Getting Started

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Getting Started

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  • 1. 2015 Pearson

2. 2015 Pearson1Youre in school!Did you make the right decision? 3. Getting Started 1When you have completed yourstudy of this chapter, you will be able to1 Define economics and explain the kinds of questions thateconomists try to answer.2 Explain the ideas that define the economic way of thinking. 2015 PearsonCHAPTER CHECKLIST 4. 1.1 DEFINITION AND QUESTIONSAll economic questions and problems arise becausehuman wants exceed the resources available to satisfythem.ScarcityScarcity is the condition that arises because wantsexceeds the ability of resources to satisfy them.Faced with scarcity, we must make choiceswe mustchoose among the available alternatives.The choices we make depend on the incentives we face. 2015 Pearson 5. 1.1 DEFINITION AND QUESTIONSEconomics DefinedEconomics is the social science that studies the choicesthat individuals, businesses, governments, and entiresocieties make as they cope with scarcity, the incentivesthat influence those choices, and the arrangements thatcoordinate them. 2015 Pearson 6. 1.1 DEFINITION AND QUESTIONSEconomics divides into two parts:Microeconomics: The study of the choices thatindividuals and businesses make and the way thesechoices interact and are influenced by governments.Macroeconomics: The study of the aggregate (ortotal) effects on the national economy and the globaleconomy of the choices that individuals, businesses,and governments make. 2015 Pearson 7. 1.1 DEFINITION AND QUESTIONSTwo big economic questions: 2015 Pearson How do choices determine what, how, and forwhom goods and services get produced? When do choices made in self-interest alsopromote the social interest? 8. 1.1 DEFINITION AND QUESTIONSWhat, How, and For Whom?Goods and services are the objects (goods) andactions (services) that people value and produce tosatisfy human wants.What goods and services get produced and in whatquantities?How are goods and services produced?For Whom are the various goods and servicesproduced? 2015 Pearson 9. 1.1 DEFINITION AND QUESTIONSCan the Pursuit of Self-Interest Be in theSocial Interest?The choices that are best for the individual whomakes them are choices made in the pursuit ofself-interest.The choices that are best for society as a whole arechoices made in the social interest. 2015 Pearson 10. 1.1 DEFINITION AND QUESTIONSCan choices made in self-interest also serve thesocial interest?Lets illustrate with four topics:1 Globalization 2015 PearsonGlobalizationthe expansion of international tradeand the production of components and services byfirms in other countrieshas been going on forcenturies. 11. 1.1 DEFINITION AND QUESTIONSBut in recent years, its pace accelerated.Microchips, satellites, and fiber-optic cables havelowered the cost of communication.This explosion of communication has globalizedproduction decisions.For example, Nike produces shoes in Malaysia; Toyotaproduces cars in the United States.Globalization is in the interest of the owners ofmultinational firms that profit, but is it in the socialinterest? 2015 Pearson 12. 1.1 DEFINITION AND QUESTIONS2 The Information Age 2015 PearsonMakers of computer chips and programsdeveloped products in their self-interest, but didthey develop their products in the socialinterest?3 Climate ChangeThe choices we make concerning how toproduce and use energy are made in our self-interest,but do they serve the social interest? 13. 1.1 DEFINITION AND QUESTIONS4 Government Budget Deficit and Debt 2015 PearsonEvery year since 2001, the U.S. government hasrun a budget deficiton average, $1.6 billion a day.The governments debt has increased each day bythat amount.Over the 12 year period from 2002 to 2013,government debt increased by $6.85 trillion.Your personal share of this debt is $22,000.This large deficit and debt is just the beginning of aneven bigger problem. 14. 1.1 DEFINITION AND QUESTIONSFrom about 2020 onwards, the retirement and health-care 2015 Pearsonbenefits to which older Americans are entitled aregoing to cost increasingly more than taxes can cover.With no changes in tax or benefit rates, the budgetdeficit will increase and the debt will swell ever higher.Debts must be repaid. Who will repay them?When we make our voter choices, we pursue our self-interest.Do our choices serve the social interest?Do the choices made by politicians promote the socialinterest, or do they serve their self-interests? 15. 1.2 THE ECONOMIC WAY OF THINKINGEconomic Ideas:Six ideas define the economic way of thinking: 2015 Pearson Choice is a tradeoff Cost is what you must give up to get something Benefit is what you gain from something People make rational choices by comparingbenefits and costs Most choices are how much choices made at themargin Choices respond to incentives 16. 1.2 THE ECONOMIC WAY OF THINKINGA Choice Is a TradeoffBecause we face scarcity we must make choices.To make a choice we select from alternatives.Whatever choice you make, you could have chosensomething else.You can think about your choices as tradeoffs.A tradeoff is an exchangegiving up one thing to getsomething else. 2015 Pearson 17. 1.2 THE ECONOMIC WAY OF THINKINGCost: What You Must Give Up 2015 PearsonOpportunity cost is the best thing that you mustgive up to get somethingthe highest-valuedalternative forgone.Benefit: What You GainBenefit is the gain or pleasure that something brings.Benefit is measured by what you are willing to give up. 18. 1.2 THE ECONOMIC WAY OF THINKINGRational ChoiceA rational choice is a choice that uses the availableresources to best achieve the objective of the personmaking the choice.We make rational choices by comparing costs andbenefits. 2015 Pearson 19. 1.2 THE ECONOMIC WAY OF THINKINGHow Much? Choosing at the MarginA choice made at the margin is a choice made bycomparing all the relevant alternatives systematicallyand incrementally. 2015 Pearson 20. 1.2 THE ECONOMIC WAY OF THINKINGMarginal CostMarginal cost is the opportunity cost of a one-unitincrease in an activity.The marginal cost of something is what you must give upto get one additional unit of it.Marginal BenefitMarginal benefit is what you gain when you get one moreunit of something.The marginal benefit of something is measured by whatyou are willing to give up to get one additional unit of it. 2015 Pearson 21. 1.2 THE ECONOMIC WAY OF THINKINGMaking a Rational ChoiceYou make a rational choice when you take those actionsfor which marginal benefit exceeds or equals marginalcost.Choices Respond to IncentivesAn incentive is a reward or a penaltya carrot or astickthat encourages or discourages an action. 2015 Pearson 22. 1.2 THE ECONOMIC WAY OF THINKINGEconomics as Social ScienceEconomists try to understand and predict the effects ofeconomic forces by using the scientific method firstdeveloped by physicists.The scientific method is a common sense way ofsystematically checking what works and what doesntwork.An economist begins with a question or a puzzle aboutcause and effect arising from some observed facts. 2015 Pearson 23. 1.2 THE ECONOMIC WAY OF THINKINGEconomic ModelsAn economists second step is to build a model thatprovides a possible answer to the question of interest.An economic model is a description of some feature ofthe economic world that includes only those featuresassumed necessary to explain the observed facts.Check Models Against FactsAn economists third step is to check the proposedmodel against the facts. 2015 Pearson 24. 1.2 THE ECONOMIC WAY OF THINKINGTo check an economic model against the facts,economists use 2015 Pearson Natural experiments Statistical investigations Economic experimentsNatural experiments: A situation that arises in theordinary course of economic life in which the one factor ofinterest is different and other things are equal. 25. 1.2 THE ECONOMIC WAY OF THINKINGA statistical investigation looks for a correlation.Correlation is the tendency for the values of twovariables to move together in a predictable and relatedway.An economic experiment puts people in a decision-making 2015 Pearsonsituation and varies the influence of one factorat a time to discover how they respond. 26. 1.2 THE ECONOMIC WAY OF THINKINGDisagreement: Normative versus PositiveEconomists sometimes disagree about assumptions andmodels and also about what policy to use.Some disagreements can be settled by appealing to furtherfacts, but others cannot.Disagreements that cant be settled by facts are normativestatementsstatements about what ought to be.Disagreements that can be settled by facts are positivestatementsstatements about what is. 2015 Pearson 27. 1.2 THE ECONOMIC WAY OF THINKINGEconomics as Policy ToolEconomics provides a way of approaching problems inall aspects of our lives:PersonalBusinessGovernmentShould you take out a student loan?Is Clayton Kershaw worth $11 million?How can the government balance its budget? 2015 Pearson 28. Does school provide a big enough benefit to justify its cost?The benefits of being in school include the presentenjoyment of student life and a higher future income.The costs of being in school for a full-time student includetuition, books, other study costs, and forgone earnings.Is school always best?The costs are incurred now, but the benefits accrue over aworking lifetime.For most people, the net benefit is big! 2015 PearsonEYE on the BENEFIT and COST of SCHOOL 29. Is school always best?Bill Gates quit Harvard; Mick Jagger quit the LondonSchool of Economics; Clayton Kershaw turned down ascholarship at Texas A & M!All three expected the benefit from school to be less thanthe opportunity cost of being in school. 2015 Pearson