Economics and Economic Reasoning - PowerPoint by 9G9zUO

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									  Economics and Economic
        Reasoning
• Chapter 1
          Laugher Curve
• Q. Why did God create economists?
• A. In order to make weather forecasters
  look good.
      What Economics Is
• Economics is the study of how human
  beings coordinate their wants and
  desires, given the decision-making
  mechanisms, social customs, and
  political realities of the society.
       What Economics Is
• One of the key words in the above
  definition is “coordination.”
       What Economics Is
• Three central coordination problems
  any economic system must solve are:
       What Economics Is
• Scarcity ensues because individuals
  want more than can be produced.
       What Economics Is
• The degree of scarcity is constantly
  changing.
       What Economics Is
• Economics is the study of how to get
  people to do things they're not wild
  about doing and not to do things they
  are wild about doing.
       What Economics Is
• The following are the five important
  things to learn in economics:
       What Economics Is
• The following are the five important
  things to learn in economics:
     A Guide to Economic
         Reasoning
• Economic reasoning is making
  decisions by comparing costs and
  benefits.
Marginal Costs and Marginal
         Benefits
• The relevant costs and benefits that
  matter are the expected incremental or
  additional costs incurred and the
  expected incremental benefits of a
  decision.
Marginal Costs and Marginal
         Benefits
• If the marginal costs of doing something
  exceeds the marginal benefits, don’t do
  it.
Marginal Costs and Marginal
         Benefits
• In economists’ jargon, marginal refers to
  additional or incremental.
Marginal Costs and Marginal
         Benefits
• Marginal cost – the additional cost to
  you over and above the costs you have
  already incurred.
Marginal Costs and Marginal
         Benefits
• Marginal benefit – the additional
  benefit above and beyond what you’ve
  already accrued.
Marginal Costs and Marginal
         Benefits
• According to the economics decision
  rule:
    Economics and Passion
• Economic reasoning is based on the
  premise that everything has a cost.
    Economics and Passion
• Although economists can be as
  passionate as the next person, they
  must squelch this normal human
  response in order to do their work with
  objectivity.
         Opportunity Cost
• Opportunity cost – the basis of
  cost/benefit economic reasoning; it is a
  cost of the activity you have chosen
  measured by the benefit foregone, of
  the next-best alternative to the activity
  you have chosen.
        Opportunity Cost
• In economic reasoning, opportunity cost
  must be less than the benefit of what
  you have chosen.
        Opportunity Cost
• Opportunity costs are not limited to
  individual decisions but to government
  decisions as well.
        Opportunity Cost
• The opportunity cost concept applies to
  all aspects of life and is fundamental to
  understanding how society reacts to
  scarcity.
Economics and Market Forces
• When goods are scarce, they must be
  rationed.
  – Rationing is a mechanism chosen to
    determine who gets what.
Economics and Market Forces
• One of the important choices that a
  society must make is to what extent
  economic forces are allowed free rein.
Economics and Market Forces
• A market force is an economic
  circumstance that is given relatively free
  rein by society to work through the
  market.
Economics and Market Forces
• Economic reality is controlled by three
  forces:
  – Economic forces (the invisible hand).
  – Social and cultural forces.
  – Political and legal forces.
Economics and Market Forces
• Economic forces:
Economics and Market Forces
• Social and cultural forces, political and
  legal forces:
    Economic Terminology
• Learning economic terminology takes
  repetition and memorization, hardly a
  fun things to do.
    Economic Terminology
• Hundreds of economic terms will be
  introduced in this book.
        Economic Insights
• General insights into how economies
  work are often based on economic
  theory.
  – Economic theory – generalizations about
    the workings of an abstract economy.
        Economic Insights
• Theory ties together economists’
  terminology and knowledge about
  economic institutions and leads to
  economic insights.
        Economic Insights
• Because theories are too abstract to
  apply to specific cases, a theory is often
  embodied in an economic model or an
  economic principle.
        Economic Insights
• Because theories are too abstract to
  apply to specific cases, a theory is often
  embodied in an economic model or an
  economic principle.
        Economic Insights
• Theories, and the models and principles
  used to represent them, are abstract but
  efficient means of conveying
  information.
        Economic Insights
• In order to understand the theory you
  must understand the assumptions
  underlying the theory.
 The Invisible Hand Theory
• The invisible hand theory states that
  markets are efficient in coordinating
  individuals’ decisions, allocating scarce
  resources to their best possible use.
 The Invisible Hand Theory
• This insight is called the invisible hand
  theory – a market economy through the
  price mechanism will allocate resources
  efficiently.
Economic Theory and Stories
• Economic theory and its models are a
  shorthand means of telling a story. If
  you can’t translate a theory into a story,
  you don’t understand the theory.
      Microeconomics and
       Macroeconomics
• Economic theory is divided into two
  parts: microeconomics and
  macroeconomics.
      Microeconomics and
       Macroeconomics
• Economic theory is divided into two
  parts: microeconomics and
  macroeconomics.
         Microeconomics
• Microeconomics is the study of
  individual choice, and how that choice is
  influenced by economic forces.
         Microeconomics
• Microeconomic theory considers
  economic reasoning from the viewpoint
  of individuals and firms and builds up
  from there to an analysis of the entire
  economy.
         Microeconomics
• Microeconomics studies such things as:
  pricing policy of firms, households’
  decisions on what to buy, and how
  markets allocate resources among
  alternative ends.
        Microeconomics
• Microeconomics analyses from the
  parts to the whole.
        Macroeconomics
• Macroeconomics is the study of
  inflation, unemployment, business
  cycles, and economic growth.
• Macroeconomics analyzes from the
  whole to the parts.
     Economic Institutions
• Corporations, governments, and cultural
  norms are all economic institutions.
  They differ significantly among nations.
• Economic institutions sometimes seem
  to operate in ways quite different than
  economic theory predicts.
     Economic Institutions
• In applying economic theory to reality,
  you’ve got to have a sense of economic
  institutions.
   Economic Policy Options
• Economic policies are actions (or
  inactions) taken by government to
  influence economic actions.
   Economic Policy Options
• Those who wish to carry out economic
  policy effectively must understand how
  institutions might change as a result of
  the economic policy.
  Objective Policy Analysis
• Good objective policy analysis keeps
  the value judgments separate from the
  analysis.
• Subjective policy analysis is that which
  reflects the analyst’s view of how things
  should be.
  Objective Policy Analysis
• In order to make the distinction between
  objective and subjective analysis clear,
  economists have divided economics
  into three categories.
  Objective Policy Analysis
• Positive economics is the study of
  what is, and how the economy works.
  Objective Policy Analysis
• Normative economics is the study of
  what the goals of the economy should
  be.
  Objective Policy Analysis
• Normative economics is the study of
  what the goals of the economy should
  be.
  Objective Policy Analysis
• Art of economics is the application of
  the knowledge learned in positive
  economics to the achievement of the
  goals determined in normative
  economics.
   Objective Policy Analysis
• Maintaining objectivity is easier in
  positive economics – harder in
  normative economics.
   Objective Policy Analysis
• It is hardest to maintain objectivity in the
  art of economics since it embodies the
  problems of both positive and normative
  economics.
  Objective Policy Analysis
• One of the best ways to find out about
  feasible economic policy options is to
  compare them from one country to
  another.
     Policy and Social and
        Political Forces
• The choice of policy options depends on
  more than economic theory.
• As soon as economists apply economy
  theory to policy, political and social
  forces must be taken into account.
  Economics and Economic
        Reasoning
• End of Chapter 1

								
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