I. Basic Terms
A. Economy is the social science
concerned with the use of scarce resources like land and labor to
fulfill unlimited human.
Resources are the inputs, want satisfaction is the output
C. Key Concepts for understanding and analysis
1. Scarcity of resources requires choices by
2. Purposeful behavior by
participants (buyers and sellers) is
exhibited to enhance their own rational
Marginal analysis: the change in benefit received is balanced
with the change in cost is a common
Fallacy of composition: applying to the whole that which
is true for
a part without adequate proof. 1 and 3 are
odd numbers, so four is
This fallacy is the basis of police profiling.
Fallacy of division:
assumption that if something is true for the
whole then it must be true for its parts.
The worst abuse here
involves inferring from an average that all
elements are average.
Post hoc fallacy: Assumption that correlation proves
This is related to the concept in law of
Cum Hoc Fallacy:simultaneous correlations while post hoc
refers to sequential correlations.
D. Economic methodology
a. What something is
b. Objective, can be measured
c. Example: measuring disposable
personal income which
an individual's salary after taxes
A Theorem on the Methodology of Positive Economics
a. What something ought to be
b. Subjective, difficult to measure
c. Requires value judgments by citizens,
politicians, economists, etc.
d. Examples: should the minimum wage be
defense spending increase
and social spending be lowered
a. Looking at the real-world to develop Economic
b. Economic Theory
concerning economic behavior based upon
real-world observations, empirical by nature
2. Economic theories are
objective "positive economics"
3. Assumes rational,
economic self-serving behavior
4. Example: as the price
of a product increases, consumers
tend to buy less
c. Economic Policy
1. Application of economic
theory to solve economic problems
2. Economic policies are
subjective, "normative economics".
3. How society makes economic
choices as in the 1980's when
spending for the elderly (Social Security) increased
spending for children (Head Start) decreased 1234
II. Economic Models
1. Simplified generalizations to represent of real-
2. Requires Ceteris Paribus: Latin for holding
other economic variables
Ceteris Paribus Trap
1. Models may be quantities or qualitative
to model analysis
Restrictive, unrealistic assumptions
Are economic models falsifiable?
4. Model representations are not always correct
Models such as the Production Possibility
Curve chapter 2 and supply
chapter 3, explained in the next chapter
simplified description of how some
aspect of an economy works.
is the study of total economic activity.
1. Inflation rate
2. Economic growth
3. Total employment
4. The business cycle
ACDC Introduction to Macro
Wiki explanation is extensive, for now,
the first few paragraphs are sufficient.
is the study of individual segments
of the economy.
1. A product's price
4. A competitive market
Microeconomics 1:54 Video
2 Wiki explanation is
extensive, for now, the first paragraph is sufficient.