Economics and Economic Reasoning pptx

© 2003 McGraw-Hill Ryerson Limited. Economics and Economics and Economic Reasoning Economic Reasoning Chapter 1 Chapter 1 © 2003 McGraw-Hill Ryerson Limited  What Economics Is 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. © 2003 McGraw-Hill Ryerson Limited  What Economics Is What Economics Is ◆ One of the key words in the definition of the term “economics” is coordination. © 2003 McGraw-Hill Ryerson Limited  What Economics Is What Economics Is ◆ Three central coordination problems any economic system must solve are: ●  ●  ●  © 2003 McGraw-Hill Ryerson Limited  What Economics Is What Economics Is ◆ Scarcity ensues because individuals want more than can be produced. ● Scarcity ! !"# ●    © 2003 McGraw-Hill Ryerson Limited $ What Economics Is What Economics Is ◆ The degree of scarcity is constantly changing. ◆ The quantity of goods, services, and usable resources depends on technology and human action. © 2003 McGraw-Hill Ryerson Limited % What Economics Is What Economics Is ◆ The following are the five important things to learn in economics: ● & ● &" ● &   © 2003 McGraw-Hill Ryerson Limited ' What Economics Is What Economics Is ◆ The following are the five important things to learn in economics (cont’d): ● (!  ● (! " !"" © 2003 McGraw-Hill Ryerson Limited ) A Guide to Economic A Guide to Economic Reasoning Reasoning ◆ Economic reasoning is making decisions by comparing costs and benefits. © 2003 McGraw-Hill Ryerson Limited * Marginal Costs and Marginal Costs and Marginal Benets Marginal Benets ◆ The relevant costs and benefits to economic reasoning are the expected incremental or additional costs incurred and the expected incremental or additional benefits of a decision. [...]... invisible hand theory – a market economy through the price mechanism will allocate resources efficiently © 2003 McGraw-Hill Ryerson Limited 1 - 34 Economic Theory and Stories x 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 © 2003 McGraw-Hill Ryerson Limited 1 - 35 Microeconomics and Macroeconomics x Economic. .. McGraw-Hill Ryerson Limited 1 - 35 Microeconomics and Macroeconomics x Economic theory is divided into two parts: microeconomics and macroeconomics © 2003 McGraw-Hill Ryerson Limited 1 - 36 Microeconomics x Microeconomics is the study of individual choice, and how that choice is influenced by economic forces © 2003 McGraw-Hill Ryerson Limited ... 2003 McGraw-Hill Ryerson Limited 1 - 15 Economics and Passion Economic reasoning is based on the premise that everything has a cost x Reasonable economic solutions are often not the most popular, as economic reasoning may take some passion out of life x © 2003 McGraw-Hill Ryerson Limited 1 - 16 Opportunity Cost x Opportunity cost – the basis of cost/benefit economic reasoning; it is a cost of the activity... social forces often work together against the invisible hand q What happens in society can be seen as a reaction to, and interaction of, the invisible hand, political and legal forces, and social and cultural forces © 2003 McGraw-Hill Ryerson Limited 1 - 26 Economic Insights x General insights into how economies work are often based on economic theory q Economic theory – generalizations about the workings... McGraw-Hill Ryerson Limited 1 - 27 Economic Insights x Theory ties together economists’ terminology and knowledge about economic institutions and leads to economic insights © 2003 McGraw-Hill Ryerson Limited 1 - 28 Economic Insights x Because theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle q Economic model – a framework that... an economic circumstance that is given relatively free rein by society to work through the market q Market forces ration by changing prices © 2003 McGraw-Hill Ryerson Limited 1 - 23 Economic and Market Forces x Economic reality is controlled by three forces: q Economic forces (the invisible hand) q Social and cultural forces q Political and legal forces © 2003 McGraw-Hill Ryerson Limited 1 - 24 Economic. .. 24 Economic and Market Forces x Economic forces: q The invisible hand is the price mechanism—the rise and fall of prices—that guides our actions in a market q When there is a shortage, the price goes up q When there is a surplus, the price goes down © 2003 McGraw-Hill Ryerson Limited 1 - 25 Economic and Market Forces x Social and cultural forces, political and legal forces: q Political and social forces... Limited 1 - 20 Economics and Market Forces x When goods are scarce, they must be rationed q Rationing is a mechanism chosen to determine who gets what © 2003 McGraw-Hill Ryerson Limited 1 - 21 Economic and Market Forces x One of the important choices that a society must make is to what extent economic forces are allowed to function freely © 2003 McGraw-Hill Ryerson Limited 1 - 22 Economic and Market Forces... 2003 McGraw-Hill Ryerson Limited 1 - 29 Economic Insights x Because theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle q Economic principle – a commonly held insight stated as a law or general assumption © 2003 McGraw-Hill Ryerson Limited 1 - 30 Economic Insights x Theories, and the models and principles used to represent them,... 31 Economic Insights x In order to understand the theory you must understand the assumptions underlying the theory © 2003 McGraw-Hill Ryerson Limited 1 - 32 The Invisible Hand Theory x The invisible hand theory states that markets are efficient in coordinating individuals’ decisions, allocating scarce resources to their best possible use © 2003 McGraw-Hill Ryerson Limited 1 - 33 The Invisible Hand . Ryerson Limited. Economics and Economics and Economic Reasoning Economic Reasoning Chapter 1 Chapter 1 © 2003 McGraw-Hill Ryerson Limited  What Economics Is What Economics Is ◆ Economics is. Limited  Economics and Passion Economics and Passion ◆ Economic reasoning is based on the premise that everything has a cost. ◆ Reasonable economic solutions are often not the most popular, as economic. to Economic A Guide to Economic Reasoning Reasoning ◆ Economic reasoning is making decisions by comparing costs and benefits. © 2003 McGraw-Hill Ryerson Limited * Marginal Costs and