Parkin Economics Chapter 1 PDF

© 2019 Pearson Education 1 WHAT IS ECONOMICS? © 2019 Pearson Education  Definition of Economics All economic questions arise because we want more than we can get. scarcity :Our inability to satisfy all our wants Because we face scarcity, we must make choices. The choices we make...

© 2019 Pearson Education 1 WHAT IS ECONOMICS? © 2019 Pearson Education  Definition of Economics All economic questions arise because we want more than we can get. scarcity :Our inability to satisfy all our wants Because we face scarcity, we must make choices. The choices we make depend on the incentives we face. An incentive is a reward that encourages an action or a penalty that discourages an action. © 2019 Pearson Education  Definition of Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the ‫کنار آمدن‬ incentives that influence and reconcile those choices. ‫آشتی دادن‬ Economics divides in two main parts: Microeconomics Macroeconomics © 2019 Pearson Education  Alternate Definitions Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses.” John Maynard Keynes: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessors to draw correct conclusions.” Alfred Marshall: “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” Jacob Viner: “Economics is what economists do.” © 2019 Pearson Education  Definition of Economics Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. An example of a microeconomic question is: Why are people downloading more movies? Would a tax on downloads change the number of movies downloaded? Macroeconomics is the study of the performance of the national and global economies. An example of a macroeconomic question is: Why does the unemployment rate fluctuate? © 2019 Pearson Education  Macro or Micro? https://www.bbc.com/news/world-us-canada-58386967 https://www.bbc.com/news/business-58360597 https://www.bbc.com/news/technology-58384457 https://www.bbc.com/news/technology-58343062 https://www.bbc.com/news/business-58331168 © 2019 Pearson Education  Two Big Economic Questions Two big questions summarize the scope of economics: How do choices end up determining what, how, and for whom goods and services get produced? When do choices made in the pursuit of self-interest also promote the social interest? © 2019 Pearson Education  Two Big Economic Questions What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. What? In the United States, agriculture accounts for less than 1 percent of total production, manufactured goods for 19 percent, and services for 80 percent. In low-income Ethiopia, agriculture accounts for 36 percent of total production, manufactured goods for 17 percent, and services for 47 percent. © 2019 Pearson Education  Two Big Economic Questions How? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: Land Labor Capital Entrepreneurship © 2019 Pearson Education  Two Big Economic Questions The “gifts of nature” that we use to produce goods and services are land. The work time and work effort that people devote to producing goods and services is labor. ‫اختصاص دادن‬ The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.. © 2019 Pearson Education  Two Big Economic Questions The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital. ( financial capital) The human resource that organizes land, labor, and capital is entrepreneurship. © 2019 Pearson Education  Two Big Economic Questions Figure 1.2 shows a measure of the growth of human capital in the United States since 1900—the percentage of the population that has completed different levels of education. © 2019 Pearson Education  Two Big Economic Questions For Whom? Who gets the goods and services depends on the incomes that people earn. Land earns rent Labor earns wages Capital earns interest Entrepreneurship earns profit profit. interest. wages. rent. © 2019 Pearson Education  Two Big Economic Questions Do Choices Made in the Pursuit of Self-Interest also Promote the Social Interest? Every day, 325 million Americans and 7.4 billion people in other countries make economic choices that result in what, how, and for whom goods and services are produced. These choices are made by people who are pursuing their self-interest. Are they promoting the social interest? © 2019 Pearson Education  Two Big Economic Questions Self-Interest You make choices that are in your self-interest—choices that you think are best for you. Social Interest Choices that are best for society as a whole are said to be in the social interest. Social interest has two dimensions: efficiency and fair shares. © 2019 Pearson Education  Two Big Economic Questions Efficiency and Social Interest Resource use is efficient if it is not possible to make someone better off without making someone else worse off. Fair Shares and Social Interest The idea that the social interest requires “fair shares” is a deeply held one. But what is a fair share? © 2019 Pearson Education  Two Big Economic Questions “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged” © 2019 Pearson Education  Economic Way of Thinking Six key ideas define the economic way of thinking: A choice is a tradeoff. People make rational choices by comparing benefits and costs. Benefit is what you gain from something. Cost is what you must give up to get something. Most choices are “how-much” choices made at the margin. Choices respond to incentives. © 2019 Pearson Education  Economic Way of Thinking A Choice Is a Tradeoff The economic way of thinking places scarcity and its implication, choice, at center stage. You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else. On Saturday night, will you study or have fun? You can’t study and have fun at the same time, so you must make a choice. Whatever you choose, you could have chosen something else. Your choice is a tradeoff. © 2019 Pearson Education  Economic Way of Thinking Making a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. Only the wants of the person making a choice are relevant to determine its rationality. © 2019 Pearson Education  The Economic Way of Thinking How do people choose rationally? The answers turn on benefits and costs. Benefit: What you Gain The benefit of something is the gain or pleasure that it brings and is determined by preferences Preferences are what a person likes and dislikes and the intensity of those feelings. © 2019 Pearson Education  The Economic Way of Thinking Cost: What you Must Give Up The opportunity cost of something is the highest-valued alternative that must be given up to get it. What is your opportunity cost of going to a live concert? Opportunity cost has two components: 1. The things you can’t afford to buy if you purchase the concert ticket. 2. The things you can’t do with your time if you attend the concert. © 2019 Pearson Education  The Economic Way of Thinking How Much? Choosing at the Margin You can allocate the next hour between studying and text messaging your friends. The choice is not all or nothing, but you must decide how many minutes to allocate to each activity. To make this decision, you compare the benefit of a little bit more study time with its cost—you make your choice at the margin. © 2019 Pearson Education  The Economic Way of Thinking To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time. ‫تغییر تدریجی‬ The benefit from pursuing an incremental increase in an activity is its marginal benefit. The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity. © 2019 Pearson Education  The Economic Way of Thinking Choices Respond to Incentives A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice. The central idea of economics is that we can predict how choices will change by looking at changes in incentives. Incentives are also the key to reconciling self-interest and the social interest. © 2019 Pearson Education  Economics: A Social Science and Policy Tool Economist as Social Scientist ‫متمایز میکنند‬ Economists distinguish between two types of statement: Positive statements Normative statements A positive statement can be tested by checking it against facts. A normative statement expresses an opinion and cannot be tested. © 2019 Pearson Education  Positive or Normative? The United States should cut its imports. Make multiple choices China is the largest trading partner of the United States. question from the whole If the price of gasoline rises, people will drive less and picture and use less gasoline. then let me answer them and check if its Monaco is the largest trading partner of the United States. correct. Also, Please don’t bold the I will receive an A for this course answer. I want I will receive a good grade for this course to answer it my self. © 2019 Pearson Education  Economics: A Social Science and Policy Tool Unscrambling Cause and Effect The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. Economists create and test economic models. ‫جنبه‬ An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. © 2019 Pearson Education  Economics: A Social Science and Policy Tool A model is tested by comparing its predictions with the facts. But testing an economic model is difficult, so economists also use: Natural experiments Statistical investigations Economic experiments © 2019 Pearson Education  Economics: A Social Science and Policy Tool Economist as Policy Adviser Economics is a toolkit for advising governments and businesses and for making personal decisions. All the policy questions on which economists provide advice involve a blend of the positive and the normative. Economics can’t help with the normative part—the goal. But for a given goal, economics provides a method of evaluating alternative solutions—comparing marginal benefits and marginal costs. © 2019 Pearson Education