8/25 Notes: Think Like An Economist (from Dallas Jordan and Billi Farr)

25.8.11 Dallas Jordan AP Economics

Economics Defined

-The social science that studies the production, distribution, and consumption of resources.
-Resources: anything that has value, e.g. Gas, water, coal

Impact of Economics
-Like it or not, economics impacts every aspect of your life.
-Most of the ideologies of the modern world (even religion) are shaped by economics.
-The study of resources and how we use them forms the foundations for most philosophical disciplines.

Economic Awareness
-It is vital that you understand economics so that you can be a well-informed, productive member of society. You need to understand economic issues- such as healthcare, taxes, wages, unemployment- and make the right decisions when voting.

Economic Application
-As a consumer, you need to understand economics to make wise choices in purchasing.
-You need to understand marginal cost and benefit as well as opportunity costs to
to make the right decisions.

How do we study economics?
-Descriptive or Empircal Economics
-Concerned with gathering facts to form theories about economic problems.
-Economists form theories and principles and then generalize about economic behaviour.

Induction vs. Deduction
-Induction
-Creating principles from facts
-Deduction
- Hypothetical method
-You make a generalization and try to prove it.
-I&D aren't opposing techniques of investigation-they actually compliment each other. Economists use both.

Economic Policies
-Talk about the general knowledge of economic behaviour
- Policies are potential solutions to problems. It isn't a given solution, but a potential solution, because you have tried it yet. Make the policy based on deduction, see if it works, then take the data and use induction to revise your policy.

Generalizations
-Economic principles are generalizations.
-They apply to the group as a whole
-It may not, however, apply to each individual person.
-Of course, you have outliers on either end. There are people that make millions, while there are those on welfare. These are on the margin.

Ceteris Paribus
-"The other things equal assumption"
-To construct a generalization, you must hold all other variables in an experiment as constant, except for the one in question. If not, your results will be tainted.

Abstractions
-An abstraction is a concept or idea not associated with any specific instance.
-Economic principles are by necessity an abstraction and do not reflect the full complexity or the full reality.

Macroeconomics (what we are studying this semester)
-Deals with the economy as a whole with basic subdivisons and aggregates.
-Ex.
-Gov't
- Households
- Business Sectors
-How will a tax increase affect the economy?

Microeconomics
-Deals with specific economic units and a detailed consideration thereof.
-Basically, you are putting a small unit of the economy under a microscope,
-Ex. Which TV will sell the most units?

Positive vs. Normative Statements
-Positive Statements
-Deals with facts and avoids value judgments.
-A purely objective and scientific approach.
-Normative Statements
-Involves value judgments about what the economy looks like.
-What is versus what should be.

THREE BASIC ECO QUESTIONS
What to produce?
-what good/service should I provide?
-decision has to be based on scarcity
Example: the rise in fuel-efficient, hybrid vehicles
How to produce?
-build yourself or outsource?
For whom to produce?
-who is your target market?

FACTORS OF PRODUCTION
FOP are the resources required to produce goods and/or services
-land; surface land and water
-labor; either in mental or physical form
-capital; tools, factories, and equip. used in making goods and services
-entrepreneurs; innovators and risk takers

HOW TO IDENTIFY AN ENTREPRENEUR
1. initiative: a spark plug to economic activity
2. Decision making: makes non-routine decisions and thinks outside of the box
3. Innovator: creates a new product or service
4. Risk taker: no guarantee of profit with a huge risk of loss. Also potential for huge gain.