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Learning Objectives
Discuss the difference between
microeconomics and
macroeconomics
Evaluate the role that rational
self-interest plays in economic
analysis
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Learning Objectives
Explain why the study of
economics is a science
Distinguish between positive and
normative economics
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The economic way of thinking is
a framework to analyze
solutions to economic problems,
such as:
Staying in school
Choosing what course to take
What to have for break
The Power of Economic
Analysis
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Economics is a way of thinking
about all decisions, such as:
Voting and public policy
Choosing a career
Buying a home
Trade policy
The Power of Economic
Analysis
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Defining Economics
Economics
The study of how people allocate
their limited resources to satisfy
their unlimited needs and wants
The study of how people make
choices
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Defining Economics
With limited income (resources),
people must make choices to
satisfy their wants.
Economics studies how these
choices are made.
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Microeconomics
versus Macroeconomics
Microeconomics
The study of decision making
undertaken by individuals (or
households) and by firms
Macroeconomics
The study of the behavior of the economy
as a whole

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8
Macroeconomics vs.
Microeconomics
To understand the scope and sweep of macroeconomics, lets
begin by looking more carefully at the difference between
microeconomic and macroeconomic questions.
MICROECONOMIC
QUESTION
MACROECONOMIC
QUESTION
Go to school or take a job? How many people are
employed in the economy as a
whole?
What determines the salary
offered by MQC to Mr. Danan,
a new MA Graduate?
What determines the overall
salary levels paid to workers
in a given year?
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Macroeconomics vs.
Microeconomics
MICROECONOMIC
QUESTION
MACROECONOMIC
QUESTION
What determines the cost to a
university or college of offering
a new course?
What determines the overall
level of prices in the economy
as a whole?
What government policies
should be adopted to make it
easier for low-income students
to attend college?
What government policies
should be adopted to promote
full employment and growth in
the economy as a whole?
What determines whether
Citibank opens a new office in
Shanghai?
What determines the overall
trade in goods, services and
financial assets between the
US and the rest of the world?
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10
Microeconomics focuses on how decisions are made by
individuals and firms and the consequences of those decisions.
Ex.: How much it would cost for a university or college
to offer a new course the cost of the instructors salary,
the classroom facilities, the class materials, and so on.
Having determined the cost, the school can then decide
whether or not to offer the course by weighing the costs
and benefits.
Macroeconomics vs. Microeconomics
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Macroeconomics examines the aggregate behavior of the
economy (i.e. how the actions of all the individuals and firms
in the economy interact to produce a particular level of
economic performance as a whole).
Ex.: Overall level of prices in the economy (how high or
how low they are relative to prices last year) rather than
the price of a particular good or service.
Macroeconomics vs. Microeconomics
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Macroeconomics or
Microeconomics
How will Ms. Martins tips change when a large
manufacturing plant near the restaurant where
she works closes?
What will happen to spending by consumers
when the economy enters a downturn?
How will the price of tomatoes change if the
town is flooded?
What will happen to our exports as the peso
becomes less expensive in terms of other
currencies?
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It is not from the benevolence of
the butcher, the brewer, or the
baker that we expect our dinner,
but from the regard to their own
interest.
Adam Smith, An Inquiry into the
Nature and Causes of the Wealth
of Nations, 1776
The Economic Person:
Rational Self-Interest
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Economists assume that people
make choices in their own self-
interest and in a rational
manner.
The Economic Person:
Rational Self-Interest
Rationality Assumption
The assumption that people do not
intentionally make decisions that
would leave them worse off
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The Economic Person:
Rational Self-Interest
Rationality and the use of
incentives
Positive incentives
Negative incentives
Making choices
Balancing cost and benefits
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Defining self-interest
The pursuit of ones goals
Humanitarian
Prestige
Wealth
Power
Friendship
The Economic Person:
Rational Self-Interest
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Economics as a Science
Models or Theories
Simplified representations of the
real world used as the basis for
predictions
or explanations
A map and getting directions are
examples of models
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Economics as a Science
Assumptions
The set of circumstances in which
a model is applicable
The Ceteris Paribus Assumption
Holding other things constant
Nothing changes except the factor
or factors being studied
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Economics as a Science
Economics is an empirical
science.
Real-world data is used to evaluate
the usefulness of a model.
Models are useful if they predict
economic phenomena.
Economic models predict how
people react, not how they think.
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Positive versus
Normative Economics
Positive Economics
Purely descriptive statements or
scientific predictionsa statement of
what is
Normative Economics
Analysis involving value judgmentsa
statement of what ought to be