Homework – Day 1
Read p. 4 - 8 in Chapter 1. As you read, answer the following questions.
• 1. Define economics.
• 2. Identify and explain the three elements of the economic perspective
(or the “economic way of thinking”) including definitions of scarcity,
opportunity cost, rational self-interest, utility, marginal benefits,
marginal costs, marginal analysis, and the ways these concepts are used
to understand decision-making.
• 3. Describe how economists use the scientific method to create models
of complex economic behaviors.
• 4. Explain the ceteris paribus (or “other things equal”)assumption and its
importance in economics.
• 5. Explain the difference between microeconomics and macroeconomics.
• 6. Explain the difference between positive economics and normative
economics.
What is economics?
• The study of how we use scarce resources to
achieve the maximum satisfaction of
economic wants.
• So what’s the problem?
• Resources are scarce.
• Economic wants are unlimited – we can’t have
it all.
Scarcity and Choice
• Because resources are limited and have
alternate uses, economists say that they are
scarce, that is, we must make choices on how
to use them.
• Choosing to use them for one thing means we
cannot use them for another.
• Are there any resources that are not scarce?
Scarcity and Choice
• The cost of making theses choices (sacrificing
the alternative use of the resources) is known
as the opportunity cost of making that choice.
It is the cost of the next best thing that you
could have done with the same resources.
• Opportunity costs include the actual monetary
cost of a choice, but they also include time
and forgone opportunities.
Purposeful Behavior
(Rational Self Interest)
• Individuals seek to maximize their utility
(satisfaction, well-being, etc.)
• In doing so they behave rationally rather
than randomly.
• Does this mean that we are all selfish?
– No!
–Why not?
Scarcity and Choice
• Questions?
• What is your opportunity cost for taking this
class?
• What is the opportunity cost of going to
college?
• What if you were Lebron
James?
Marginalism
• Economists focus on activity on the
margins.
• Marginal analysis is the comparison of
marginal benefits and marginal costs.
• Marginal benefits and costs: the benefit
(utility gained) or cost of consuming or
producing one more of something.
Marginal Analysis
• Marginal benefit always involves the
marginal cost of forgoing something
else.
• We consume or produce too much of
something when its marginal cost is
greater than its marginal benefit.
Economic Methodology
• Economics relies on the scientific method.
– Observation of facts
– Formulation of hypotheses
– Testing hypotheses
– Hypothesis >>> theory >>> law (or principle).
– Theories and laws are then combined to create
models.
– Models are intentionally simplified explanations of
how the real world works that makes it easier for
us to understand.
Ceteris Paribus
• “All other things unchanged.”
• Key assumption in economics.
• For example, the law of demand states
that, as the price for a product goes up,
the quantity of it that people will buy
will go down.
• “All other things unchanged” is
assumed.
Generalizations
• Economic theories and principles enable us to
predict the probable effects of certain actions
or events.
• Generalizations mean that these principles
hold true when applied to a large group of
consumers or producers, even if they are not
true for every individual.
• It turns out the same thing is true in quantum
physics!
Macroeconomics vs. Microeconomics
• Microeconomics examines specific
economic units or small parts of the
economy
–Individuals
–Firms
–Industries
–Etc.
Macroeconomics vs. Microeconomics
• Macroeconomics examines the economy
as a whole or large sectors of it:
–Total output
–Total employment
–The general level of prices
–Etc.
Positive vs. Normative Economics
• Positive: Statements about the way
things are.
• Normative: Statements about the
way things should be.
Homework
• Answer:
Chapter 1 Discussion Questions #1 - 3.
Chapter 1 AP Review Questions #1 - 4.