is Economics the study of the allocation of our limited resources to satisfy our unlimited wants. Economics is concerned with the choices people make, human decision makers and the factors that influence their choices, and the allocation of limited resources to satisfy unlimited wants. Resources are inputs used to produce goods and services. Land, human effort and skills, and machines and factories are examples of resources. Scarcity describes the fact that our wants exceed our limited resources. If a good is scarce, our unlimited wants exceed our limited resources. Increasing the amount of resources available would NOT eliminate scarcity. Living in a world of scarcity involves trade-offs. Scarcity forces us to make choices on how best to spend our lmited resources. Choices are costly because we must give up other opportunities that we value--this is the "economic problem". If it weren't for scarcity, people could have all the goods and services they wanted for free; it would no longer be necessary to make choices; and poverty would be eliminated. Aggregate means total amount. Macroeconomics deals with the aggregate, or total economy. A decrease in the unemployment rate would likely be a topic of discussion in Macroeconomics. Microeconomics deals with smaller units within the economy. Microeconomics attempts to understand the decision-making behavior of firms--whether small or large--and households and their interaction in markets for particular goods or services. Topics of microeconomics include discussi9ons of health care, agricultural subsidies, the price of everyday items, the distribution of income, and labor's impact on wages. When we look at a particular segment of the economy, we are studying Microeconomics. The effects of an increase in the supply of lumber on the home-building industry is a topic which would be covered in Microeconomics. Changes in the national unemployment rate is a topic which would be covered in Macroeconomics. Changes in the inflation rate is also a topic which would be covered in Macroeconomics. Changes in the country's economic growth rate, too, is a topic which would be covered in Macroeconomics.
But the price of concert tickets, for example, is a topic which would be covered in Microeconomics. A theory is an established explanation that accounts for known facts or phenomena. A good theory should explain and predict well. Economists use theories to abstract from the complexities of the world, understand economic behavior, and to explain and help to predict human behavior. The beginning of a theory is a hypothesis. A hypothesis is a testable proposition that makes some type of prediction about behavior in response to certain changes in conditions. To see if a hypothesis is valid, one must engage in empirical analysis. Empirical analysis is the use of data to test a hypothesis. When a hypothesis survives a number of tests, it is accepted until it no longer predicts well. Determining whether an economic hypothesis is acceptable is more difficult than in the natural or physical sciences because, unlike a chemist in a chemistry lab, an economist cannot control all the other variables that might influence human behavior. Ceteris paribus means "let everything be equal". Ceteris paribus is holding all other things constant. The importance of the Ceteris Paribus assumption is that it allows one to analyze the relationship between two variables apart from the influence of other variables. People purchased more gas last year than in 1970 when prices were lower. Asserting that this is a violation of the law of demand involves a fallacy because it ignores the Ceteris Paribus conditions. In order to isiolate the effects of one variable on another, one must use the Ceteris Paribus assumption. The Fallacy of Composition is the incorrect view that what is true for the individual is always true for the group. Assuming that, because a basketball team is more successful when it spends more time to get better players, all the teams should spend more to get better players is an example of the Fallcy of Composition. Positive analysis is an objective and TESTABLE approach or statement, using the scientific method (i.e. how the economy IS) In positive analysis, we want to know the impact of variable A on varailble B. While a positive statement must be testable, it does not have to be true. A hypothesis is a positive statement, or example of positive analysis. Asserting that an increase in the tax rate will reduce unemployment is an example of a positive
statement, or positive analysis. Asserting that an increase in the price of corn will decrease the amount of corn purchased, but will increase the amount of wheat purchased, is a positive statement, or an example of positive analysis. Asserting that the birth rate is reduced as economies urbanize, but also leads toa decreased average age of developing countries' populations, is a positive statement, or an example of positive analysis. Normative analysis is a subjective, non-testable statement (i.e. how the economy SHOULD be). Normative analysis expresses opinions about the desirability of various actions and involves judgements. The majority of disagreements in economics stem from normative issues. Asserting that the study of physics is more valuable than the study of sociology, although both should be studies by all college students, is an example of normative analysis. Asserting that a higher income-tax rate would generate increased tax revenues, and that those extra revenues should be used to give more government aid to the poor, is an example of a statement that is both positive AND normative. Asserting that a decrease in the price of butter will increase the amount of butter purchased, but that that would be bad because it would increase Americans' cholesterol levels, is also an example of a statement which is both positive AND normative. When economists assume that people act rationally, it means they do the best they can based on their and values information under current and future circumstances. Event A and Event B may not imply causality from A to B because the observed correlation may be coincidental, a third variable may be responsible for causing both events, or causality may run from Event B to Event A instead of in the opposite direction. If ten-year-old Tommy observes that people who play football are larger than average and tells his mom that hes going to play football because it will make him big and strong, Tommy is mistaking correlation for causation. That a lower price of a particular good and a higher quantity purchased tend to occur at the same time is likely to involve primarily one variable causing the other, rather than a third variable causing them both. Self-interest is the desire to improve ones life. It includes the desire to advance any goal one cares about, including many altruistic goals, such as helping the poor. Selfishness, on the other hand, is the excessive concern for oneself and ones own advantage without regard for others. Economists look at group behavior rather than individual behavior because Economics is concerned with reaching generalizations about human behavior. If one generalizes on the basis of observed individual behavior, one risks committing the fallacy of composition. Generalizations based upon observed group behavior are likely to be both more realistic and useful (reliable)
Abstraction enables an observer to highlight what are considered significant details for her purposes. If maps attempted to capture even the most minute of details, they would be far too complicated and difficult to read for their intended purposes. Instead, good maps provide useful information by highlighting important features. Likewise, students abstract when taking notes. Rather than attempt to write down every word spoken by an instructor, a student is likely to outline the main ideas that are expressed. By abstracting in this way, a student can master the information that is most essential to understanding the topic at hand. Pie charts are used to show the relative size of various quantities that add up to a total of 100%. Bar graphs are used to show a comparison of the size of quantities of similar items. A time-series graph shows changes in the value of a variable over time. Bar graphs and time-series graphs do not allow us to show the relationship between two variables. A variable is something that is measured by a number (ie. height). A direct or positive relationship is when two variables change in the same direction. In a direct/positive relationship, an increase in one variable will be accompanied by an increase in the other, or a decrease in one variable will be accompanied by a decrease in the other. A negative relationship is when two variables are inversely related--that is, they change in opposite directions. In a negative relationship, when one variable rises the other one falls, or when one variable decreases the other one rises. A curve is formed on a demand curve graph by/when connecting all the points. If you add a third variable (ie. income) to a curve showing the quantity of CDs purchased (ie. more CDs are bought), the demand curve shifts outward/rightward compared to the old curve. If income falls (ie. less CDs are bought), the demand curve will shift inward/leftward compared to the old curve. A change in one of the variables already there (ie. price of CDs and/or CDs purchased) will cause a movement ALONG the curve, but a shift in one of the variables not known/listed (ie income) will cause the whole curve to shift either to the left or right. Pie charts are used to show the relative size of various quantities that add up to a total of 100% (i.e. the percent of college students in a particular earnings category). Bar graphs are used to show a comparison of the size of quantities of similar items (i.e. annual attendance at popular tourist attractions). Time series graphs show changes in the value of a variable over time (ie. the inflation rate over time). A variable is something that is measured by a number (ie. your height). Positive relationship = direct relationship. A positive relationship means that the variables change in the same direction--that an increase in or decrease one variable (ie. practice time) is accompanied by a likewise increase or decrease in
the other variable (overall score). Negative Relationship = inverseley related. A Negative relationship happens when two variables change in opposite directions--when one variable rises, the other variable falls...or when one variable decreases, the other variable increases (ie. when prices go up, sales fall or when prices go down sales go up). If you have a third variable (income) on a graph, and income goes up, the curve shifts outward (right); if income goes down, the curve shifts inward (left). On a graph, a change in one variable will cause a movement ALONG the curve but a change in one of the variables not shown (ie. income) will cause the whole curve to shift (either right or left). A linear curve is a straight-line curve. The slope of the linear curve between two points measures the relative rates of two variables. Slope in curve = ratio of change in Y to change in X. The slope of a curve is the ratio (change in Y variable) over the run (change in X variable). And upward slope is positive--representing a positive/direct relationship between the two variables: / A downward slope is negative--representing a negative/inverseley related relationshp between the two variables: \ A straight line curve is called a linear curve. The slope of the linear curve = the ratio of the change in the Y value to the change in the X value AND/OR the ration of the rise to the run, where the rise is the change in the Y varaible and the run is the change in the X variable. Run = first change (on the line) of X axis. Rise = first change (on the line) of Y axis. A nonlinear curve is a line that actually curves. Where a line is straight/linear, there is 0 slope.