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Unformatted text preview: Chapter 1: The Economic Approach • Adam Smith – published foundation of economics in 1776 in “An inquiry into the Nature and Causes of the Wealth of Nations” • Argued wealth of a nation lies in goods and services rather than gold and silver • Economics is about the choices individuals make • Scarcity- fundamental concept of econ, can’t have everything thus individuals must make a choice-selecting among alternatives includes trade-offs • Resources- inputs- people use to produce goods and services therefore limited and includes land, labor, and skills. • Capital – human made resources used to produce goods and services-enhances ability in the future • Scarcity is an objective concept that describes a factual situation. Poverty is a subjective concept that refers to personal opinions on defined level of income. • When a good or resource is scarce, individuals must ration or decide who will receive and who will go without • Scarcity also leads to competition among individuals (good thing) • Economic theory- definitions, postulates, and principles assembled in a manner that makes clear cause and effect relationships • 8 Guideposts of Economic Theory • 1. Use of scarce resources is costly, thus choices must be made and trade-offs will occur. • Opportunity cost- the highest value alternative that must be sacrificed as a result of decision making. • 2. Individuals choose purposefully-trying to get the most from limited resources. • Economizing behavior- choosing the option that offers the greatest benefit at the least possible cost. • Utility- subjective benefit or satisfaction a person expects from a choice or action • 3. Incentives matter- choice is influenced in a predictable way by changes in incentives. (arguably the most important guidepost, sometimes called basic postulate of all economics) • 4. Individuals make decisions at the margin (marginal- effects of a change in the current situation) • 5. Although information can help us make better choices its acquisition is costly and time is scarce. • 6. Beware of the secondary effects: economic actions often generate indirect as well as direct effects. (secondary effects-indirect impact of an event or policy that is not easily perceivable or often unintended or overlooked) • 7. The value of a good or service is subjective and based on individual preferences • 8. The test of a theory is its ability to predict, economics is scientific thinking based on theories and tests. Good theories are consistent and help explain real world events. • Scientific Economics or Positive economics attempt to determine “what is”’ among economic relationships • Normative economics is about “what out to be” given preferences and philosophical views of the advocate....
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- Fall '07