CHAPTER 1

Economics and Life

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LIMITED

resources

UNLIMITED competing uses

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WHAT IS ECONOMICS?

https://www.youtube.com/watch?v=2YULdjmg3o0&feature=player_em
bedded
1-3

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Individuals

DECISION
MAKERS

Households

Businesses

Governments

1-4

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CORE QUESTIONS
WHAT to
produce

Limited resources.

HOW to
produce

Method of Production
Efficiency

FOR WHOM
to produce

Reward to factors of production

Income and wealth distribution
1-5

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RESOURCES
Individuals

Time
and
money
resources

Societies
resources

Factors of
production, such as
labor and technology
1-6

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FACTORS OF PRODUCTION:
LAND

Land includes All Natural Resources

such as crude oil, water, air, and minerals.

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FACTORS OF PRODUCTION:
CAPITAL

Capital Goods or Investment Goods are produced for use in the

production of other goods, e.g., equipment, machinery, structures.

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FACTORS OF PRODUCTION:
LABOR

1-9

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FACTORS OF PRODUCTION:
ENTREPRENEURSHIP
Assembling of resources to
produce new or improved
products and technologies

Strategic business decision

maker, innovator, and risk
taker

1-10

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FIELD OF ECONOMICS

Macroeconomics
Study of the economy on a
regional, national, or international

Microeconomics
Study of individuals and firms.

scale.

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RATIONAL
BEHAVIOR
Purposefully behave in the
way that will best achieve
their goals

Compare all available

choices
1-12

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SELF-INTERESTED BEHAVIOR

To increase
personal
satisfaction

1-13

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Wants &
Limitation

MAKING
DECISIONS

Trade Offs

Responses

1-14

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SCARCITY

Lack of enough
resources to
satisfy all desired
uses

Wants > Available

resources
1-15

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MAKING RATIONAL DECISION

Trade-off
A choice with
greatest net
benefit

Costs &
benefits
Direct costs &
Opportunity
costs

1-16

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THE OPPORTUNITY COST

The value of the next

best alternative

1-17

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SUNK COSTS
Additional
benefits vs.
Additional
costs
No
consideration
of past benefits
or costs

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MARGINAL BENEFITS
MARGINAL COSTS ANALYSIS
The marginal cost of an
action should not exceed
its marginal benefits.
No free lunch

Conflicts between long

and short-run

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People respond
to a change in
the tradeoffs
they face

Negative
incentive

INCENTIVES

Positive
incentive

1-20

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EFFICIENCY
If a profit-making
opportunity
exists, someone
will provide the
good or service.

resources are used

to produce goods
and services with
the greatest
economic value.

People seek
opportunities to get
what they want.

1-21

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EFFICIENCY
Innovation

Market failure
Intervention & Government Failure

Goals other than profit

1-22

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UNDERSTANDING GLOBAL FOOD CRISIS

https://www.youtube.com/watch?v=IbOc0ZXyjKM&feature=player_emb
1-23
edded

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THEORY
REALITY
The economy is too
complex to describe
and explain in one
course or one lifetime.

Economists use
theories, or models, of
economic behavior to
evaluate and design
economic policy.
1-24

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SCIENTIFIC
METHOD

Observation
Hypothesis
Testing
Acceptance, Rejection,
or Modification
Theories
Economic Principles or
Economic Laws
1-25

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Generalization
Other-ThingsEqual
Assumption

BEHIND
ECONOMIC
PRINCIPLES
Ceteris paribus is the
assumption that nothing else is
changing.

Graphical
Expression
1-26

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WHY DO ECONOMISTS DISAGREE?

Positive economics

Normative economics

The Way Things Are

Facts and Data
Imperfect Information

The Way Things Should Be

Subjective perspective
Value Judgment

1-27

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POSITIVE
OR
NORMATIVE

a) GDP increased by 1%
during last quarter.
b) GDP growth was slow
during last quarter.
1-28

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CORRELATION CAUSATION
When two events occur
together, there is a
tendency to assume that
one causes the other.

Correlation
Consistently-observed
relationship between
two events

Causation
Relationship between
two events in which one
brings about the other

Positive

Negative
1-29

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Correlation without Causation,
an Omitted Variable,
OR Reverse Causation

Education and future earnings is

positively correlated.
Shoe size and reading
comprehension scores are
positively correlated.
Baby booms are caused by
higher-quality minivans.
1-30

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ANSWERS:

Education and future earnings is

positively correlated.
Omitted variable bias: ability
Shoe size and reading comprehension
scores are positively correlated.
Correlation without causation
Baby booms are caused by higherquality minivans.
Reverse causation
1-31

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WHY MAY ASSUMED CAUSAL

RELATIONSHIP BE FALSE?
Correlation
without
causation

Extremely correlated, making it

appear that a causal relationship
exists.

Omitted
variables

Extremely correlated due to a

third event causing the two

Reverse
causation

Unclear whether Event A causes

Event B or if Event B causes
Event A
1-32

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MODELS
Simplification of
a complex
problem
Clear assumptions.
Describes the real
world accurately
Predicts cause and
effect
1-33

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THE CIRCULAR FLOW DIAGRAM

Land, labor,
and capital

Income

Spending

Market for
factors of production

Market for goods

and services

Wages, rent,
and profit
land, labor
and capital

Goods and
services

Households

Firms

Flow of dollars

Revenue
Goods and
services to

Flows of goods
and services
1-34

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SUMMARY
Scarcity
Opportunity cost
Incentives/disincentives.
Efficiency
1-35

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THANK YOU

Complete Reading Chapter 1

Read Appendix to Chapter 2

Take the quiz on Syllabus & Technology

Start Reading Chapter 2

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Watch the video on the Basic of Graphing.

Ida Mirzaie, PhD

Department of Economics
423 Arps Hall
(614) 292-6110
mirzaie.1@osu.edu