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Unformatted text preview: `CHAPTER 1 THE NATURE AND METHOD OF ECONOMICS INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Define economics. 2. State some important reasons for studying economics. 3. Explain what economic principles are and how they are derived. 4. Explain what is meant by a generalization and an abstraction. 5. Differentiate between micro- and macroeconomics. 6. Explain the importance of ceteris paribus . 7. Differentiate between descriptive, theoretical, and policy economics. 8. List eight economic goals and give examples of conflicting and complementary goals. 9. Explain and give examples of the fallacy of composition and post hoc fallacy. 10. Describe the economic way of thinking, including definitions of rational behavior, marginal costs, marginal benefits and how these concepts may be used in decision making. 11. Explain and illustrate a direct relationship between two variables, and define and identify a positive sloping curve. 12. Explain and illustrate an inverse relationship between two variables, and define and identify a negative slope. 13. Identify independent and dependent variables. 14. Define and identify terms and concepts listed at end of chapter and appendix. LECTURE NOTES I. Definition of Economics A. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of unlimited human materials wants. B. Human wants are unlimited, but the means to satisfy the wants are limited. II. The Economic Perspective A. Scarcity and choice 1. Resources can only be used for one purpose at a time. 2. Scarcity requires that choices be made. 3. The cost of any good, service, or activity is the value of what must be given up to obtain it. (opportunity cost). B. Rational Behavior 1. Rational self-interest entails making decisions to achieve maximum fulfillment of goals. 1 The Nature and Method of Economics 2. Different preferences and circumstances lead to different choices. 3. Rational self-interest is not the same as selfishness. C. Marginalism: benefits and costs 1. Most decisions concern a change in current conditions; therefore the economic perspective is largely focused on marginal analysis. 2. Each option considered weighs the marginal benefit against the marginal cost. 3. Whether the decision is personal or one made by business or government, the principle is the same. 4. The marginal cost of an action should not exceed its marginal benefits. 5. There is no free lunch and there can be too much of a good thing . III. Why Study Economics? A. Economics for citizenship. 1. Most political problems have an economic aspect whether it is balancing the budget, fighting over the tax structure, welfare reform, international trade, or concern for the environment....
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