Roadmap for Economics. What is Economics? The Social Science concerned with the efficient use of...

Roadmap for Roadmap for EconomicsEconomics

What is Economics?What is Economics?

The Social Science concerned The Social Science concerned

with the with the efficientefficient use of use of limited or limited or

scarce resourcesscarce resources to achieve to achieve

maximum satisfactionmaximum satisfaction of human of human

material wants.material wants.

EconomicsEconomics……studies the allocation of studies the allocation of scarce resources in response to scarce resources in response to unlimited wants.unlimited wants.

……is about choice.is about choice.

Society is forced to choose because Society is forced to choose because resources are scarce.resources are scarce.

√ Economics for CitizenshipEconomics for Citizenship• Well informed citizens will vote Well informed citizens will vote intelligently intelligently • Well informed politicians will choose Well informed politicians will choose wisely among alternativeswisely among alternatives√ Professional and Personal ApplicationProfessional and Personal Application• Businessmen need an understanding of Businessmen need an understanding of economy economy • Problems are examined from social Problems are examined from social rather than personal viewpointrather than personal viewpoint

Why Study Economics?Why Study Economics?

• Scarcity and ChoiceScarcity and Choice

• Rational BehaviorRational Behavior

• Marginal Thinking: Marginal Thinking:

Costs and BenefitsCosts and Benefits

The Economic PerspectiveThe Economic Perspective

… …is a unique way of thinking is a unique way of thinking about economic issuesabout economic issues

ScarcityScarcity

Scarcity - Scarcity - When There Is Not Enough When There Is Not Enough

For Everyone – Someone SuffersFor Everyone – Someone Suffers

TheoriesTheories

FactsFacts

Policy EconomicsPolicy Economics

Theoretical EconomicsTheoretical Economics

Economic Way of ThinkingEconomic Way of Thinking

Descriptive EconomicsDescriptive Economics

√ √ Based on factsBased on facts —observable and —observable and verifiable behavior of certain data or verifiable behavior of certain data or subject mattersubject matter

√ √ Economists Economists examine behaviorexamine behavior of of individuals and institutions engaged in the individuals and institutions engaged in the production, exchange, and consumption production, exchange, and consumption of goods and services. of goods and services.

Economic Way of ThinkingEconomic Way of Thinking

√ √ Task of analysisTask of analysis is to systematically is to systematically arrange, interpret, and generalize upon factsarrange, interpret, and generalize upon facts

√ √ Principles and theories Principles and theories bring order and bring order and meaningmeaning to facts by tying them together, putting to facts by tying them together, putting them in correct relationship to one another and them in correct relationship to one another and generalizing.generalizing.

√ √ Principles are Principles are expressed as the tendenciesexpressed as the tendencies of typical, or average consumers, workers, or of typical, or average consumers, workers, or business firmsbusiness firms

Economic Way of ThinkingEconomic Way of Thinking

Economic Principles (laws, models)Economic Principles (laws, models)

√ √ Three Generalizations:Three Generalizations:• ““Other things equal” assumption Other things equal” assumption —controlling all variables except one—controlling all variables except one• AbstractionsAbstractions—do not mirror the —do not mirror the complexity of real worldcomplexity of real world• Graphic ExpressionsGraphic Expressions—models used —models used to show theoryto show theory

Economic Way of ThinkingEconomic Way of Thinking

Economic Principles (laws, models)Economic Principles (laws, models)

Economic Way of ThinkingEconomic Way of Thinking

√ √ Applied EconomicsApplied Economics that recognizes that recognizes the principles and data which can be used the principles and data which can be used to formulate policies.to formulate policies.

√ √ Determining a Determining a course of actioncourse of action to to resolve a problem or to further a nation’s resolve a problem or to further a nation’s economic goals.economic goals.

Economic Way of ThinkingEconomic Way of Thinking

Policy EconomicsPolicy Economics

The Economic LandscapeThe Economic Landscape

MacroMacroeconomics: looks at economy as a economics: looks at economy as a whole and its basic subdivisions such as whole and its basic subdivisions such as government, business and households. government, business and households. Macro looks at totals or aggregates to Macro looks at totals or aggregates to examine the “big picture”.examine the “big picture”.

MicroMicroeconomics: looks at specific units or economics: looks at specific units or segments of the economy, a particular segments of the economy, a particular firm, household or the government. firm, household or the government. Micro looks at the “trees not the forest”.Micro looks at the “trees not the forest”.

NORMATIVENORMATIVE Economics… involves Economics… involves

value judgments. It is concerned with value judgments. It is concerned with

HOW IT SHOULD BE!HOW IT SHOULD BE!

ECONOMIC GOALSECONOMIC GOALS

POSITIVE POSITIVE Economics… collects and Economics… collects and

presents facts. It avoids value judgments presents facts. It avoids value judgments

Positive economics concerns WHAT IS —Positive economics concerns WHAT IS —

what the economy is really like.what the economy is really like.

Three Basic QuestionsThree Basic Questions

1. What?1. What?

What goods and services will be What goods and services will be produced and offered for sale, produced and offered for sale,

and in what quantities?and in what quantities?

Three Basic QuestionsThree Basic Questions

2. How?2. How?

How will the goods and services How will the goods and services be produced?be produced?

Three Basic QuestionsThree Basic Questions

3. For Whom?3. For Whom?

Who will consume the goods and Who will consume the goods and services which are produced?services which are produced?

Two Primary Two Primary

Economic ObjectivesEconomic Objectives

Equity-fairness

Efficiency-best use

Technological or productive efficiency: getting the greatest quantity of output from the resources that are being used —least cost!

Allocative efficiency: choosing the most valuable mix of outputs to produce—what society wants!

EfficiencyEfficiency

The Spectrum of The Spectrum of

Economic SystemsEconomic Systems

CommandCommand

and and

ControlControl

Laissez-FaireLaissez-Faire

Free MarketsFree MarketsMixedMixed

““The Invisible Hand”The Invisible Hand”

Adam Smith described in Adam Smith described in The Wealth of The Wealth of

NationsNations, how the , how the invisible handinvisible hand of the of the

marketplace leads the economy to marketplace leads the economy to

produce an efficient variety of goods produce an efficient variety of goods

and services, with efficient production and services, with efficient production

methods as well. methods as well.