Chapter 1

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  • Topic: Economics, Macroeconomics, Microeconomics
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Economics, Economic Methods, and Economic Policy
Learning Objectives
By the end of this chapter, you will be able to: • Define economics and recognize the value of studying economics. • Explain the relationship between scarcity and choice, and the role of opportunity costs. • Understand how the production possibilities curve is used to help understand an economic system. • Understand and follow the steps to proper policy analysis.

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Section 1.1 What Is Economics?

CHAPTER 1

Introduction

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onsider this. . . Why are some people rich and others poor? Why do doctors earn higher salaries than newspaper reporters? Why do Republican congressional representatives attack the economic policy proposals of the Democrats? Why do some companies make lots of profits, while others file for bankruptcy? Why is welfare only temporary? And perhaps most importantly, why can’t you have everything you want—now? These are all important personal, societal, and even global issues. Economics can help you understand the answers to these and many other questions. By the time you finish this chapter, you will have some idea about the way economists address these questions, and by the time you finish this textbook, you will be able to develop answers of your own.

1.1 What Is Economics?

conomics is the study of how people, individually and through institutions, make decisions about producing and consuming goods and services and how they face the problem of scarcity. Scarcity, or the inability to satisfy everyone’s wants, is a fundamental economic problem in a world with limited resources. The study of economics is divided into microeconomics and macroeconomics. Microeconomics focuses on the choices made by individuals and businesses. It describes the interactions of producers and consumers in individual markets, such as the market for cars. It also examines interactions between such markets—for example, the impact of changes in the demand for steel on the price of aluminum. The study of the economy as a whole is called macroeconomics. Macroeconomics is concerned with the aggregate or total effect, determined by adding across many markets. Macroeconomics studies the behavior of variables that describe the whole economy, such as the value of the total output that the economy produces in a given time period (which is called gross domestic product, or GDP). Macroeconomics also examines the behavior of such aggregates as the price level and unemployment. In microeconomics, the most important tools are demand and supply. Demand and supply help to explain prices and outputs in individual markets. These tools also explain the relationship between prices and outputs in different markets. In microeconomics, you may look

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The study of microeconomics focuses on a micro level while the study of macroeconomics focuses on the aggregate level. An analogy can be made to studying flowers: Consider the analysis of all the components of a single flower versus the analysis of the combined impact of all the flowers in a garden together.

Section 1.1 What Is Economics?

CHAPTER 1

at the demand for the output of a single industry, such as bicycle manufacturing. In macroeconomics, you look at the level of prices and output for the economy as a whole, using aggregate demand and aggregate supply as the main tools. Even though microeconomics and macroeconomics are often studied separately, they are closely related. Economics is a social science. This classification makes economics an academic relative of political science, sociology, psychology, and anthropology. All of these fields look at the behavior of human beings, both individually and in groups. They study different subsets of the actions and interactions of human beings. (For this reason, they are also sometimes termed behavioral sciences.) Economics focuses on the consumption, production, and use of scarce resources...
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