Chapter 1 Exploring Economics CoreEconomics 2 nd edition by Gerald W. Stone 1 © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone Slides By: Debbie Evercloud

Chapter 1Exploring Economics

CoreEconomics 2nd edition by Gerald W. Stone

1

© 2011 Worth Publishers ▪ CoreEconomics ▪ StoneSlides By: Debbie Evercloud

• What is Economics About?

• Key Ideas of Economics

• Adam Smith (1723 – 1790)

• Nobel Prize: Paul A. Samuelson

Chapter Outline

© 2011 Worth Publishers ▪ CoreEconomics ▪ Stone

• At the end of this chapter, the student will be able to:– Explain the scope of economics and economic

analysis– Distinguish between microeconomics and

macroeconomics– Describe how economists use models– Describe the ceteris paribus assumption

Learning Objectives


• At the end of this chapter, the student will be able to:– Discuss the difference between efficiency and

equity– Recognize fundamental concepts of the

economic approach

Learning Objectives


Economic Growth

• Economic growth is the focus of political debate and government policy.


Economic Growth

• Small improvements make a significant difference over the long term.

• Reducing the rate of annual economic growth by one percentage point for the past 75 years would cut our current standard of living in half.


What is Economics About?

• Economics analyzes human behavior from the perspective of rationality.

• We assume that people respond to incentives.

• This frames the economic perspective as it is used to understand how people react to costs and benefits.


Categories of Economic Theory

• Microeconomics is concerned with decisions made by consumers, workers, and firms. – Decisions made within the marketplace usually

promote efficiency.


Categories of Economic Theory

• Macroeconomics focuses on the broader issues we face as a nation.– Fluctuations of the business cycle create

recessions, unemployment, and periods of inflation.

– Monetary and fiscal policy measures are used to smooth out these fluctuations.


Model Building

• Economic analysis uses a stylized approach.• Models typically are accompanied by the

ceteris paribus assumption.• Models are crafted from new insights, and

they are tested against empirical realities.


Equity vs. Efficiency

• Efficiency deals with how well resources are used and allocated.

• Equity deals with questions of fairness.



• Economics is separated into two broad categories: microeconomics and macroeconomics.

• Microeconomics deals with individuals, firms, and industries and how they make decisions.

• Macroeconomics focuses on broader economic issues such as inflation, employment and unemployment, and economic growth.



• Economics uses a stylized approach, creating simple models holding all other relevant factors constant.

• Economists and policymakers often confront the tradeoff between efficiency and equity. Economists have much to say about efficiency.


Try It!

• Economists would say that governments are concerned with economic growth because:– A. this is the primary way that countries compete

with one another.– B. it is only through economic growth that

countries can increase the amount of money they have.

– C. economic growth is the primary determinant of the overall standard of living.

– D. it is possible for political leaders to claim that economic growth is always strong, since there is no way of measuring it.


Try It!

• Economists would say that governments are concerned with economic growth because– A. this is the primary way that countries compete

with one another.– B. it is only through economic growth that

countries can increase the amount of money they have.

– C. economic growth is the primary determinant of the overall standard of living. • Correct!

– D. it is possible for political leaders to claim that economic growth is always strong, since there is no way of measuring it.


Key Ideas of Economics

• Choice and scarcity force tradeoffs.• Opportunity costs dominate our lives.• Rational thinking

requires thinking at the margin.– Even hummingbirds

demonstrate the behaviorof comparing costs andbenefits.



• People follow incentives.• Markets are efficient.– They encourage the provision of goods at the

lowest possible opportunity cost.• Government must deal with market failure.• Information is important.• Specialization and trade improve our well-

being.



• Productivity determines our standard of living.– The wealth of the economy is determined not by

the number of jobs, but by the value of what people produce when they are on the job.

• Government can smooth fluctuations in the overall economy.– Macroeconomic policy is designed to address the

problems of recession, unemployment, and inflation.


Chapter Summary

• What Is Economics About?• Economics is about almost everything.

Economic analysis can be usefully applied to the process of decision-making.


Chapter Summary

• What Is Economics About?• Microeconomics deals with consumers,

workers, and firms.• Macroeconomics focuses on the broader

economic issues confronting the nation.


Chapter Summary

• What Is Economics About? - Economists build models using a stylized approach. - This usually incorporates the ceteris paribus

assumption.


Chapter Summary

What Is Economics About? Policymakers confront a

tradeoff between efficiency and equity.

Economists rely on the framework of rational behavior to analyze how people respond to incentives and to relative costs and benefits.


Documents

Chapter 1 Exploring Economics CoreEconomics 2 nd edition by Gerald W. Stone 1 © 2011 Worth Publishers ▪ CoreEconomics ▪ Stone Slides By: Debbie Evercloud