Chapter 1

ceteris paribus

is a Latin phrase that means "all other things unchanged."

A choice at the margin

is a decision to do a little more or a little less of something. But choices in water consumption, like virtually all choices, are made at the margin. Individuals do not make choices about whether they should or should not consume water. Rather, they decide whether to consume a little more or a little less water.

model

is a set of simplifying assumptions about some aspect of the real world. Models are always based on assumed conditions that are simpler than those of the real world, assumptions that are necessarily false. A model of the real world cannot be the real world. Reality is never as simple as a model; one point of a model is to simplify the world to improve our understanding of it. Economists often use graphs to represent economic models. Models in economics also help us to generate hypotheses about the real world. In the next section, we will examine some of the problems we encounter in testing those hypotheses. Economists, like other social scientists and scientists, use models to assist them in their analyses.

hypothesis

is an assertion of a relationship between two or more variables that could be proven to be false. A statement is not a hypothesis if no conceivable test could show it to be false. The statement "Plants like sunshine" is not a hypothesis; there is no way to test whether plants like sunshine or not, so it is impossible to prove the statement false. Hypotheses in economics typically specify a relationship in which a change in one variable causes another to change. Scientists cannot prove a hypothesis to be true; they can only fail to prove it false.

Scarce goods

is one for which the choice of one alternative use of the good requires that another be given up. -Everything is a scarce good Air is a scarce good because it has alternative uses.

Free Good

is one for which the choice of one use does not require that we give up another. Example: Gravity

normative statement

is one that makes a value judgment. Such a judgment is the opinion of the speaker; no one can "prove" that the statement is or is not correct. Here are some examples of normative statements in economics: "We ought to do more to help the poor." "People in the United States should save more." "Corporate profits are too high." The statements are based on the values of the person who makes them. They cannot be proven false. We elect politicians to make deci sions on the major normative questions we face. Instead of 300 million people ar guing about what we should do we only have a few hundred people arguing about wha t we should do.

Variable

is something whose value can change. example: The speed at which a car is traveling is an example of a variable

Constant

is something whose value does not change. example: The number of minutes in an hour is an example of a constant.

Microeconomics

is the branch of economics that focuses on the choices made by individual decision-making units in the economy—typically consumers and firms—and the impacts those choices have on individual markets. Why do tickets to the best concerts cost so much? How does the threat of global warming affect real estate prices in coastal areas? Why do women end up doing most of the housework? Why do senior citizens get discounts on public transit systems? These questions are generally regarded as microeconomic because they focus on individual units or markets in the economy. Both microeconomics and macroeconomics give attention to individual markets. But in microeconomics that attention is an end in itself; in macroeconomics it is aimed at explaining the movement of major economic aggregates—the level of total output, the level of employment, and the price level.

Scarcity

is the condition of having to choose among alternatives (resources are limited, wants and desires are unlimited) Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

Opportunity Cost

is the value of the best alternative forgone in making any choice. Opportunity cost is the value of the best opportunity forgone in a particular choice. It is not simply the amount spent on that choice.

Questions of Scarcity

1) What should be produced? 2) How do we produce it? 3)For whom should goods and services be produced?

3 central ideas to economics

1) scarcity 2) choice 3) opportunity cost

Spurious correlation

A 3rd variable working behind the scenes can create an observed correlation

theory

A hypothesis that has not been rejected after widespread testing and that wins general acceptance

positive statement.

A statement of fact or a hypothesis Another testable assertion is a statement of fact, such as "It is raining outside" or "Microsoft is the largest producer of operating systems for personal computers in the world." Like hypotheses, such assertions can be demonstrated to be false. Unlike hypotheses, they can also be shown to be correct.

law

A theory that has been subjected to even more testing and that has won virtually universal acceptance

Invisible Hand

Created by Adam Smith we are guided by an invisible hand- our self-interested acts typically result in socially constructive transactions. I want my toothpaste for free. If I have to pay I guess I will... but I want to pay as little as possible. Of course if one brand is better than another I will willingly pay a little more for it. But I still want it for free! I would rather save my money for beer than to pay workers in a toothpaste factory.

Self-Interest

Economists assume that individuals make choices that they expect will create the maximum value of some objective, given the constraints they face. Furthermore, economists assume that people's objectives will be those that serve their own self-interest. In assuming that people pursue their self-interest, economists are not assuming people are selfish. People clearly gain satisfaction by helping others, as suggested by the large charitable contributions people make. Pursuing one's own self-interest means pursuing the things that give one satisfaction. It need not imply greed or selfishness. Adam Smith

Why is Econ different from other social sciences?

Economists study choices that scarcity requires us to make 1) Economists give special emphasis to the role of opportunity costs in their analysis of choices. 2)Economists assume that individuals make choices that seek to maximize the value of some objective, and that they define their objectives in terms of their own self-interest. 3)Individuals maximize by deciding whether to do a little more or a little less of something. Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue. The emphasis economists place on opportunity cost, the idea that people make choices that maximize the value of objectives that serve their self-interest, and a focus on the effects of small changes are ideas of great power.

fallacy of false cause

Reaching the incorrect conclusion that one event causes another because the two events tend to occur together

All Other Things Unchanged Problem

The hypothesis that an increase in the price of gasoline produces a reduction in the quantity demanded by consumers carries with it the assumption that there are no other changes that might also affect consumer demand. A better statement of the hypothesis would be: An increase in the price of gasoline will reduce the quantity consumers demand, ceteris paribus. Other things changed and affected gasoline consumption. Such problems are likely to affect any analysis of economic events. We cannot ask the world to stand still while we conduct experiments in economic phenomena. Economists employ a variety of statistical methods to allow them to isolate the impact of single events such as price changes, but they can never be certain that they have accurately isolated the impact of a single event in a world in which virtually everything is changing all the time.

Rational Cost-Benefit Analysis

Weigh the benefits of an action against the costs... and when the benefits outweigh the cost then it is wise to undertake that action - economics calls that a rational choice. Economics assumes rational behavior. That is,individuals do not intentionally make decisions that leave them worse off. Rational behavior is a broad behavioral assumption that greatly simplifies our analysis.

Sunk cost

a cost paid that you cannot get back. Staying through a bad concert or a bad movie is essentially saying, "OK, in response to wasting my money I am now going to waste my time too."

scientific method

a systematic set of procedures through which knowledge is created. In the scientific method, hypotheses are suggested and then tested.

Econ Careers

government agencies, business firms, and colleges and universities. Economists working for business firms and government agencies sometimes forecast economic activity to assist their employers in planning. They also apply economic analysis to the activities of the firms or agencies for which they work or consult. Economists employed at colleges and universities teach and conduct research. The study of law requires keen analytical skills; studying economics sharpens such skills. Economists have traditionally argued that undergraduate work in economics serves as excellent preparation for law school.

The Margin

the current level of an activity. Think of it as the edge from which a choice is to be made.

Economics

the study of how society allocates limited resources is in an attempt to satisfy unlimited wants or the study of choice in the face of scarcity -is a social science ( it is social because it involves people and their behavior, it is a science because it uses a scientific approach in its investigation of choices)

independent variable

the variable that induces a change

dependent variable

the variable that responds to the change