Economics and Choice
Economics is the study of the choices people make to cope with scarcity.
Economics is sometimes called the science of choice — the science that explains the choices that people make
and predicts how choices change as circumstances change.
How Economists Think
Economists, as professionals, try to stand clear of emotion and to approach their work with the detachment,
rigor, and objectivity of scientists.
The first step in this process is to identify the fundamental economic problem: scarcity.
When wants exceed the resources available to satisfy them, there is scarcity.
People have unlimited wants.
Resources to satisfy those wants are limited.
Scarcity and Poverty
Scarcity is not poverty.
The poor and the rich alike face scarcity.
Faced with scarcity, people must make choices.
Choice and Opportunity Cost
Choosing more of one thing means having less of something else.
The opportunity cost of any action is the best foregone alternative.
There is no such thing as a free lunch. Every choice involves an opportunity cost.
Opportunity cost is the single best alternative foregone (it varies over people).
For example, the opportunity cost of attending ECO 211 class is either
going to the beach
taking another class
Economic analysis uses marginal analysis to study choices made by people, businesses and governments.
Choices are made in small steps — at the margin.
Marginal Cost and Marginal Benefit
The cost of a small increase in an activity is called marginal cost.
The benefit that arises from a small increase in an activity is called marginal benefit.
What Economists Do
Economic questions can be divided into two big groups: microeconomics and macroeconomics. Microeconomics
Microeconomics: study of decisions of people & businesses and the interaction of those decisions in markets.
Goal: to explain the prices and quantities of individual goods and services.
Macroeconomics is the study of the national economy and the global economy and the way that economic
aggregates grow and fluctuate.
Goal: to explain average prices and total employment, income, and production.
Economic Science and Economic Policy
Economic science is the attempt to understand the economic world. Science makes predictions.
Economic policy is the attempt to improve the economic world. Policy makes prescriptions.
Policies made without science usually will not be very good.
Economists distinguish between what is and what ought to be.
Statements about what is are called positive statements.
Statements about what ought to be are called normative statements.
Positive Versus Normative
Apositive statement can be tested by checking it against facts.
Anormative statement depends on values and cannot be scientifically tested.
Economists create theories by building and testing models. We learn as much from theories that fail as is
learned from theories that are confirmed. When a theory fails, it prompts us to revise other models.
Economic Science is Young
Economics as a science is just over 200 years old.
Adam Smith’s (AKAthe father of capitalism)The Wealth of Nations (1776) marks the beginning of our subject.
Compared to physics and chemistry, however, we’re newcomers.
Economic policy is the attempt to devise government actions and to design institutions that might improve
Objectives of Economic Policy
When economic efficiency has been achieved, production costs are as low as possible and consumers are as
satisfied as pos