sg01 - 1 Introduction What Is Economics Chapter Summary...

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1 Introduction: What Is Economics? Chapter Summary This chapter explains what economics is and why it is useful. Here are the main points of the chapter: Most of modern economics is based on positive analysis, which answers the question “what is?” or “what will be?” Economists contribute to policy debates by conducting positive analyses about the consequences of alternative actions. The choices made by individuals, firms, and governments answer three questions: What products do we produce? How do we produce the products? Who consumes the products? Normative analysis answers the question “what ought to be?” To think like economists, we (a) use assumptions to simplify, (b) use the notion of ceteris paribus to focus on the relationship between two variables, (c) think in marginal terms, and (d) assume that rational people respond to incentives. We use macroeconomics to understand why economies grow, to understand economic fluctuations, and to make informed business decisions. We use microeconomics to understand how markets work, to make personal and managerial decisions, and to evaluate the merits of public policies. Applying the Concepts After reading this chapter, you should be able to answer these two key questions: 1. Do people respond to incentives? 2. What is the role of prices in allocating resources? 1.1 What Is Economics? Economics is the study of how people, businesses, governments, and other organizations make choices when there is scarcity. Scarcity means that the resources we use to produce goods and services are limited. Human wants, however, are unlimited. For instance, you may earn enough money each month to make a lease payment on a Lexus, but if you do that you won’t have money to pay for rent and buy food. Because your resources are limited, you have to choose between a nice car, and food and a place to sleep. We call the resources used to produce goods and services factors of production and typically think of five types of factors:
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2 Chapter 1 Natural resources , which are provided by nature and include land, mineral deposits, oil and gas deposits, and water. Labor , the physical and mental effort people use to produce goods and services. Physical capital , the stock of equipment, machines, structures, and infrastructure that is used to produce goods and services. Human capital , the knowledge and skills acquired by a worker through education and experience. Entrepreneurship , the effort to co-ordinate the factors of production to produce and sell products. Think about the factors of production needed to open a coffee shop near your campus. You would need some physical capital such as a building, an espresso machine, tables, and chairs. You would need labor, workers who would make the coffee drinks and who, hopefully, could suggest and help develop new recipes as they learn what your customers like. You would provide the entrepreneurial ability as you find a location and make decisions on the best way to use the resources at your disposal. Economic analysis takes on two primary forms:
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This note was uploaded on 10/25/2009 for the course ECON 81509 taught by Professor X.song during the Spring '09 term at Mesa CC.

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sg01 - 1 Introduction What Is Economics Chapter Summary...

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