Chapter 1: Economics and economic reasoning . After reading this chapter, you should be able to: Define economics and identify its components; discuss various ways in which economists use economic reasoning; explain real-world events in terms of economic forces, social forces, and political forces; explain how economic insights are developed and used; distinguish among positive economics, normative economics, and the art of economics. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define economics Discuss ways in which economists use economic reasoning Explain real-world events in terms of: Economic forces Social forces Political forces Explain how economic insights are developed and used Distinguish among: Positive economics Normative economics The art of economics 2 What Economics Is Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanism, social customs, and political realities of the society The three central coordination problems any economy must solve: What, and how much, to produce How to produce it For whom to produce it 3 Scarcity Scarcity exists because individuals want more than can be produced The degree of scarcity is constantly changing The quantity of goods, services and usable resources depends on technology and human action Scarcity means the goods available are too few to satisfy | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define economics Discuss ways in which economists use economic reasoning Explain real-world events in terms of: Economic forces Social forces Political forces Explain how economic insights are developed and used Distinguish among: Positive economics Normative economics The art of economics 2 What Economics Is Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanism, social customs, and political realities of the society The three central coordination problems any economy must solve: What, and how much, to produce How to produce it For whom to produce it 3 Scarcity Scarcity exists because individuals want more than can be produced The degree of scarcity is constantly changing The quantity of goods, services and usable resources depends on technology and human action Scarcity means the goods available are too few to satisfy individuals’ desires 4 Microeconomics and Macroeconomics Economic theory is divided into two parts: Microeconomics is the study of individual choice, and how that choice is influenced by economic forces Macroeconomics is the study of the economy as a whole 5 A Guide to Economic Reasoning Steve Levitt’s bestseller, Freakonomics, contains many examples of “thinking like an economist” Levitt uses economic reasoning to explain why people become drug dealers The potential financial benefit of selling drugs is much higher than the cost of giving up a minimum wage job 6 Marginal Costs and Marginal Benefits Using economic reasoning, decisions are often made by comparing marginal costs and marginal benefits Marginal cost is the additional cost over and above costs already incurred Marginal benefit is the additional benefit above and beyond what has already accrued The economic decision rule: If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs of .
