
market economies:
• Consumer sovereignty
• Free enterprise
• Distribution of output
decentralized
• Prices coordinate behavior
43
What is Consumer
Sovereignty?
Our choices as
consumers guide what
gets produced
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44
Most modern economies
are mixed systems
A mixture of free markets
with government
involvement
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http://www.yahoo.com
http://www.excite.com
http://www.lycos.com
http://www.helsinki.fi/WebEc/WebEc.html
http://www.bankamerica.com/econ_indicat
or/econ_indicator.html
©1999 South-Western College Publishing
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What is Economics?
What is the Resource Market?
What is the Product Market?
What is Macroeconomics?
What is Microeconomics?
What is Positive Economics?
What is Normative Economics?
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• What is the Fallacy of
Composition?
• What does Ceteris Paribus
mean?
• What is consumer
sovereignty?
48