Can you see the advantage of being able to think

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Unformatted text preview: r companies. When the Japanese placed a tax on U.S. computers, they did not intend to do harm to Japanese car companies. Do unintended effects matter? The answer is yes, they matter a great deal. That is why, for any action, economists think in terms of both intended and unintended effects. Can you see the advantage of being able to think about and anticipate unintended effects when making decisions? Thinking in Terms of the Small and the Big Economics is divided into two branches, microeconomics and macroeconomics. In microeconomics, economists look at the small picture. They study the behavior and choices of relatively small economic units, such as an individual or a single business firm. Economists who deal with macroeconomics look at the big picture, studying behavior and choices as they relate to the entire economy (see Exhibit 1-4). For example, in microeconomics, an economist would study and discuss the unemployment that exists in a particular industry, such as the car industry; in macroeconomics, an economist would investigate the unemployment that exists in the nation. In microeconomics, an economist would look at the buying behavior of consumers in regard to a single product, such as computers; an economist dealing in macroeconomics would study the buying EXHIBIT 1-4 Two Major Branches of Economics ECONOMICS Microeconomics Macroeconomics The study of small economic units such as an individual or single business firm The study of the “big picture,” the entire economy Economists divide economics into two major branches: microeconomics and macroeconomics. behavior of consumers in regard to all goods. We might say that the tools of macroeconomics are telescopes, while the tools of microeconomics are microscopes. Macroeconomics stands back from the trees to see the forest. Microeconomics gets up close and examines the tree itself, including its bark, its branches, and the soil in which it grows. In this book you will learn to look at the world from both “micro” and “macro” perspectives. Thinking in Terms of Theories Some questions have obvious answers, and others do not. For example, if you hold a ball in your right hand and ask someone what will happen if you let go of it, the person will likely say that the ball will drop to the ground. Right answer. If the classroom clock reads 10:12 and you ask someone in the class what time it is, that person will say 10:12. Again, right answer. Now suppose you ask someone any of the following questions: • • • Why is the crime rate higher in some countries than in other countries? What causes the stock market to rise or fall? What causes some nations to be rich and others to be poor? microeconomics The branch of economics that deals with human behavior and choices as they relate to relatively small units—an individual, a business firm, or a single market. macroeconomics The branch of economics that deals with human behavior and choices as they relate to the entire economy. Section 2 The Economic Way of Thinking 19 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 20 She says that there are things called “calories,” and that we can measure food in terms of how many calories it has. Some foods have more calories than others. She then says that every day you use up, or burn, calories when you walk, run, and clean the house. You even burn them, she says, when you are sitting still on the couch watching television. Finally, she says that your weight depends on how many calories you take in compared to how many you burn. If you consume more calories than you burn, you will gain weight. U.S. Representative James Sensenbrenner Jr. (left) and Senator Charles Grassley (right) meet with President Bush to discuss economic policy. Do you think these men make use of economic theories? If so, how? You probably would agree that these questions have no obvious, easy answers. Because some economic questions do not have obvious answers, economists build theories. Think of a theory as a mechanism that an economist uses to answer a question that has no obvious, easy answer. Here are only five of hundreds of questions for which economists have built theories: 1. What causes inflation? 2. What causes the unemployment rate to rise or fall? 3. How do business firms operate? 4. What causes the prices of goods and services to rise, fall, or remain stable? 5. Why do countries experience good economic times in some years and bad economic times in other years? theory An explanation of how something works, designed to answer a question for which there is no obvious answer. 20 E X A M P L E : Suppose you are living in the days before anyone has heard the word calorie. Over a period of three years, you notice that your weight changes. At one time you weigh 140 pounds, then 145 pounds, then 155 pounds. You wonder why you are gaining weight. Along comes a person who gives you a simplified explanation of what is happening. Chapter 1 What Is Economics? This calorie theory is used to explain one’s...
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This document was uploaded on 01/16/2014.

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