CHAPTER 1 notes - The Nature and Method of Economics...

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The Nature and Method of Economics CHAPTER ONE THE NATURE AND METHOD OF ECONOMICS CHAPTER OVERVIEW This chapter begins with a discussion of the meaning and importance of economics. In this first chapter, however, we will not plunge into problems and issues; instead we consider some important preliminaries. We first look at the economic perspective—how economists think about problems. Next, we state some of the benefits of studying economics. Then, we examine the specific methods economists use to examine economic behavior and the economy, distinguishing between macroeconomics and microeconomics. Finally, the problems, limitations, and pitfalls that hinder sound economic reasoning are examined. 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 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. Consider This … Free for All ? 1. Products provided for “free” to an individual are not free for society because of the required use of scarce resources to produce them. 2. Companies provide “free” goods as a marketing strategy to promote brand awareness. 3. Products that are promoted as “free” to the individual may actually be bundled with another good for which the consumer must pay. Because a purchase is required to obtain them, these products are not really free to the buyer. C. Rational Behavior. 1. Rational self-interest entails making decisions to achieve maximum utility. 2. Different preferences and circumstances lead to different choices. 3. Rational self-interest is not the same as selfishness. D. 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.” 6. Conflicts between long and short-run objectives may result in decisions that appear to be irrational, when if fact they are not. 1
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The Nature and Method of Economics 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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