Several problems exist in interpreting any set of economic data. Table 1.1 "LSAT Scores for Students Taking the Exam in 2008" gives the scores, as well as the ranking for each of these majors in 2008. Scarcity, Choice, and Cost All choices mean that one alternative is selected over another. Are such models valid? How might we test such a hypothesis? Part of that cost is the value of the best alternative use of the money required to see the doctor. In the process of making this choice they have to give up other alternative so the concept of opportunity cost is applicable for each and every level of economic agents. Would time still be scarce? And, of course, you will consider the expected benefits of alternative courses of study. Not all goods, however, confront us with such choices. This allowed Mr. Harper to continue to pursue a policy of deficit and tax reduction. Economists have investigated the nature of family life, the arts, education, crime, sports, law—the list is virtually endless because so much of our lives involves making choices. Making a choice made normally involves a trade-off – this means that choosing more of one thing can only be achieved by giving up something else in exchange. Resources are not always dollars and cents – time, skill and land are all resources. Economics is, at its core, the study of how and why people make choices. Many models in physics and in chemistry assume the existence of a perfect vacuum (that is, a space entirely empty of matter). Economists focus on the opportunity costs of choices, they assume that individuals make choices in a way that maximizes the value of an objective defined in terms of their own self-interest, and they assume that individuals make those choices at the margin. concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions A high income can make it very costly to take a day off; we might expect highly paid individuals to work more hours than those who are not paid as well. Our observation of the gasoline market between May 2005 and May 2006 did not offer a conclusive test of the hypothesis that an increase in the price of gasoline would lead to a reduction in the quantity demanded by consumers. Presumably, though, it is the warm weather that causes people to wear shorts rather than the wearing of shorts that causes warm weather; it would be incorrect to infer from this that people cause warm weather by wearing shorts. Economics majors tied philosophy majors for the highest average score. Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years. In assuming that people pursue their self-interest, economists are not assuming people are selfish. Economics ranges from the very small to the very large. This fact is not what distinguishes economics from other social sciences; all social scientists are interested in choices. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost. If you're the analytical type, fascinated by the world around you, then an economics major might be a good choice for you. Nick Robinson is a writer, instructor and graduate student. The study of individual decisions is called microeconomics. Why or why not? Positive statements are factual and can be tested. is a decision to do a little more or a little less of something. How should goods and services be produced? Faster economic growth? Our resources are limited. Consider a parcel of land. Economists generally work in three types of organizations: government agencies, business firms, and colleges and universities. 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. The choices we confront as a result of scarcity raise three sets of issues. All choices mean that one alternative is selected over another. Or consider the cost of going to the doctor. “ECONOMIC CHOICES” This phrase simply means ….. ‘my choice is limited by the amount of money at my disposal’. interest: money a bank or borrower pays for the use of money trade-off: giving up the chance to buy But as the table suggests, economics majors as a group did quite well in 2011. Ahmed adds that people who choose to pursue a Ph.D. in economics generally specialize in a particular area, such as labor economics or international economics… Not only must we make choices as individuals, we must make choices as a society. Explain the distinguishing characteristics of the economic way of thinking. Such results would lead us to modify our hypothesis about the relationship between solar radiation and plant growth. Economic activities exist at all levels within a society. The manager must choose between producing cars and producing SUVs. We certainly need the air to breathe. In the example above, rational choice theory would probably predict that you would elect to pay your bills instead of flying to Disneyland. Does studying more economics serve your interests and will doing so maximize your satisfaction level? 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. If individuals are maximizing their level of satisfaction and firms are maximizing profits, then a change in the set of alternatives they face may affect their choices in a predictable way. 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. ; the variable that induces a change is called the independent variableA variable that induces a change.. https://universalteacher.com/1/three-basic-economic-problems The basic premise of rational choice theory is that aggregate social behavior results from the behavior of individual actors, each of whom is making their individual decisions. In economics, a choice is a decision someone must make about what to do with limited resources, according to Economics Wisconsin, a guide for social studies teachers. It is important to see the distinctions between these broad areas of study. Table 1.2 Average Yearly Salary Offers, Summer 2011. Canadian voters faced the kinds of choices we have been discussing. is the current level of an activity. d. 75. Alternatively, you can book a flight to Disneyland. In this section, we will look at economics as a field of study. Rather, they decide whether to consume a little more or a little less water. Why do women end up doing most of the housework? Reducing the quantity of heroin available will increase total spending on heroin and increase the crime rate. Suggest some problems that might arise in each test due to the ceteris paribus (all-other-things-unchanged) problem and the fallacy of false cause. This is because economic's central theme is opportunity cost. The appendix to this chapter provides a quick, refresher course, if you think you need one, on understanding, building, and using graphs. A rainy day could change the opportunity cost of reading a book; we might expect more reading to get done in bad than in good weather. To say yes to one thing requires that we say no to another. Could it possibly be scarce? Under Mr. Harper, the deficit had fallen by one-third in 2010. You can use an economics degree to study industry trends, labor markets, the prospects for individual companies, and the forces that drive the economy. National Welfare Fund (Russia): One of two parts of the Russian sovereign wealth fund, the other being the Reserve Fund. We pollute it when we drive our cars, heat our houses, or operate our factories. If I can make daily economic choices with as much integrity as possible, then I am doing the most I know how to do to heal the larger whole. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost. Economic decision making is the process of making business decisions involving money. Thus, even parts of outer space are scarce. A choice must be made between these uses. Because no test exists for these values, these two economists will continue to disagree, unless one persuades the other to adopt a different set of values. Think of that starting point as the edge from which a choice at the margin in water consumption is made. Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue. More time watching movies? b. These questions are generally regarded as microeconomic because they focus on individual units or markets in the economy. For whom should goods and services be produced? If a test reveals that a particular hypothesis is false, then the hypothesis is rejected or modified. We could leave the land undeveloped in order to be able to make a decision later as to how it should be used. Price determination is one of the things that we will study in this book. It is not clear from the information given how close the estimate of cost comes to the economic concept of opportunity cost. MacroeconomicsThe branch of economics that focuses on the impact of choices on the total, or aggregate, level of economic activity. A scarce goodA good for which the choice of one alternative requires that another be given up. Individuals maximize by deciding whether to do a little more or a little less of something. It is built around the ways of society: that is, the livelihood of the people determines the products and services. The opportunity cost of any choice is the value of the best alternative forgone in making it. Explain how economists test hypotheses, develop economic theories, and use models in their analyses. They also apply economic analysis to the activities of the firms or agencies for which they work or consult. If you choose to spend $20 on a potted plant, you have simultaneously chosen to give up the benefits of spending the $20 on pizzas or a paperback book or a night at the movies. A model of the real world cannot be the real world. Such a judgment is the opinion of the speaker; no one can “prove” that the statement is or is not correct. c. Products or Services . For that model, we will assume that an economy can produce only two goods. If the book is the most valuable of those alternatives, then the opportunity cost of the plant is the value of the enjoyment you otherwise expected to receive from the book. ... Why do all economic decisions involve trade-offs? Identify the elements of scarcity, choice, and opportunity cost in each of the following: Canadian Prime Minister Stephen Harper, head of the Conservative Party, had walked a political tightrope for five years as the leader of a minority government in Canada’s parliamentary system. Economists assume, for example, that the owners of business firms seek to maximize profit. Choice is the central object of study in the discipline. The cost of Grampa’s day with his family is the enjoyment he anticipated from spending time with Bea. We breathe it. Unlike hypotheses, they can also be shown to be correct. Many of the disagreements among economists stem from differences in values. Many of the disagreements among economists are based on such differences in values and therefore are unlikely to be resolved. Homer and his family prevailed, however, and insisted on taking Grampa to “Discount Lion Safari,” a local amusement park. Because our resources are limited, we cannot say yes to everything. Most college students are under age 25. The fact that land is scarce means that society must make choices concerning its use. GDP growth in Canada was 3.1 percent in 2010; the Bank of Canada projects 4.2 for its growth rate the first quarter of 2011, compared to a U.S. rate for that quarter of 1.8 percent. Economic theory tries to understand human action as it relates to prices, markets, production, and consumption. Ceteris paribusA Latin phrase that means, “all other things unchanged.“ is a Latin phrase that means “all other things unchanged.”. The economist Amartya Sen (Winner of the 1998 Nobel Prize for Economics) has written extensively on this issue. But now, our use of space has reached the point where one use can be an alternative to another. We will look at these two areas of economic thought in the next section. Economic Choices Involve Costs Economic choice is a conscious decision to use scarce resources in one manner rather than another. --Referenced: Working within the framework of the scientific method, economists formulate hypotheses and then test them. 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. Space will surely become scarcer as we find new ways to use it. It is a classic case of the problem when choices are made between environmental quality and economic growth. Is the total level of economic activity rising or falling? Explain the concepts of scarcity and opportunity cost and how they relate to the definition of economics. Suppose we have decided the land should be used for housing. Before deciding to pursue an advanced degree, he worked as a teacher and administrator at three different colleges and universities, and as an education coach for Inside Track. Economists, like other social scientists and scientists, use models to assist them in their analyses. What did Dr. Margaret answer? A theory that has been subjected to even more testing and that has won virtually universal acceptance. There is another category of assertions, however, for which investigation can never resolve differences. Why do senior citizens get discounts on public transit systems? In this usage, anything from timber to money to the number of hours in a day can be a resource. A set of simplifying assumptions about some aspect of the real world. But the cost also includes the value of the best alternative use of the time required to see the doctor. The opportunity cost of preserving the land in its natural state is the forgone value of the land as a housing development. They constitute the core of economic thinking. Economic activity is the activity of making, providing, purchasing, or selling goods or services. The existence of alternative uses forces us to make choices. Consequently, the scope of economics is wide indeed. Your time is a scarce resource. Developers had planned to build a housing development on the land. Efforts to improve the environment tend to reduce production and employment. A more likely explanation for the association between baldness and heart disease is that both conditions are affected by an underlying factor. A good that is not scarce is a free good. The scarce resources are the plant and the labor at the plant. Similarly, economists assume that maximizing behavior is at work when they examine the behavior of consumers. The political victory was short-lived—the Conservative Party won the May 2011 election easily and emerged as the ruling party in Canada. 1) Economic choice refers to the act of deciding how to use its scarce resources to attain the maximum possible satisfaction of the member of the society. Undergraduate work in economics can be applied to other careers as well. Both microeconomics and macroeconomics give attention to individual markets. There are not many free goods. It is the economic way of thinking; this chapter introduces that way of thinking. And economists have tested the hypothesis about price and the quantity demanded quite extensively. This section explores the application of the scientific method to economics. Air is a scarce good because it has alternative uses. As the set of available alternatives changes, we expect that the choices individuals make will change. Did the strong performance by economics and philosophy majors mean that training in those fields sharpens analytical skills tested in the LSAT, or that students with good analytical skills are more likely to major in them? The cost of any choice is the option or options that a person gives up. Trade-offs and Choices. Economics ranges from the very small to the very large. Every economy must answer the following questions: Every economy must determine what should be produced, how it should be produced, and for whom it should be produced. What happens to economic phenomena such as growth, unemployment, gasoline and food prices, house values, and the national debt matters—and these phenomena matter a great deal. What if the quantity of time were increased, say to 48 hours per day, and everyone still lived as many days as before. All choices mean that one alternative is selected over another. Ultimately, economics is the study of choice. A Latin phrase that means, “all other things unchanged.“. We would always like more and better housing, more and better education—more and better of practically everything. Two problems inherent in tests of hypotheses in economics are the all-other-things-unchanged problem and the fallacy of false cause. One of the hotly debated questions in economics is why people often make choices that appear irrational. Could a higher price cause you to use less water brushing your teeth, take shorter showers, or water your lawn less? But choices in water consumption, like virtually all choices, are made at the margin. This does not mean that choice architecture is something to be feared, but perhaps should prompt us all to be more aware of how we make the decisions we make. is something whose value can change. Why are models based on assumptions that are essentially incorrect? Is the rate of inflation increasing or decreasing? Normative statements, unlike positive statements, cannot be tested and provide a source for potential disagreement. Economics is defined less by the subjects economists investigate than by the way in which economists investigate them. Why or why not? Scarcity Economics is the study of how people make choices under scarcity. Why? We have now examined the characteristics that define the economic way of thinking and the two branches of this way of thinking: microeconomics and macroeconomics. A good for which the choice of one alternative requires that another be given up. If the couple is looking far ahead, it may want to consider the opportunity cost of sending a child to college. The three fundamental economic questions are: What should be produced? You can pay your rent and your utility bills, buy groceries, and maybe head to a movie. Source: National Association of Colleges and Employers, Average Salary Offer to College Class of 2011 Rises 4.8 Percent, press release at http://www.naceweb.org/Press/Releases/Average_Salary_Offer_to_College_Class_of_2011_Rises_4_8_Percent.aspx. And, if it is looking very far ahead, it may want to consider the fact that nearly half of all parents over the age of 50 support at least one child over the age of 21. In studying consumers, economists assume that individual consumers make choices aimed at maximizing their level of satisfaction. Because of the complexity of the real world, economists rely on models that rest on a series of simplifying assumptions. No longer posted. The incorrect assumption that one event causes another because the two events tend to occur together. Referring to the Case in Point “Baldness and Heart Disease,” explain the possible fallacy of false cause in concluding that baldness makes a person more likely to have heart disease. The test of whether air is scarce is whether it has alternative uses. While the investigation of these problems surely falls within the province of economics, economics encompasses a far broader range of issues. The concepts of scarcity, choice, and opportunity cost are at the heart of economics. At any one time, we have only so much land, so many factories, so much oil, so many people. Since economic decisions have to do with the amount of money a business earns or is valued at, it is essential that the decision-making process relies heavily on the company's financial reports. We could put a gas station on it. But things changed between May 2005 and May 2006. Every choice has an opportunity cost and opportunity costs affect the choices people make. Other things changed and affected gasoline consumption. In the next section, we will examine some of the problems we encounter in testing those hypotheses. Economic analyses may be aimed at explaining individual choice or choices in an individual market; such investigations are largely the focus of microeconomics. How would the inability to carry out controlled experiments make your analysis more difficult? Consider, for example, the problem of curtailing water consumption when the amount of water available falls short of the amount people now use. The opportunity cost of producing cars is the profit that could be earned from producing SUVs; the opportunity cost of producing SUVs is the profit that could be earned from producing cars. When there is scarcity and choice, there are costs. is the condition of having to choose among alternatives. Economists argue that an understanding of opportunity cost is crucial to the examination of choices. Economics, it seems to me, ultimately boils down to each of us, and to the simple, often unnoticed economic choices that we make each day of our lives. 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