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Chapter 1

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ECO 211

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. 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 Opportunity cost is the single best alternative foregone (it varies over people). For example, the opportunity cost of attending ECO 211 class is either sleeping working studying going to the beach taking another class MarginalAnalysis 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 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. Economic Science 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. Economic Theories 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 Economic policy is the attempt to devise government actions and to design institutions that might improve economic performance. Objectives of Economic Policy Efficiency Equity Growth Stability Efficiency When economic efficiency has been achieved, production costs are as low as possible and consumers are as satisfied as pos
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