Chapter 1 The Nature and Method of Economics

Chapter 1 The Nature and Method of Economics - Chapter 1...

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Chapter 1 The Nature and Method of Economics 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. Rational Behavior 1. Rational self-interest entails making decisions to achieve maximum fulfillment of goals. 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.
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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. 2. Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles. B. Professional and personal applications 1. The study of economics helps to develop an individual’s analytical skills and allows students to better predict the logical consequences of their actions. 2. Economic principles enable business managers to make more intelligent decisions. 3. Economics can help individuals make better buying decisions, better employment choices, and
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Chapter 1 The Nature and Method of Economics - Chapter 1...

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