CHAPTER

1
Introduction: What is Economics?

Prepared by: Fernando and Yvonn Quijano

2006 Prentice Hall Business Publishing

Microeconomics: Principles and Tools, 4/e

OSulli van/ Sheffrin

What is Economics?
C H A P T E R 1: Introduction: What is Economics?

Economics studies the choices that can be made when there is scarcity.

Scarcity is a situation in which resources are limited in quantity and can be used in different ways.

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What is Economics?
C H A P T E R 1: Introduction: What is Economics?

Because our resources are limited, we must sacrifice one thing for another.

Economists are always reminding us that there is scarcitythat there are tradeoffs in everything we do.

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Positive versus Normative Analysis

C H A P T E R 1: Introduction: What is Economics?

Positive economics predicts the consequences of alternative actions, answering the questions, What is? or What will be?

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Positive versus Normative Analysis

C H A P T E R 1: Introduction: What is Economics?

Normative economics answers the question, What ought to be? Normative questions lie at the heart of policy debates.

2006 Prentice Hall Business Publishing

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OSullivan/ She ffrin

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Decisions in a Modern Economy

C H A P T E R 1: Introduction: What is Economics?

Economic decisions are made at every level in society. The choices made by individuals, firms, and governments answer three questions:
1. 2. 3.

What products do we produce? How do we produce the products? Who consumes the products?
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Economic Analysis and Modern Problems

C H A P T E R 1: Introduction: What is Economics?

Economic analysis provides important insights into real-world problems. Economists attempt to diagnose and provide solutions to problems such as:
Effects of oil prices on costs of other products
The effects of the aging of the population on

consumption of products
The effects of environmental activism on the

quality of life.

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The Economic Way of Thinking

C H A P T E R 1: Introduction: What is Economics?

Three elements of the economic way of thinking:

1. Use assumptions to simplify
Eliminate irrelevant details and focus on

what really matters.

Keep in mind that simplifying

assumptions do not have to be realistic.

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The Economic Way of Thinking

C H A P T E R 1: Introduction: What is Economics?

Three elements of the economic way of thinking:

2. Isolate variablesCeteris Paribus
Economists are interested in exploring

relationships between two variables. A variable is a measure of something that can take on different values. The expression ceteris paribus means everything else is held fixed.
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The Economic Way of Thinking

C H A P T E R 1: Introduction: What is Economics?

Three elements of the economic way of thinking:

3. Think at the margin
A small, one-unit change in value is

called a marginal change.

Economists use the marginal approach

to decide whether to expand, or reduce an activity

2006 Prentice Hall Business Publishing

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The Economic Way of Thinking

C H A P T E R 1: Introduction: What is Economics?

A key assumption of most economic analysis is that people act rationally, meaning that they act in their own self-interest. Rational people respond to incentives.

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Preview of Coming Attractions: Microeconomics

C H A P T E R 1: Introduction: What is Economics?

Microeconomics is the study of the choices made

by:

households Firms

and government,

and of how these choices affect the markets for goods or services.

2006 Prentice Hall Business Publishing

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Preview of Coming Attractions: Microeconomics

C H A P T E R 1: Introduction: What is Economics?

We can use microeconomic analysis to understand how:

1.

Markets work and predict changes of events on markets.

2.
3. 4.

Individuals make personal decisions on consumption, work and leisure

Public and private organizations make managerial decisions. Public policies affect individuals and markets
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Preview of Coming Attractions: Macroeconomics

C H A P T E R 1: Introduction: What is Economics?

Macroeconomics is the study of the nations economy as a whole. We can use macroeconomic analysis to:
1. Understand why economies grow. 2. Understand economic fluctuations. 3. Make informed business decisions.
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Key Terms
ceteris paribus
C H A P T E R 1: Introduction: What is Economics?

economics
marginal change macroeconomics microeconomics normative economics positive economics scarcity

variable

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