Ch01 What Is Economics

WHAT IS
ECONOMICS? 1
CHAPTER
Objectives
After studying this chapter, you will be able to:

 Define economics and distinguish between
microeconomics and macroeconomics
 Explain the three big questions of microeconomics
 Explain the three big questions of macroeconomics
 Explain the ideas that define the economic way of
thinking
 Explain how economists go about their work as social
scientists
Choice, Change, Challenge, and Opportunity
Economics, the science of choice, has much to say about

the change, challenge, and opportunity that we face today.
Technological change, terrorism, and recession provide a
landscape that is rich with problems to be tackled and
choices to be understood.
Your economics course helps you to understand the
powerful forces that shape and change our world.
Definition of Economics
Limited Resources vs. Unlimited Needs

Definition of Economics
Three Big Microeconomic Questions
What Goods and Services

are Produced?
Figure 1.1 shows the
major items produced in
the U.S. economy today.
It emphasizes the
dominant place of services
in our economy.
Figure 1.2 shows the

trends in what the U.S.
economy has produced
over the past 60 years.
It shows the decline of
agriculture, mining,
construction, and
manufacturing, and the
expansion of services.
The facts about what we

produce raise the deeper
question: What determines
the quantities of realtor
services, new homes, DVD
players, and corn that we
produce?
Microeconomics provides
some answers to these
questions.
Egypt 2018
Figure 1.3 shows a

measure of the growth of
human capital in the
United States over the last
century—the percentage
of the population that has
completed different levels
of education.
The facts about how we

produce raise the deeper
question: What determines
the quantities of capital,
labor, and other resources
that get used to produce
goods and services?
some answers to this
question.
https://wid.world/count
ry/egypt/
53 44
3% % %
Poorest 20% Middle 60% Richest 20%

2200 28000 27000
5000
1000 2000 17000
7000
7000
1200 3000
10000
4000
Total
Income 57200
10
%
50
%
40
%
The facts about for whom

raise the deeper question:
What determines earnings
and the distribution of
income that in turn
determine who gets the
goods and services
produced?
some answers to this
question.
https://www.ida2at.com/reading-research-
income-expenditure-egypt/
Three Big Macroeconomic Questions
GDP Per Capita
A rising cost of living is called inflation.

A falling cost of living is called deflation.
Inflation brings a shrinking value of the dollar and deflation
brings a rising value of the dollar.
Macroeconomics seeks to explain the forces that
determine the cost of living and the inflation (or deflation)
rate.
Why Does Our Economy Fluctuate?

Economists remain unsure about the sources of economic
fluctuations and about the actions that might be taken to
smooth the economy.
But in your study of macroeconomics, you will learn what
economists have discovered about economic fluctuations.
Q1 2%
Q2 4%
Q3 7%
Q1 2%
Q2 1%
Q3 0.5%
Q1 -2%
Q1 -2% Q2 -1%
Q2 -4% Q3 -0.5%
Q3 -6%
Economic Way of
Thinking
The Economic Way of Thinking
Opportunity Cost
Thinking about a choice as a tradeoff emphasizes cost as
an opportunity forgone.
The highest-valued alternative that we give up to get
something is the opportunity cost of the activity chosen.
Ahmed is considering going for a touristic trip on the
coming summer. He used to work in the summer in
part time job for $2000 or to take a
$ 4000 scholarship and the trip will cost $1200
What is the opportunity cost of this trip?
$4000 + $1200 = $5200

Economics: A Social Science
Social science
The task of economic science is to discover positive
statements that are consistent with what we observe in the
world and that enable us to understand how the economic
world works.
This task is large and breaks into three steps:
 Observation and measurement
Model building
Testing models
Observation and Measurement

Economists observe and measure economic activity,
keeping track of such things as:
Quantities of resources
Wages and work hours
Prices and quantities of goods and services produced
Taxes and government spending
Quantities of goods and services bought from and sold
to other countries
Obstacles and Pitfalls in Economics

Two common fallacies that economists try to avoid are:
The fallacy of composition, which is the false statement
that what is true for the parts is true for the whole or what
is true for the whole is true for the parts.
The post hoc fallacy from the Latin term “post hoc, ergo
propter hoc”—means “after this, therefore because of
this,” which is the error of reasoning that a first event
causes a second event because the first occurs before the
second.
Agreement and Disagreement

Economists are often accused of contradicting each other.
In contrast to the popular image, economists find much
common ground on a wide range of issues.
Page 14 of the textbook lists twelve economic propositions
that at least 70 percent of all economists polled agreed on.
WHAT IS
ECONOMICS? 1
CHAPTER
THE END

Ch01 What Is Economics

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WHAT IS

After studying this chapter, you will be able to:

Economics, the science of choice, has much to say about

Limited Resources vs. Unlimited Needs

What Goods and Services

Figure 1.2 shows the

The facts about what we

Figure 1.3 shows a

The facts about how we

Poorest 20% Middle 60% Richest 20%

The facts about for whom

A rising cost of living is called inflation.

Why Does Our Economy Fluctuate?

What is the opportunity cost of this trip?

$4000 + $1200 = $5200

Observation and Measurement

Obstacles and Pitfalls in Economics

Agreement and Disagreement

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