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CHAPTER 1 - THE ECONOMIC WAY OF THINKING Economics is NOT about what to think, but HOW to think! "Economics is not a body of concrete truth, but an engine for the discovery of the truth." WAY of thinking in a very systematic, rational, logical manner. In this chapter we will look at the economic way of thinking and we investigate how economists look at making choices and decisions, and see how that is different than a non-economic approach. "Economic way of thinking is a powerful tool that can help you understand a broad range of real world events." What is Economics about? About how people make choices. First principle of economics is that we live in a world of scarcity. Second principle is that we have unlimited wants and desires. Third principle - given 1 and 2, we have to make choices. Resources - the tools that we can use to battle scarcity. Three categories of resources: 1. Natural materials - forests, land, minerals, rivers, oceans, wildlife, oil, etc. 2. Human resources (capital) - knowledge and skills, innovation, ingenuity, etc. Education is developing human capital. Investing in human capital. 3. Physical capital - machinery, technology, tools, computers, equipment, etc. Man-made resources. We use resources as inputs to produce economic goods - output. Through the use of human capital (technology) we have greatly improved our standard of living. Think of life today vs life 200 years ago. Back to Adam Smith (p. 4), economics is concerned about how wealth is created. Economic Way of Thinking Quote, p. 8 - Keynes. Economists differ about policy prescriptions - (Hoover wanted a one-armed economist) but there is a common thread of econ theory that is consistent in econ. Most econ principles are just common sense. However, there is nothing common. ....... Eight Guideposts to Econ Thinking MGT 551: BUSINESS ECONOMICS – CH 1 Professor Mark J. Perry 1
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Econ thinking is based on several key assumptions which form the basis of clear econ thinking. Book points out that students who have difficulty with econ have usually failed to grasp the basic principles of econ thinking. 1. The use of scarce resources to produce a good is always costly.
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This note was uploaded on 01/23/2012 for the course FIN 551 taught by Professor Staff during the Spring '11 term at University of Michigan.

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