CHAPTER 1 – INTODUCING THE

ECONOMIC WAY OF THINKIG

Dr. Luzviminda An Abacan

Asst. Prof., BatStateU-
Rosario

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Can you prove there is no person worth a trillion dollar?

Why would you purchase more Coca-Cola when the price

increases?

How can we explain the relationship between the Super Bowl

Winner and changes in the stock market?
ECONOMIC PUZZLES TO SOLVE

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 INTRODUCING THE
ECONOMIC WAY OF
THINKING
The Problem of Scarcity
Scarcity- The condition in which human
wants are forever greater than the
available supply of time, goods, and
resources
-impossible to satisfy every desire
-list some of your unsatisfied wants
-there are always limits on the economy’s
ability to satisfy unlimited wants
-it is a fact of life throughout the world
Conclusion
The problem of scarcity and choice are basic
economic problems faced by every society.
1-2 Scarce Resources and Production
Resources- the basic categories of inputs used
to produce goods and services.
-Resources are also called factors of production
-Economists divide resources into three
categories: land, labor and capital.
1-2a LAND
Any natural resource provided by nature that is
used to produce a good or service.
-it includes those resources that are gifts of
nature available for use in the production
process 3
 INTRODUCING THE
ECONOMIC WAY OF
THINKING
Two broad categories of natural
resources:
a) Renewable resources-basic inputs
that resources can automatically
replace. eg. Lakes crops, clean air
b) Nonrenewable resources- are basic
inputs that nature cannot
automatically replace. eg. Coal, oil,
natural gas. If fossil fuels disappear,
must use substitutes
1-2b LABOR
The mental and physical capacity of worker to
producr goods and services.
-the labor resources is measured both by the
number of people available for work and by the
skills of quality of workers.
-nations differ in their ability to produce is that
human characteristics such as the education,
experience, health, and motivation of workers,
differ among nations.
Entrepreneurship- is the creative ability of
individuals to seek profit by taking risk and
combining resources to produce innovative
products.
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 INTRODUCING THE 1-2c CAPITAL
ECONOMIC WAY OF A human-made used to produce other goods
THINKING and services.
-capital goods do not directly satisfy human
wants eg. Building, robots, vehicles, etc.
Entrepreneur- is a motivated person who -it is also a money value of paper assets like
seeks profit by such risky activities as stocks and bond called financial capital
starting new business, creating new
products, or inventing new ways of
Conclusion
accomplishing tasks.
Money by itself does not produce goods and
-they are agents of change who bring services; instead, it only a means of buying
material progress to society. capital.
Example: Levi Strauss Company

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 INTRODUCING THE
ECONOMIC WAY OF
THINKING
1-3 Economics: The Study of Scarcity
and Choice
Economics- is the study of how the
society chooses to allocate its scarce
resources to the production of goods and
services to satisfy unlimited wants.
Society makes two kinds of choices:
a) Macro choices- large choices
b) Micro choices – small choices
1-3a Macroeconomics
A branch of economics that studies decision
making for the economy as a whole.
-it examine inflation, unemployment, growth of
the economy, the money supply, and the
national income
1-3b Microeconomics
A branch of economics that studies decision
making by a single individual, household, firm,
industry, or level of government.
-it examines group of consumers and
businesses
It study economic units involve in the market
like supply, demand, price changes
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 INTRODUCING THE 1-4a Problem Identification
ECONOMIC WAY OF - Define the issue
THINKING - Example: suppose an economist wishes to investigate
the microeconomic problem of why motorists cut
back on gasoline consumption in a given year from,
for example, 400 million gallons per day in May to
300 million gallons per day in December.
1-4 The Methodology of Economics
1-4a Model Development
- A Model is a simplified description of reality used to
understand and predict the relationship between
variables.
- Model requires simplified assumptions
- Example: in gasoline consumption several variables
might be related to the quantity of gasoline
consumed: consumer income, the price of substitute
for gasoline, the price of gasoline, the fuel economy
of cars, and weather conditions.
- Reject variables that have slight or no relationship to
gasoline consumption.
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 INTRODUCING THE An economic theory can be expressed say:
ECONOMIC WAY OF -”f A, then B, other things held constant”
THINKING an economic model is useful only if it yields
accurate predictions
- When the evidence is consistent with the
1-4 Testing a Theory theory that A causes outcome B, there is
confidence in the theory validity.
-verbal argument
- When the evidence is inconsistent with the
-numerical table theory that A causes outcome B, the
-graph researcher reject the theory.
-mathematical equation Economist gathers data to test the theory, that
-the purpose of an economic model is to if the price of gasoline rises, the gasoline
forecast or predict the results of various purchases fall- all other relevant factors held
changes in variables. constant.

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 INTRODUCING THE
ECONOMIC WAY OF
THINKING
Checkpoint
Can You Prove There Is No Trillion-
Dollar Person?
Suppose a theory sys that no citizen is worth
$i trillion. You decide to test this theory and send
researchers to all corners of the nation to check
financial records to see whether someone qualifies
by owning assets valued at $ 1 trillion or more.
After years of checking, the researchers return and
report that not a single person is worth atleast $1
trillion. Do you conclude that the evidence proves
the theory? Explain.
1-5 Hazards of the Economic way of
Thinking
Two most common pitfalls to clear thinking
are: 1) failing to understand ceteris paribus
assumption; 2) confusing association and
causation
1-5a The Ceteris Paribus Assumption
-It is a latin phrase that means while certain
variables change “all other things remain
unchanged.”
Example: the ceteris paribus assumption holds
everything else constant; allows to concentrate on the
relationship between two key variables: changes in the
price of gasoline and the quantity of gasoline purchased
per month.
Conclusion: The fact that one event follows
another does not necessarily mean that the first
event caused the second event. 10
 INTRODUCING THE Conclusion: The fact that one event follows
ECONOMIC WAY OF another does not necessarily mean that the first
THINKING event cause the second event.

Should Nebraska State Join a Big-Time

Athletic Conference?
1-5b Association versus Causation Nebraska State (a mythical university) sttod by
while Penn State, Florida State, the University of Miami,
Common errors reasoning is confusing and the University of South Carolina, joined Big-Time
association (or correlation) and causation athletic conferences, Now Nebraska State officials are
between variables pondering whether to remain independent or to pursue
membership in a conference noted for high quality
A model is valid only when a cause-and-effect football and basketball programs. An editorial in the
relationship is stable or dependable overtime, newspaper advocates joining the cities a study showing
rather than being an association that occurs by that the universities belonging to major athletic
chance and eventually disappears. conference have higher graduation rates than
nonmembers. Because educating its students is the
Example: witch doctor perform a voodoo dance number one goal of Nebraska State, will this evidence
and stock market prices skyrocket persuade Nebraska State officials to join a big-time
conference? Why or why not?
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 INTRODUCING THE
ECONOMIC WAY OF
THINKING
1-6 Why do economists disagree?
-more interesting to report disagreement
than agreement.
Ex. Free trade among nations, elimination
of farm subsidies and rent ceilings,
government deficits, etc.
-when disagreement do exist, the reason
can often be explained by difference
between positive economics and
normative economics.
1-6aPositive Economics – an analysis limited
to statements that are verifiable.
-it can be proven either true or false
-positive statement is expressed: “If A, then B”
Ex. If the national unemployment rate rises to
9 percent, then teenage unemployment exceeds
80 percent.
-the key consideration is whether the statement
is testable and not whether it is true or false.
-”If event A occurs, then event B follows” can
be thought as conditional positive statement.
Ex. Two economists may agree that if the
government cuts spending by 10 percent this
year, prices will fall about two percent next
year.
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 INTRODUCING THE 1-6b Normative Economics- is an
ECONOMIC WAY OF analysis based on value judgement.
THINKING -it attempts to determine what should be
-it express an individual or collective
Other economist assumes opinion on a subject and cannot be
Congress will not cut spending proven by facts to be true or false.
While others assume Congress Ex. Animal rights activist says that no
will cut spending by 10 percent. one should purchase a fur coat.
Conclusion: Economists’ forecasts -”We ought to ensure that every
can differ because using the same teenager who want a job has one.”
methodology, economists can agree Conclusion: When opinions or points of
that event A causes event B, but view are not based on facts, they are
disagree over the assumption that scientifically untestable.
even A will occur.
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 INTRODUCING THE Two normative statements:
ECONOMIC WAY OF 1) Government should target only those
THINKING who needs assistance , rather than
using the “shotgun approach”.
Does the Minimum Wage Really Help
the Working Poor?
Analyze the Issue:
 Two positive statements
 1) when raising the minimum
wage, working poor will get better
living without cost to taxpayer
 2) if inflation occurs, then lost
employment opportunities for
marginal workers increases
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 “Economics is a study of cause-and-effect relationships in
an economy. It's purpose is to discern the consequences
of various ways of allocating resources which have
alternative uses. It has nothing to say about philosophy or
values, anymore than it has to say about music or
literature.”
― Thomas Sowell, Basic Economics: A Citizen's Guide to
the Economy

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