As you read this book or listen to your instructor, you may find yourself nodding along and thinking that everything makes perfect sense. Economics may even seem easy. Indeed, it is rather easy to follow economics, since it's based so heavily on simple logic. But following and learning are two different things. You will eventually discover (preferably before your first exam) that economics must be studied actively, not passively.
If you are reading these words lying back on a comfortable couch, a phone in one hand and a remote control in the other, you are going about it in the wrong way. Active studying means reading with a pencil in your hand and a blank sheet of paper in front of you. It means closing the book periodically and reproducing what you have learned. It means listing the steps in each logical argument, retracing the cause-and-effect steps in each model, and drawing the graphs that represent the model. It means thinking about the basic principles of economics and how they relate to what you are learning. It is hard work, but the payoff is a good understanding of economics and a better understanding of your own life and the world around you.
Economics is the study of choice under conditions of scarcity. As individuals, and as a society, we have unlimited desires for goods and services. Unfortunately, the resources—land, labor, and capital—needed to produce those goods and services are scarce. Therefore, we must choose which desires to satisfy and how to satisfy them. Economics provides the tools that explain those choices.
The field of economics is divided into two major areas. Microeconomics studies the behavior of individual households, firms, and governments as they interact in specific markets. Macroeconomics, by contrast, concerns itself with the behavior of the entire economy. It considers variables such as total output, total employment, and the overall price level.
Economics makes heavy use of models—abstract representations of reality. These models are built with words, diagrams, and mathematical statements that help us understand how the economy operates. All models are simplifications, but a good model will have just enough detail for the purpose at hand.
When analyzing almost any problem, economists follow a four-step procedure in building and using economic models. This four-step procedure will be introduced at the end of Chapter 3.
economics scarcity resources labor capital human capital land microeconomics macroeconomics positive economics normative economics model simplifying assumption critical assumption
1. Discuss (separately) how scarcity arises for households, businesses, and governments.
2. Would each of the following be classified as microeconomics or macroeconomics? Why?
a. Research into why the growth rate of total production increased during the 1990s.
b. A theory of how consumers decide what to buy.
c. An analysis of Dell Computer's share of the personal computer market.
d. Research on why interest rates were unusually high in the late 1970s and early 1980s.
3. Discuss whether each statement is an example of positive economics or normative economics or if it contains elements of both:
a. An increase in the personal income tax will slow the growth rate of the economy.
b. The goal of any country's economic policy should be to increase the well-being of its poorest, most vulnerable citizens.
c. Excess regulation of small business is stifling the economy. Small business has been responsible for most of the growth in employment over the last 10 years, but regulations are putting a severe damper on the ability of small businesses to survive and prosper.
d. The 1990s were a disastrous decade for the U.S. economy. Income inequality increased to its highest level since before World War II.
4. What determines the level of detail that an economist builds into a model?
5. What is the difference between a simplifying assumption and a critical assumption?
1. Come up with a list of critical assumptions that could lie behind each of the following statements. Discuss whether each assumption would be classified as normative or positive.
a. The United States is a democratic society.
b. European movies are better than American movies.
c. The bigger the city, the higher the quality of the newspaper.
1. Go to the Bank of Sweden's Web page on the Nobel Prize in economic science at http://www.ee.nobel.se/prize/memorial. html. Review the descriptions of some recent awards and try to determine whether each of those awards was primarily for work in microeconomics or macroeconomics.
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