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What are Resources?
The basic categories of
inputs used to produce
goods and services
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What are the three
categories of Resources?
Land
Labor
Capital
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What is a
Land Resource?
A shorthand expression for
any natural resource
provided by nature
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What is Labor?
The mental and physical
capacity of workers to
produce goods and services
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What is Capital?
The physical plants,
machinery, and
equipment used to
produce other goods
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What is
Financial Capital?
The money used to
purchase capital
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What is
Entrepreneurship?
The creative ability of
individuals to seek
profits by combining
resources to produce
innovative products
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Labor
Labor
Land
Land Capital
Capital
Entrepreneurship organizes
Entrepreneurship organizes
resources to produce goods
resources to produce goods
and services
and services
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What is Economics?
The study of how society
chooses to allocate its
scarce resources to the
production of goods and
services in order to satisfy
unlimited wants
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What is
Macroeconomics?
The branch of economics
that studies decision-
making for the economy
as a whole
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What is
Microeconomics?
The branch of economics that
studies decision-making by
a single individual,
household, firm, industry, or
level of government
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What is the
Scientific Method?
Problem identification
Model development
Testing a theory
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What is the purpose of
an Economic Model?
To forecast or predict
the results of various
changes in variables
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Identify the
Identify the problem
problem
Develop aa model
Develop model based
based
on simplified
on simplified assumptions
assumptions
Collect data
Collect data and
and
test the
test the model
model
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What assumption is
always made when
testing a model?
Ceteris Paribus
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What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, all other
things remain unchanged
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What is the difference
between Association
and Causation?
We cannot always assume
that when one event
follows another, the first
caused the second
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What is
Positive Economics?
An analysis limited
to statements that
are verifiable
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What is
Normative Economics?
An analysis based on
value judgement
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Key Concepts
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What is the Economic Problem?
What is meant by Scarcity?
What are resources?
What are the three categories of Resources?
What is Entrepreneurship?
What is Economics?
What is Macroeconomics?
What is Microeconomics?
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What is the Scientific Method?
What assumption is always made when
testing a model?
What is Ceteris Paribus?
What is the purpose of model
building?
What is Positive Economics?
What is Normative Economics?
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Summary
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Scarcity is the fundamental
economic problem that human wants
exceed the availability to time,
goods, and resources. Individuals and
society therefore can never have
everything they desire.
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Resources are factors of
production classified as land, labor,
and capital. Entrepreneurship is a
special type of labor. An
entrepreneur combines resources to
produce innovative products.
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Economics is the study of how
individuals and society choose to
allocate scarce resources. In order to
satisfy unlimited wants. Faced with
unlimited wants and scarce resources,
we must make choices among
alternatives.
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Society
Chooses
Resources
Scarcity
Unlimited
wants
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Macroeconomics applies an
economy wide perspective that focuses
on such issues as inflation,
unemployment, and the growth rate of
the economy.
33
Microeconomics examines
individual decision-making units
within an economy. Microeconomics
studies such topics as a consumers
response to changes in the price of
coffee and the reasons for changes in
the market price of personal
computers.
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Models are simplified descriptions
of reality used to understand and
predict economic events. An economic
model can be stated verbally or in a
table, graph, or equation. If the
evidence is not consistent with the
model, the model is rejected.
35
Microeconomics examines
individual decision-making units
within an economy.
Microeconomics studies such topics
as a consumers response to changes
in the price of coffee and the reasons
for changes in the market price of
personal computers.
36
Microeconomics examines
individual decision-making units
within an economy. Microeconomics
studies such topics as a consumers
response to changes in the price of
coffee and the reasons for changes in
the market price of personal
computers.
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Collect data
and test
the model
Develop
a model based
on assumptions
Identify
the
problem 38
Ceteris paribus holds all other
factors unchanged that might affect a
particular relationship. If this
assumption is violated, a model
cannot be tested. Another reasoning
pitfall is to think association means
causation.
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Use of positive versus normative
economic analysis is a major reason for
disagreement among economists.
Positive economics uses testable
statements. Often a positive argument is
expressed as an if-the statement.
Normative economics is based on value
judgments or opinions and uses words
such as good, bad, ought to, and ought
not to.
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Chapter 1 Quiz
42
2. Which of the following would eliminate
scarcity as an economic problem?
a. Moderation of peoples competitive
instincts.
b. Discovery of large new energy
reserves.
c. Resumption of steady productivity
growth.
d. None of the above because scarcity can
not be eliminated.
D. Because it is impossible to provide
everyone with everything they want,
we will always have scarcity.
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3. Which of the following is not a resource?
a. Land.
b. Labor.
c. Money.
d. Capital.
44
4. Economics is the study of
a. how to make money.
b. how to operate a business.
c. people making choices because of the
problem of scarcity.
d. the government decision-making
process.
C. Economics is the study of how people must
decide among alternatives to meet their
wants and needs in this world of scarcity.
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5. Microeconomics approaches the study of
economics from the viewpoint of
a. individuals or specific markets.
b. the operation of the Federal Reserve.
c. economy wide effects
d. the national economy.
A. Microeconomics is the study of the
decision- making process for individuals,
business owners, and government.
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6. A review of the performance of the U.S.
economy during the 1990s is primarily
the concern of
a. macroeconomics.
b. microeconomics.
c. both macroeconomics and
microeconomics.
d. neither macroeconomics nor
microeconomics.
A. Macroeconomics is the study of the
economy as a whole.
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7. An economic theory claims that a rise in
gasoline prices will cause gasoline purchases
to fall, ceteris paribus. The phrase ceteris
paribus means that
a. other relevant factors like consumer
incomes must be held constant.
b. the gasoline prices must first be adjusted
for inflation.
c. the theory is widely accepted, but cannot
be accurately tested.
d. consumers need for gasoline remains the
same regardless of price.
A. Anytime price changes we always make
the assumption that nothing else changes.
48
8. An economist notices that sunspot activity
is high just prior to recessions and
concludes that sunspots cause recessions.
The economist has
a. confused association with and causation.
b. misunderstood the ceteris paribus
assumption.
c. Used normative economics to answer a
positive question.
d. built an untestable model.
53
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