1.1 Economics: A brief introduction
Economics is the study of the allocation of our limited resources to satisfy or unlimited wants.
Resources are inputs like land, human, effort, skills, and machines and factories to produce goods and services.
Scarcity - Want exceeds resources. Forces us to make choices of how to use our resources wisely Economic problem Living in a world of scarcity means tradeoff
Most precious single resource is time.
Why Study Economics?
Most of the things of concern in the world are at least partly economics in character.
Macroeconomics and Microeconomics
Economics is the study of people.
Social science that studies the choices people make in a world of limited resources
Study of the aggregate or total economy looks at economic problems that influence the whole of society
Topics include discussions of inflation, unemployment, business cycles and economic growth
Study of smaller units within the economy topics includes decision-making behavior of firms and households, and their interaction in markets for particular goods or services, discussions of health care, agricultural subsidies, the price of everyday items, the distribution of income and impact of labour unions on wages.
Microeconomics looks at trees and Macroeconomics looks at the forest
Economics is the study of the allocation of our limited resources to satisfy our unlimited wants.
Economics is a problem-solving science that teaches you how to ask intelligent questions.
Macroeconomics deals with the aggregate, or total, economy, while microeconomics focuses on smaller units within the economy
1.2 Economic theory
What Are Economic Theories?
Theory – An established explanation that accounts for known facts or phenomena.
Economic theories - statements or propositions about patterns of human behavior under certain circumstance Helps us sort out and understand complexities of economic behavior.
Good economics theory should help us understand and ideally predict human economic behavior.
Why Do We Need To Abstract?
Economic theories cannot include every event that occurred it provides a broad view, not a detailed examination, of human economic behavior.
What is a hypothesis?
Beginning of any theory.
In economic theory it’s a testable prediction about how people will behave or react toeconomic circumstances. EG, Price increase = less sold = hypothesis
To see if hypothesis valid, use empirical analysis – examine data to see if the hypothesis fits well with the fact
If hypothesis is not consistent with real-world observations, it’s “back to the drawing board.”
Determining if it’s acceptable is harder in economics.
Cannot control all the variables that influence human behavior.
Must evaluate data after gathering them to determine if accepted.
Becomes theory when tentatively accepted
Economic theories are always on probation. Accepted until it no longer predicts well.
What Is The Ceteris Paribus Assumption?
Virtually all economic theories share a condition expressed by the Latin expression ceteris paribus. - let everything else be equal/holding everything else constant.
When trying to assess the effect of one variable to another, we must isolate their relationship from other events that might also influence the situation that the theory tries to explains or predict.
Eg – study harder = do better on test. Ceteris paribus = overslept, study wrong material
Why Are Observations And Predictions Harder In The Social Sciences? economists, are concerned with human behavior individual and group behavior
What Distinguishes Between Correlation And Causation?
Without a theory of causation, no scientist could sort out and understand the enormous complexity of the real world.
Careful not to confuse correlation with causation and be clear on the direction of