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CHAPTER 1
The Economic Approach
I. What Is Economics About?
A.
Scarcity and Choice
1. Scarcity and choice are the two essential ingredients of an economic
topic.
2. Goods are scarce because desire
for them far outstrips their availability on nature.
a.
Scarce goods are called economic goods.
3.
Scarcity forces us to choose among available alternatives.
B.
Scarcity and Poverty
1.
Scarcity and poverty are not the same thing.
a. Absence of poverty implies some
basic level of need has been met.
b. An absence of scarcity would
imply that all of our desires for goods are fully satisfied.
2. We may someday eliminate poverty,
but scarcity will always be with us.
C.
Scarcity Necessitates Rationing
1. Every society must have a method
to ration the scarce resources among competing uses.
a.
Various factors can be used to ration (first-come, first served).
b.
In a market setting, price is used to ration goods and resources.
c. When price is used, the good or
resource is allocated to those willing to give up “other things” in order to
obtain ownership rights.
D.
Competition Results from Scarcity
1. Competition is a natural
outgrowth of the need to ration scarce goods.
2. Changing the rationing method
used will change the form of competition, but it will not eliminate competitive
tactics.
II.
The Economic Way of Thinking
A.
Guideposts to Economic Thinking
1.
The use of scarce resources to produce a good is always costly.
a. Someone must give up something if
we are to have more scarce goods.
(1)
The highest valued alternative that must be sacrificed is the opportunity cost
of the choice.
2.
Individuals choose purposefully; therefore they will economize.
a. Economizing:
gaining a specific benefit at the least possible cost.
3.
Incentives Matter
a. As personal benefits (costs) from
choosing an option increase, other things constant, a person will be more (less)
likely to choose that option.
4.
Economic reasoning focuses on the impact of marginal changes.
a. Decisions will be based on
marginal costs and marginal benefits (utility).
5.
Since information is scarce, uncertainty is a fact or life.
6. In addition to their initial
impact, economic events often generate secondary events that may be felt only
with the passage of time.
7. The value of a good is subjective
and varies with individual preferences.
8. The test of an economic theory is
its ability to predict and explain events in the real world.
III.
Positive and Normative Economics
A.
Positive Economics
1.
Positive Economics: The
scientific study of “what is” among economic relationships.
a.
Positive economic statements can be proved either true or false.
(1)
Ex: The inflation rate rises when the money supply is increased
B.
Normative Economics
1.
Normative Economics:
Judgements about “what ought to be” in economic matters.
b.
Normative statements cannot be proved true or false.
(1)
Ex: The inflation rate should be lower.
IV. Pitfalls to Avoid in
Economic Thinking
A.
Pitfalls
1.
Violation of the ceteris paribus condition.
a.
Ceteris paribus is a Latin term meaning “other things constant.”
b.
Used when the effect of one change is being described, recognizing that
if other things changed, they also could affect the result.
2.
Association is not causation.
a.
Statistical association alone cannot establish causation.
3.
Fallacy of composition
a.
The fallacy of composition is the erroneous view that what is true for
the individual (or the part) will also be true for the group (or the whole).
b.
Microeconomics focuses on narrowly defined units, while macroeconomics is
focuses on highly aggregated units.
(1)
One must beware of the fallacy of composition when shifting from micro- to
macro-units.
V.
Economics as a Career
A.
Economics as a Career
1. Graduating with a major in
economics provides a variety of choices.
a.
Graduate school in economics, law, or business.
b. Students who don’t pursue
graduate school have many job opportunities
2. A graduate degree in economics is typically required to pursue a career as a professional economist.
