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Introducing The Economic Way of Thinking

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Diego Fernando Ariza González
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84 views36 pages

Introducing The Economic Way of Thinking

Uploaded by

Diego Fernando Ariza González
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Introducing the

Economic Way of
Thinking

Economics for Today by Irvine Tucker, 5 th edition


©2008 South-Western College Publishing 1
What will you learn
in this chapter?
You will be acquainted
with the foundation of the
economic way of thinking
2
What is the economic
way of thinking?
A logical framework for
organizing your thoughts
and understanding
economics
3
What are some
examples?
 Can you prove there is no
person worth a trillion dollars?
 Why would you purchase more
Coca-Cola when the price
increases?
 How can you explain the
relationship between the
Super Bowl winner and
changes in the stock market? 4
What are the 3 building
blocks in the economic
way of thinking?
• scarcity & choice
• model building
• pitfalls of economic
reasoning
5
What is the
economic problem?
Providing for people’s
wants and needs in a
world of scarcity

6
What is meant
by scarcity?
The condition in which
wants are forever greater
than the available supply
of time, goods, and
resources
7
What does scarcity
force us to do?
It forces us to
make choices

8
What are resources?
The basic categories
of inputs used to
produce goods and
services
9
What are the three
categories of
resources?
Land
Labor
Capital
10
What is a
land resource?
A shorthand expression
for any natural resource
provided by nature

11
What is labor?
The mental and physical
capacity of workers to
produce goods and services

12
What is capital?
The physical plants,
machinery, and
equipment used to
produce other goods,
they do not directly
satisfy human wants
13
What is
financial capital?
The money used to
purchase capital.
Financial capital by itself
is not productive, it is a
paper claim on capital
14
What is
entrepreneurship?
Creative labor of
individuals that enables
them to seek profits by
combining resources

15
Labor
Labor
Land
Land Capital
Capital

Entrepreneurship organizes
Entrepreneurship organizes
resources to produce goods
resources to produce goods
and services
and services

16
What is economics?
The study of how society
chooses to allocate its
scarce resources in
order to satisfy unlimited
wants and needs
17
What is
macroeconomics?
The branch of economics
that studies decision-
making for the economy
as a whole
18
What is
microeconomics?
The branch of economics
that studies decision-
making by a single
individual, household, firm,
industry, or government
19
What is an
economic model?
A simplified description of
reality used to
understand and predict
the relationships
between variables
20
What is the purpose of
an economic model?
To forecast or predict
the results of various
changes in variables

21
What is the
scientific method?
• Problem identification
• Model development
• Testing a theory

22
Identify the
Identify the problem
problem

Develop aa model
Develop model based
based
on simplified
on simplified assumptions
assumptions

Test the
Test the model
model and
and
formulate aa conclusion
formulate conclusion
23
What conclusion
can we make?
If the evidence supports
the model, the
conclusion is to accept
the model. If not, the
model is rejected
24
What assumption is
always made when
testing a model?
ceteris paribus

25
What is
ceteris paribus?
A Latin phrase that
means that while certain
variables can change,
“all other things remain
unchanged”
26
What is an example
of ceteris paribus?
If the price of new Ford
cars decrease, and
everything else stays the
same, consumers will
buy more, but if other
variables change, we
cannot make a prediction27
What is the difference
between association
and causation?
We cannot always assume
that when one event
follows another, the first
caused the second
28
What are the two
common pitfalls in
understanding how
the economy works?
• failing to understand the
ceteris paribus assumption
• confusing association with
causation
29
What conclusion
can we make?
A theory cannot be tested
legitimately unless its
ceteris paribus
assumption is satisfied
30
Why do economists
forecasts differ?
Because using the same
methodology,
economists can agree
that event A causes
event B, but disagree
over the assumption
that event A will occur
31
Why do some
economists disagree?
The answer lies in
understanding the
difference between
positive and normative
economics
32
What is
positive economics?
An analysis limited
to statements
that are verifiable

33
What is
normative economics?
An analysis based on
value judgement

34
What conclusion
can we make?
When opinions or points of
view are not based on
facts, they are
scientifically untestable
35
END
36

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