Chapter 1: The Art and Science of Economic Analysis
is the study of how people choose to use their scarce resources to produce,
exchange, and consume goods and services in an attempt to satisfy unlimited wants.
The economic problem arises from the conflict between scare resources and unlimited
wants. If wants were limited or if resources were not scarce, there would be no need to
Economic resources are combined in a variety of ways to produce goods and services.
Major categories of resources include labor, capital, natural resources, and
entrepreneurial ability. Because economic resources are scarce, only a limited number
of goods and services can be produced with them; therefore, choices must be mad.
Microeconomics focuses on choices made in households, firms, and governments and
how these choices affect particular markets, such as the market for used cars. Choice is
guided by rational self-interest. Choice typically requires time and information, both of
which are scarce and valuable.
Whereas microeconomics examines the individual pieces of the puzzle,
macroeconomics steps back to look at the whole big picture—the performance of the
economy as a whole as reflected by such measures as total production, employment,
the price level, and economic growth.
Economists use theories, or models, to help understand the effects of economic
changes, such as changes in price and income, on individual choices and how these
choices affect particular markets and the economy as a whole. Economists employ the
scientific method to study and economic problem by (a) formulating the question and
isolating relevant variables, (b) specifying the assumptions under which the theory
operates, (c) developing a theory, or hypothesis, about how the variables relate, and (d)
testing that theory by comparing its predictions with evidence. A theory might not work
perfectly, but it’s useful as long as it predicts better than competing theories do.
(statement that can be proven or disproven by reference to facts)
aims to discover how the economy works. Normative economics
represents an opinion, which cannot be proven or disproven) is concerned more with
how, in someone’s opinion, the economy should work. Those who aren’t careful can fall
victim to the fallacy that association is causation
(incorrect idea that if two variables are