guía de estudio 1 - qué es economía

8/9/2019 Gua de Estudio 1 - Qu es Economa

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1 WHAT ISECONOMICS?

K e y C o n c e p t s

Definition of Economics

The fundamental economic problem is scarcity , whichis the inability to satisfy all our wants. Because theavailable resources are never enough to satisfy every-

ones wants, choices are necessary.Incentives, a rewardthat encourages or a penalty that discourages an action,influence choices.Economics is the social science that studies the choicesthat individuals, businesses, governments, and societiesmake as they cope with scarcity and the incentives thatinfluence and reconcile those choices. Microeconomics is the study of choices that indi-

viduals and businesses make, the way these choicesinteract in markets, and the influence of govern-ments.

Macroeconomics is the study of the performance

of the national economy and the global economy.

Two Big Economic Questions

Economics explores two big questions: How do choices end up determining what , how ,

and for whomgoods and services get produced? When do choices made in the pursuit of self interest

also promote the social interest?Goods and services are the objects that people valueand produce to satisfy wants. Goods and services areproduced using productive resources calledfactors of production. There are four categories: Land: the gifts of nature such as land, minerals,

and water. Labor: the work time and work effort people de-

vote to producing goods and services. The quality

of labor depends on human capital , which is theknowledge and skill that people obtain from educa-tion, on-the-job training, and work experience.

Capital: the tools, instruments, machines, build-ings, and other constructions that businesses nowuse to produce goods and services.

Entrepreneurship: the human resource that organ-izes land, labor, and capital.

For whom the goods and services are produced dependson peoples incomes. To earn an income, people sellthe services of the factors of production they own. Landearns rent; labor earns wages; capital earnsinterest; and entrepreneurship earns profit.People make choices that are in theirself interest,choices that they think are the best for them. Choicesthat are the best for society as a whole are in thesocialinterest. Economists work to understand when choicesmade in self interest advance the social interest. Forinstance, does private ownership of businesses and doesglobalization best serve the social interest? Did the

high-tech New Economy result from choices made inthe social interest? Are the changes in production madeas a result of the terror attacks on 9-11 in the socialinterest? And are the private choices made about theprice of new drugs, about using the tropical rainforests,about fighting water shortages, about the number of people without work, and about the size of the gov-ernment deficit made in the social interest?

The Economic Way of Thinking A choice involves atradeoff. A tradeoff is an ex-changegiving up one thing to get something else.Tradeoffs include the what tradeoffs, the howtradeoffs, and the for whom tradeoffs. The big tradeoff is the tradeoff between equality

and efficiency that occurs as a result of governmentprograms redistributing income.

C h a p t e r


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Choices being change and affect the quality of our eco-nomic lives. For instance, choices to give up currentconsumption in order to save mean higher consump-tion per person in the future, though at the cost of alower consumption per person in the present.The opportunity cost of a choice is the highest-valued

alternative given up. Opportunity cost is not all thealternatives foregone, only the highest-valued alterna-tive foregone. All tradeoffs involve an opportunity cost.Choices are made in small steps are choices made at themargin . The benefit that arises from an increase in an activ-

ity is calledmarginal benefit. The cost of an increase in an activity is calledmar-

ginal cost. When making choices, people compare the marginalcost of an action to the marginal benefit of the action.Changes in marginal cost and/or marginal benefit affect

the decisions made, so choices respond to incentives.Institutions affect whether a self-interested choice pro-motes the social interest.

Economics: A Social Science

Economists distinguish between: Positive statements statements about what is.

These can be shown to be true or false throughobservation and measurement.

Normative statements statements about whatought to be. These are matters of opinion.

Economic science is a collection of positive statementsthat are consistent with the real world. Economic sci-ence uses three steps to progress: Observation and measurement economists ob-

serve and record economic data. Model building an economic model is a de-

scription of some aspect of the economic worldthat includes only those features of the world thatare needed for the purpose at hand.

Testing a model is tested to determine how wellits predictions correspond with the real world. Aneconomic theory is a generalization that summa-

rizes what we think we understand about economicchoices that people make and the performance of industries and entire economies.

When developing models and theories, economists usethe idea of ceteris paribus , which is Latin for other

things being equal, to focus on the effect of one par-ticular factor.In the development of theories and models, two falla-cies are possible: Fallacy of composition the (false) assertion that

what is true of the parts must be true for the whole,or what is true for the whole must be true for theparts.

Post hoc fallacy the assertion that one eventcaused another because the first occurred before thesecond.

H e l p f u l H i n t s

1. C HOICES AND I NCENTIVES : The basic assump-tion made by economists about human behavior isthat people make themselves as well off as possible.

As a result, people respond to changed incentivesby changing their decisions. The key idea is that anindividual compares the additional (or marginal)benefit from taking an action to the additional (ormarginal) cost of the action. If the marginalbenefit from the action exceeds the marginal cost,taking the action makes the person better off, sothe person takes the action. Conversely, if the mar-ginal benefit falls short of the marginal cost, the ac-tion is not taken. Only the additional benefit andadditional cost are relevant because they are thebenefits and costs that the person will enjoy andincur if the action is undertaken. Keeping straightthe distinction between additional benefits andcosts versus total benefits and costs is a vital part of economics, particularly of microeconomics.

2. M ODELS AND S IMPLIFICATION : In attempting tounderstand how and why something works (for ex-ample, an airplane or an economy), we can use de-scription or we can use theory. A description is alist of facts about something. But it does not tell us

which facts are essential for understanding how anairplane works (the shape of the wings) and whichfacts are less important (the color of the paint). Sci-entists use theory to abstract from the complex de-

scriptive facts of the real world and focus only onthose elements essential for understanding. Theseessential elements are fashioned into models highly simplified representations of the real world.In a real sense, models are like maps, which areuseful precisely because they abstract from real


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world detail. A map that reproduced all the detailsof the real world (street lights, traffic signs, electric

wires) would be useless. A useful map offers a sim-plified view, which is carefully selected according tothe purpose of the map. A useful theory is similar:It gives guidance and insight into how the im-

mensely complicated real world functions and re-acts to changes.

Q u e s t i o n s

True/False and ExplainDefinition of Economics

11. Scarcity is a problem only for the poor.

12. Macroeconomics studies the factors that changenational employment and income.

Two Big Economic Questions13. Answering What goods and services are pro-

duced? automatically answers How are goods andservices produced?

14. An example of the how part of the first big ques-tion is: How does the nation decide who gets thegoods and services that are produced?

15. Capital earns profit.

16. When making choices, most people consider thesocial interest of their decisions.

17. Choices made in self interest sometimes advancethe social interest.

The Economic Way of Thinking

18. Tradeoffs mean that you give up one thing to getsomething else.

19. There is no such thing as a how tradeoff becausea business uses only one way to produce its goodsand services.

10. The big tradeoff refers to the tradeoff between whatgoods are produced and how they are produced.

11. If Sam buys a pizza for $3 rather than a burrito for

$3, the burrito is the opportunity cost of buyingthe slice of pizza.

12. By comparing the cost and benefit of a smallchange you are making your choice at the margin.

Economics: A Social Science

13. A positive statement is about what is; a normativestatement is about what will be.

14. The idea of ceteris paribus is used whenever a post hoc fallacy is being examined.

Multiple Choice

Definition of Economics

11. The fact that wants cannot be fully satisfied withavailable resources reflects the definition of

a. incentives.b. scarcity.c. the output-inflation tradeoff.d. for whom to produce.

12. Studying the effects choices have on the nationaleconomy is part of a. scarcity.b. microeconomics.c. macroeconomics.d. global science.

Two Big Economic Questions

13. Which of the following is NOT part of the first bigeconomic question?a. What goods and services are produced?b. How are goods and services produced?c. For whom are goods and services produced?d. Why are goods and services produced?

14. The question, Should personal computers or main-frame computers be produced? is an example of

which part of the first big economic question?a. what partb. how partc. where partd. for whom part

15. People have different amounts of income. This ob-servation is most directly related to which part of thfirst big economic question?a. The what part.b. The how part.c. The why part.d. The for whom part.


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16. The factor of production that earns the most incomeis ____.a. landb. laborc. capitald. entrepreneurship

17. If a drug executive sets the price of a new drug at$1,000 a dose because that is the price that is bestfor the executive, the executive is definitely making aa. self-interested choice.b. choice in the social interest.c. globalization choice.d. factors of production choice.

18. Choices made in the pursuit of self interest ____ thesocial interest.a. always furtherb. sometimes furtherc. never furtherd. are no comparable to choices made in the

The Economic Way of Thinking

19. The fact that Intel decides to produce CPU chipsrather than memory chips best reflects a ____ trade-off.a. whatb. how c. for whomd. standard of living

10. The choice about how much to savea. has no opportunity cost because saving means

more future consumption.b. has the opportunity cost of higher future con-

sumption.c. trades off current consumption for future con-

sumption.d. None of the above answers is correct.

11. From 9 to 10 A .M., Fred can sleep in, go to his eco-nomics lecture, or play tennis. Suppose that Freddecides to go to the lecture but thinks that, if hehadnt, he would otherwise have slept in. The op-

portunity cost of attending the lecture isa. sleeping inand playing tennis.b. playing tennis.c. sleeping in.d. one hour of time.

12. When the government chooses to use resources tobuild a dam, these resources are no longer availableto build a highway. This choice illustrates the con-cept of a. a market.b. macroeconomics.

c. opportunity cost.d. marginal benefit.

13. To make a choice on the margin, an individuala. ignores any opportunity cost if the marginal

benefit from the action is high enough.b. will choose to use his or her scarce resources only

if there is a very large total benefit from so doing.c. compares the marginal cost of the choice to the

marginal benefit.d. makes the choice with the smallest opportunity

cost.

Economics: A Social Science14. A positive statement is

a. about what ought to be.b. about what is.c. always true.d. one that does not use theceteris paribus clause.

15. Which of the following is a positive statement?a. The government must lower the price of a pizza

so that more students can afford to buy it.b. The best level of taxation is zero percent because

then people get to keep everything they earn.

c. My economics class should last for two termsbecause it is my favorite class.d. An increase in college tuition will lead fewer stu-

dents to apply to college.

16. An economic model includesa. only normative statements.b. no use of ceteris paribus .c. all known facts about a situation.d. only details considered essential.

17. The Latin term ceteris paribus meansa. false unless proven true.

b. other things the same.c. after this, then because of this.d. not correct, even though it is logical.


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W H AT I S E C O N O M I C S ? 5

18. One student from a class of 30 can walk easily through a door. Assuming that all 30 students si-multaneously therefore can walk easily through thesame door is an example of thea. opportunity cost fallacy.b. fallacy of composition

c. fallacy of substitution.d. post hoc fallacy.

19. The post hoc fallacy is thea. assertion that what is true for a part of the whole

must be true for the whole.b. claim that one event caused another because the

one event came first.c. use of ceteris paribus in order to study the impact

of one factor.d. claim that the timing of two events has nothing

to do with which event caused the other.

Short Answer Problems

1. In the future, as our technology advances evenfurther, eventually we will whip scarcity. In thehigh-tech future, scarcity will be gone. Do youagree or disagree with this claim? Explain your an-swer and what scarcity is. Why does the existenceof scarcity require choices?

2. What are the factors of production? Focusing onthe factors of production, describe the relationshipbetween the question How are goods and servicesproduced? and the question For whom are goodsand services produced?.

3. What is making a choice based on self interest?Making a choice based on social interest? Why is itimportant to determine if choices based on self in-terest are the same as choices based on social inter-est?

4. Why does your decision to buy a taco from TacoBell reflect a tradeoff? Be sure to discuss the roleplayed by opportunity cost in your answer.

5. Education is a basic right. Just as kindergartenthrough 12th grade education is free, so, too,should a college education be free and guaranteedto every American. This statement can be analyzedby using the economic concepts discussed in thischapter to answer the following questions.

a. What would be the opportunity cost of provid-ing a free college education for everyone?

b. Is providing this education free from the per-spective of society as a whole?

6. Indicate whether each of the following statementsis positive or normative. If it is normative, rewrite itso that it becomes positive. If it is positive, rewriteit so that it becomes normative.a. Policymakers ought to lower the inflation rate

even if it lowers output.b. An imposition of a tax on tobacco products will

decrease their consumption.

c. Health care costs should be lower so that poorerpeople can afford quality health care.

7. In sciences such as chemistry, controlled experi-ments play a key role. How does that relate toeconomists use of ceteris paribus ?

Youre the Teacher

1. Your friend asks, Does everything have an oppor-tunity cost? Your friend has hit upon a very goodquestion; provide an equally good answer!

2. Economic theories are useless because the models

on which they are based are totally unrealistic.They leave out so many descriptive details aboutthe real world, they cant possibly be useful for un-derstanding how the economy works. So says yourskeptical friend. Youd like to keep your friend inyour economics class so that you two can study to-gether. Defend the fact that economic theories aremuch simpler than reality and help your friend re-alize that time spent studying economic theories istime well spent!

guía de estudio 1 - qué es economía

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