1-1 Chapter 1 - Introduction Rhesus monkeys are willing to forgo 10% of their “income” of cherry juice to examine photos of leading and attractive members of their group. This behavior mirrors our willingness to purchase celebrity magazines. Nevertheless, economists who study making choices in response to rewards or inducements, propose some are willing to pay to be viewed by others as leading and attractive members of our society. What can economists tell us about why people purchase items that attract attention such as flashy sports cars or designer clothing?
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1-1 Chapter 1 - Introduction Rhesus monkeys are willing to forgo 10% of their “income” of cherry juice to examine photos of leading and attractive members.
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Transcript
1-1
Chapter 1 - Introduction
Rhesus monkeys are willing to forgo 10% of their “income” of cherry juice to examine photos of leading and attractive members of their group.
This behavior mirrors our willingness to purchase celebrity magazines.
Nevertheless, economists who study making choices in response to rewards or inducements, propose some are willing to pay to be viewed by others as leading and attractive members of our society.
What can economists tell us about why people purchase items that attract attention such as flashy sports cars or designer clothing?
1-2
Learning Objectives
• Discuss the difference between microeconomics and macroeconomics
• Evaluate the role that rational self-interest plays in economic analysis
• Explain why the study of economics is a science
• Distinguish between positive and normative economics
1-3
Chapter Outline
• The Power of Economic Analysis
• Defining Economics
• Microeconomics versus Macroeconomics
• The Economic Person: Rational Self-Interest
• Economics as a Science
• Positive versus Normative Economics
1-4
The Power of Economic Analysis
• Incentives Rewards for engaging in a
particular activity
1-5
• The economic way of thinking is a framework to analyze solutions to economic problems.
How much time to study
Choosing which courses to take
Whether troops should be sent abroad
The Power of Economic Analysis (cont'd)
1-6
The Power of Economic Analysis (cont'd)
• The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world.
• Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.
1-7
The Power of Economic Analysis (cont'd)
• Economic analysis is a way of thinking about all decisions.
Your education, career, financing your home, family
Your involvement in the business world, or in politics as a voter
1-8
Defining Economics
• Economics
The study of how people allocate their limited resources to satisfy their unlimited wants
The study of how people make choices
1-9
Defining Economics (cont'd)
• Resources Things used to produce other things to
satisfy people’s wants
• Wants What people would buy if their incomes
were unlimited
1-10
Defining Economics (cont'd)
• With limited income (resources), people must make choices to satisfy their wants.
• We never have enough of everything, including time, to satisfy our every desire.
1-11
Defining Economics (cont'd)
• Individuals, businesses, and nations face alternatives, and choices must be made.
• Economics studies how these choices are made.
1-12
Microeconomicsversus Macroeconomics
• Microeconomics
The study of decision making undertaken by individuals (or households) and by firms
Like looking though a microscope to focus on the smaller parts of the economyDecision of a worker to work overtime or not
A family’s choice of having a baby
An individual firm advertising
1-13
Microeconomicsversus Macroeconomics (cont'd)
• Macroeconomics
The study of the behavior of the economy as a whole
Deals with economy wide phenomenaThe national unemployment rate
The rate of growth in the money supply
The national government’s budget deficit
1-14
Microeconomicsversus Macroeconomics (cont'd)
• Macroeconomics deals with aggregates, or totals—such as total output in an economy.
• Modern economic theory blends micro and macro concepts.
1-15
The Economic Person:Rational Self-Interest
• Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain.
1-16
The Economic Person:Rational Self-Interest (cont'd)
• Rationality Assumption
The assumption that people do not intentionally make decisions that would leave them worse off
1-17
The Economic Person:Rational Self-Interest (cont'd)
• Questions
Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics?
Can economic models be applied to situations in which behavior is at odds with what we expect from rational people?
1-18
The Economic Person:Rational Self-Interest (cont'd)
• Responding to incentives
Rationality and the use of incentives
Making choicesBalancing cost and benefits
1-19
The Economic Person:Rational Self-Interest (cont'd)
• Some examples of incentives
Responding to positive incentivesSchoolchildren getting gold stars, working to
have a “better life” for yourself
Responding to negative incentivesPenalties, punishments, using credit cards to
avoid check overdrafts
1-20
E-Commerce Example: Playing the Float with Plastic Instead of Checks
• Checks used to take up to several days to clear.
• People would rush to make deposits to avoid overdraft charges.
• Technological developments enhanced digital imaging, and banks have reduced check float.
• This has provided incentives for more credit card purchases—as they allow for deferred payment.
• How might high interest rates influence incentives to use credit cards?
1-21
The Economic Person:Rational Self-Interest (cont'd)
• Defining self-interest
The pursuit of one’s goals, does not always mean increasing one’s wealthPrestige
Friendship
Love
1-22
Example: The Perceived Value of Gifts
• The perceived value of gifts
Often, the recipient of the gift places a value on it far less than the market value.
Should we substitute gift certificates for physical gifts?
1-23
Economics as a Science
• Models or Theories
Simplified representations of the real world used as the basis for predictions or explanationsA map is the quintessential model
1-24
Economics as a Science (cont'd)
• Assumptions
The set of circumstances in which a model is applicable
Every model, or theory, must be based on a set of assumptions.
1-25
Example: Getting Directions
• A map is a simplifying model of reality.
• The degree of simplification varies across maps; some contain more detail than others.
• Economic models attempt to focus on what is relevant to the problem at hand and omit what is not.