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Introducing the
Economic Way of Thinking
Economics for Today by Irvine Tucker, 5 th edition2008 South-Western College Publishing
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What will you learnin this chapter?
You will be acquaintedwith the foundation of theeconomic way of thinking
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What is the economicway of thinking?
A logical framework for organizing your thoughtsand understandingeconomics
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What are some
examples?Can you prove there is noperson worth a trillion dollars?
Why would you purchasemore Coca-Cola when theprice increases?
How can you explain therelationship between theSuper Bowl winner and
changes in the stock market?
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What are the 3 buildingblocks in the economicway of thinking?
scarcity & choicemodel building
pitfalls of economicreasoning
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What is theeconomic problem?
Providing for peopleswants and needs in a
world of scarcity
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What is meantby scarcity?
The condition in whichwants are forever greater than the available supplyof time, goods, andresources
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What does scarcityforce us to do?
It forces us tomake choices
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What are resources?
The basic categoriesof inputs used toproduce goods andservices
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What are the threecategories of resources?
LandLabor Capital
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What is aland resource?
A shorthand expressionfor any natural resource
provided by nature
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What is labor?
The mental and physicalcapacity of workers toproduce goods and services
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What is capital?The physical plants,
machinery, andequipment used toproduce other goods,they do not directlysatisfy human wants
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What isfinancial capital?
The money used topurchase capital.Financial capital by itself
is not productive, it is apaper claim on capital
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What isentrepreneurship?
Creative labor of individuals that enablesthem to seek profits bycombining resources
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LandLand Labor Labor CapitalCapital
Entrepreneurship organizesresources to produce goodsand services
Entrepreneurship organizesresources to produce goodsand services
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What is economics?The study of how society
chooses to allocate itsscarce resources inorder to satisfy unlimitedwants and needs
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What ismacroeconomics?
The branch of economicsthat studies decision-making for the economyas a whole
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What ismicroeconomics?
The branch of economicsthat studies decision-making by a single
individual, household, firm,industry, or government
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What is aneconomic model? A
simplified description of reality used tounderstand and predictthe relationshipsbetween variables
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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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What is thescientific method?
Problem identificationModel development
Testing a theory
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What conclusioncan we make?
If the evidence supportsthe model, theconclusion is to acceptthe model. If not, themodel is rejected
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What assumption isalways made when
testing a model?ceteris paribus
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What isceteris paribus? A Latin phrase that
means that while certainvariables can change,all other things remainunchanged
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What is an example
of ceteris paribus?If the price of new Fordcars decrease, andeverything else stays thesame, consumers will
buy more, but if other variables change, wecannot make a prediction
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What is the differencebetween associationand causation?
We cannot always assumethat when one eventfollows another, the firstcaused the second
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What are the two
common pitfalls inunderstanding howthe economy works?failing to understand theceteris paribus assumptionconfusing association withcausation
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What conclusioncan we make?
A theory cannot be testedlegitimately unless itsceteris paribusassumption is satisfied
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Why do economistsforecasts differ?Because using the same
methodology,economists can agreethat event A causes
event B, but disagreeover the assumptionthat event A will occur
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Why do someeconomists disagree?
The answer lies inunderstanding thedifference betweenpositive and normativeeconomics
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What ispositive economics? A n analysis limited
to statements
that are verifiable
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What conclusioncan we make?
When opinions or points of view are not based onfacts, they arescientifically untestable
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