In Economics What Is A Collection Of Specific Economic Units Treated As If They Were One Unit

more economic security allows less economic freedom, society must assess the tradeoffs and decide on the optimal (best) balance between them.

• Economists use the scientific method to establish theories, laws, and principles. Economic theories (laws, principles, or models) are generalizations relating to the economic behaviour of individuals and institutions; good theories are grounded in facts.

behaviour and the economy; policy economics involves using the theories to fix economic problems or promote economic goals.

• Economists use the scientific method to establish theories, laws, and principles. Economic theories (laws, principles, or models) are generalizations relating to the economic behaviour of individuals and institutions; good theories are grounded in facts.

• Theoretical economics involves formulating theories (or laws and principles) and using them to understand and explain economic behaviour and the economy; policy economics involves using the theories to fix economic problems or promote economic goals.

• Policy-making requires a clear statement of goals, a thorough assessment of options, and an unbiased evaluation of results.

• Some of society's economic goals are complementary, while others conflict; where conflicts exist, tradeoffs arise.

macroeconomics and microeconomics

Economists derive and apply principles about economic behaviour at two levels.

mAcROeconomics

The part of economics concerned with the economy as a whole.

AggRegAte

A collection of specific economic units treated as if they were one unit.

Macroeconomics

Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates such as the government, household, and business sectors. An aggregate is a collection of specific economic units treated as if they were one unit. Therefore, we might lump together the millions of consumers in the Canadian economy and treat them as if they were one huge unit called "consumers."

In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the structure of the economy and the relationships of its major aggregates. Macroeconomics speaks of such economic measures as total output, total employment, total income, aggregate expenditures, and the general level of prices in analyzing various economic problems. Very little attention is given to specific units making up the various aggregates. Macroeconomics examines the beach, not the sand, rocks, and shells.

microeconomics

The part of economics concerned with such individual units as industries, firms, and households.

Microeconomics

Microeconomics looks at specific economic units. At this level of analysis, we observe the details of an economic unit, or very small segment of the economy, under the figurative microscope. In microeconomics we talk of an individual industry, firm, or household. We measure the price of a specific product, the number of workers employed by a single firm, the revenue or income of a particular firm or household, or the expenditures of a specific firm, government entity, or family. In microeconomics, we examine the sand, rocks, and shells, not the beach.

The macro-micro distinction does not mean that economics is so highly compartmentalized that every topic can be readily labelled as either macro or micro; many topics and subdivisions of economics are rooted in both. Example: While the problem of unemployment is usually treated as a macroeconomic topic (because unemployment relates to aggregate spending), economists recognize that the decisions made by individual workers in searching for jobs and the way specific product

Part One • An Introduction to Economics and the Economy and labour markets operate are also critical in determining the unemployment rate. (Key Question 7)

positive economics

The analysis of facts or data to establish scientific generalizations about economic behaviour.

normative economics

The part of economics involving value judgments about what the economy should be like.

Positive and Normative Economics

Both macroeconomics and microeconomics involve facts, theories, and policies. Each contains elements of ositive economics and normative economics. Positive economics focuses on facts and cause-and-effect relationships. Positive economics avoids value judgments, tries to establish scientific statements about economic behaviour, and deals with what the economy is actually like. Such factually based analysis is critical to good policy analysis.

In contrast normative economics incorporates value judgments about what the economy should be like. Normative economics looks at the desirability of certain aspects of the economy. It underlies expressions of support for particular economic policies.

Positive economics concerns what is, while normative economics embodies subjective feelings about what ought to be. Here are some examples. Positive statement: "The unemployment rate in several European nations is higher than that in Canada." Normative statement: "European nations ought to undertake policies to reduce their unemployment rates." A second positive statement: "Other things equal, if tuition is substantially increased, college and university enrolment will fall." Normative statement: "College and university tuition should be lowered so that more students can obtain an education." Whenever words such as "ought" or "should" appear in a sentence, there is a strong chance you are encountering a normative statement.

Most of the disagreement among economists involves normative, value-based policy questions. Of course, there is often some disagreement about which theories or models best represent the economy and its parts. But economists agree on a full range of economic principles. Most economic controversy thus reflects differing opinions or value judgments about what society should be like. (Key Question 8)

• Macroeconomics examines the economy as a whole; microeconomics focuses on specific units of the economy.

• Positive economics deals with factual statements ("what is"); normative economics involves value judgments ("what ought to be"). Theoretical economics is "positive"; policy economics is "normative."

• Macroeconomics examines the economy as a whole; microeconomics focuses on specific units of the economy.

• Positive economics deals with factual statements ("what is"); normative economics involves value judgments ("what ought to be"). Theoretical economics is "positive"; policy economics is "normative."

Pitfalls to Objective Thinking

Because they often affect us so personally, we often have difficulty thinking objectively about economic issues. Here are some common pitfalls to avoid in successfully applying the economic perspective.

Biases

Most people bring a bundle of biases and preconceptions when thinking about economic issues. For example, you might think that corporate profits are excessive or

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CHAPTER ONE • THE NATURE AND METHOD OF ECONOMICS

that lending money is always superior to borrowing money. Perhaps you believe that government is necessarily less efficient than businesses or that more government regulation is always better than less. Biases cloud thinking and interfere with objective analysis. The novice economics student must be willing to shed biases and preconceptions that are not supported by facts.

Loaded Terminology

The economic terminology used in newspapers and popular magazines is sometimes emotionally biased, or loaded. The writer or the interest group he or she represents may have a cause to promote or an axe to grind and may slant an article accordingly. High profits may be labelled "obscene," low wages may be called "exploitive," or self-interested behaviour may be "greed." Government workers may be referred to as "mindless bureaucrats," and those favouring stronger government regulations may be called "socialists." To objectively analyze economic issues, you must be prepared to reject or discount such terminology.

Definitions

Some of the terms used in economics have precise technical definitions that are quite different from those implied by their common usage. This is generally not a problem if everyone understands these definitions and uses them consistently. For example, investment to the average citizen means the purchase of stocks and bonds in security markets, as when someone "invests" in Bell Canada stock or government bonds. But to the economist, investment means the purchase of newly created real (physical) cap-www.tse.com ital assets such as machinery and equipment or the construction of a new factory build-Toronto Stock Exchange ing. It does not mean the purely financial transaction of swapping cash for securities.

fallacy of composition

Incorrectly reasoning that what is true for the individual (or part) is necessarily true for the group (or whole).

Fallacy of Composition

Another pitfall in economic thinking is the assumption that what is true for one individual or part of a whole is necessarily true for a group of individuals or the whole. This is a logical fallacy called the fallacy of composition; the assumption is not correct. A statement that is valid for an individual or part is not necessarily valid for the larger group or whole.

Consider the following example from outside of economics. You are at a football game and the home team makes an outstanding play. In the excitement, you leap to your feet to get a better view. A valid statement: "If you, an individual, stand, your view of the game is improved." But is this also true for the group—for everyone watching the play? Not necessarily. If everyone stands to watch the play, nobody— including you—will probably have a better view than when all remain seated.

A second example comes from economics: An individual farmer who reaps a particularly large crop is likely to realize a sharp gain in income. But this statement cannot be generalized to farmers as a grou . The individual farmer's large or "bumper" crop will not noticeably influence (reduce) crop prices because each farmer produces a negligible fraction of the total farm output. But for all farmers as a group, prices decline when total output increases. Thus, if all farmers reap bumper crops, the total output of farm products will rise, depressing crop prices. If the price declines are relatively large, total farm income might actually fall.

Recall our earlier distinction between macroeconomics and microeconomics: The fallacy of composition reminds us that generalizations valid at one of these levels of analysis may or may not be valid at the other.

14 Part One • An Intrdductidn to Economics and the Economy post hoc, ergo propter hoc fallacy

Incorrectly reasoning that when one event precedes another the first event must have caused the second event.

Causation Fallacies

Causation is sometimes difficult to identify in economics. Two important fallacies often interfere with economic thinking.

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