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EC190 Chapter 1
Transcript of EC190 Chapter 1
Chapter 1: Introducing the
Economic Way of Thinking
UNOH Summer 2013
Jon C. Tomlinson, Ph.D.
The Problem of Scarcity
Scarcity - the condition in which human wants are forever greater than than the available supply of time, goods, and resources.
It is impossible to satisfy every desire.
Scarcity requires CHOICE.
Scarce Resources and Production
Resource (factors of production) - the basic categories of inputs to produce goods and services.
Exhibit 1, page 4
Land - any natural resource
Labor - mental/physical capacity of workers
Capital - physical, plants, machinery, and equipment (financial capital is different here)
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.
Keys = Scarcity and Choice
Macro versus Micro
Macroeconomics - the branch of economics that studies decision making for the economy as a whole.
"Big picture" items such as inflation and unemployment
Microeconomics - studies the decision making by a single individual, household, firm, or level of government.
Think of your checking account.
Methodology of Economics
Economists employ a step-by-step procedure for solving problems by developing a theory, gathering data, and testing whether the data are consistent with the theory.
The Model Building Process
Exhibit 2, page 7
Identify the problem
Develop a model based on simplified assumptions
Collect data, test the model, and formulate a conclusion
Hazards of the Economic Way of Thinking
Reasoning mistakes, common pitfalls to clear thinking
The Ceteris Paribus Assumption
- All other things remain unchanged
Association/Correlation versus Causation
You're The Economist
Correlation or Causation?
Why Do Economists Disagree?
Positive Economics - an analysis limited to statements that are verifiable.
Normative Economics - an analysis based on value judgment.
What should be.
You're The Economist
DOES RAISING THE MINIMUM WAGE HELP THE WORKING POOR?
1. Identify two positive and two normative statements given concerning raising the minimum wage. List
other minimum wage arguments not discussed in the Economics in Practice, and classify them as
either positive or normative economics.
“In 1938 Congress enacted. . .” (positive economics)
“Today a minimum wage worker. . . deplorable annual increase.” (normative economics)
“Only a small percentage. . . are full-time workers below the poverty line.” (positive economics)
“They say it is outrageous that a worker can work full-time and. . .” (normative economics)
2. Give a positive and a normative argument why a business leader would oppose raising the
minimum wage. Give a positive and a normative argument why a labor leader would favor raising
the minimum wage.
A business leader might argue that a higher minimum wage raises labor costs and cuts profits
(positive economics). The business leader might also argue that a higher minimum wage is unfair
to businesses because the business should be able to set wages without government intervention
(normative economics). A labor leader could state that there is no relationship between higher
minimum wage rates and unemployment (positive economics). The labor leader may also argue
that the government must insure that workers earn a decent living (normative economics).
3. Explain your position on this issue. Identify positive and normative reasons for your decision. Are
there alternative ways to aid the working poor?
Students should give thoughtful answers. One alternative to aid the working poor is simply to
mail them a check.
Questions or Concerns??