• Principles of Economics, Case and Fair,8e


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PART I INTRODUCTION TO ECONOMICS
Chapter
1
The Scope and Method
of Economics
Prepared by:
Fernando & Yvonn Quijano
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
PART I INTRODUCTION TO ECONOMICS
The Scope and Method
of Economics 1
CHAPTER 1: The Scope and Method
Chapter Outline
of Economics
Why Study Economics?
To Learn a Way of Thinking
To Understand Society
To Understand Global Affairs
To Be an Informed Voter
The Scope of Economics
Microeconomics and
Macroeconomics
The Diverse Fields of Economics
The Method of Economics
Theories and Models
Economic Policy
An Invitation
Appendix: How to Read
and Understand Graphs
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CHAPTER 1: The Scope and Method THE SCOPE AND METHOD OF ECONOMICS
economics The study of how
individuals and societies choose to
use the scarce resources that
of Economics
nature and previous generations
have provided.
Economics is the study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided. The key word in this
definition is choose. Economics is a behavioral, or social, science. In large measure it is
the study of how people make choices. The choices that people make, when added up,
translate into societal choices.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 36
WHY STUDY ECONOMICS?
There are four main reasons to study
CHAPTER 1: The Scope and Method
economics:
• to learn a way of thinking,
of Economics
• to understand society,
• to understand global affairs, and
• to be an informed voter.
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WHY STUDY ECONOMICS?
TO LEARN A WAY OF THINKING
CHAPTER 1: The Scope and Method
Three fundamental concepts:
of Economics
Opportunity cost
Marginalism, and
Efficient markets
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WHY STUDY ECONOMICS?
Opportunity Cost
CHAPTER 1: The Scope and Method
opportunity cost The best
alternative that we forgo, or give
of Economics
up, when we make a choice or a
decision.
scarce Limited.
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WHY STUDY ECONOMICS?
Marginalism and Sunk Costs
CHAPTER 1: The Scope and Method
marginalism The process of
analyzing the additional or
of Economics
incremental costs or benefits
arising from a choice or decision.
sunk costs Costs that cannot
be avoided, regardless of what is
done in the future, because they
have already been incurred.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of 36
WHY STUDY ECONOMICS?
Efficient Markets—No Free Lunch
CHAPTER 1: The Scope and Method
efficient market A market
of Economics
in which profit opportunities are
eliminated almost instantaneously.
The study of economics teaches us a way of thinking and helps us make decisions.
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THE SCOPE OF ECONOMICS
MICROECONOMICS AND MACROECONOMICS
CHAPTER 1: The Scope and Method
microeconomics The branch of economics
that examines the functioning of individual
of Economics
industries and the behavior of individual
decision-making units—that is, business firms
and households.
macroeconomics The branch of economics
that examines the economic behavior of
aggregates—income, employment, output,
and so on—on a national scale.
Microeconomics looks at the individual unit—the household, the firm, the industry. It
sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It
sees and analyzes the “forest.”
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 36
THE METHOD OF ECONOMICS
positive economics An approach to
CHAPTER 1: The Scope and Method
economics that seeks to understand
behavior and the operation of systems
without making judgments. It describes
of Economics
what exists and how it works.
normative economics An approach to
economics that analyzes outcomes of
economic behavior, evaluates them as
good or bad, and may prescribe courses
of action. Also called policy economics.
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THE METHOD OF ECONOMICS
Descriptive Economics and Economic Theory
CHAPTER 1: The Scope and Method
descriptive economics The
of Economics
compilation of data that describe
phenomena and facts.
economic theory A statement or set of
related statements about cause and
effect, action and reaction.
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THE METHOD OF ECONOMICS
THEORIES AND MODELS
CHAPTER 1: The Scope and Method
model A formal statement of a theory,
of Economics
usually a mathematical statement of a
presumed relationship between two or
more variables.
variable A measure that can change
from time to time or from observation to
observation.
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THE METHOD OF ECONOMICS
Ockham’s razor The principle that
CHAPTER 1: The Scope and Method
irrelevant detail should be cut away.
of Economics
Maps are useful abstract
representations of reality.
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THE METHOD OF ECONOMICS
All Else Equal: Ceteris Paribus
CHAPTER 1: The Scope and Method
of Economics
ceteris paribus, or all else equal A
device used to analyze the relationship
between two variables while the values
of other variables are held unchanged.
Using the device of ceteris paribus is one part of the process of abstraction. In formulating
economic theory, the concept helps us simplify reality to focus on the relationships
that interest us.
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THE METHOD OF ECONOMICS
Expressing Models in Words, Graphs, and
CHAPTER 1: The Scope and Method
Equations
of Economics
The most common method of expressing
the quantitative relationship between two
variables is graphing that relationship on
a two-dimensional plane.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 36
Review Terms and Concepts
ceteris paribus marginalism
CHAPTER 1: The Scope and Method
descriptive economics microeconomics
economic theory model
of Economics
economics normative economics
efficiency Ockham’s razor
efficient market opportunity cost
empirical economics positive economics
macroeconomics Scarce
sunk costs
variable
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