Chapter 1 Summary - Lecture notes 1 PDF

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Economics Chapter 1 Summary 

Economics is the study of how people use their limited resources to satisfy unlimited wants. Similarly, economics can be defined as the study of how a society chooses to use its scarce resources to produce, exchange, and consume goods and services.

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Microeconomics is the study of the decisions of households and business firms, and the interactions of those decisions. The actions of households and business firms take place within the context of a system of laws, which are established and enforced by governments. Thus, microeconomics decisions are affected by government policies.

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The tools of microeconomic analysis can be used to study international economics (which deals with international trade, and the effects of policies that interfere with international trade), the economics of industrial organization (which deals with the way in which business firms interact with one another and with their customers, and with government policies to control businesses), and labor economics (which deals with wage rates, participation in the labor force, labor unions, and policies such as minimum wage laws). The tools of microeconomic analysis can also be used to study public economics (which deals with taxes and government spending) and environmental economics.

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Macroeconomics is the study of the economy-wide aggregates, such as the overall rate of economic growth, or the overall rate of unemployment, or the overall rate of inflation. Since the macroeconomic aggregates are made from microeconomic pieces, we say that macroeconomics rests on a microeconomic foundation.

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Every society must make three fundamental choices: What to produce, how to produce, for whom to produce.

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Positive economics is concerned with understanding the actual workings of the economy. In principle, positive statements can be proven to be true or false.

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Normative economics is concerned with what ought to be. Therefore, normative statements involve value judgments. People can disagree about normative judgments, but it is not possible to prove normative statements to be true or false.

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Because the economy is very complex, economists use models to represent some of the workings of the economy. These models are tested against data, using statistical techniques. Then, the models are refined, and tested again.

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In economics, it is often impossible to perform controlled laboratory experiments. Therefore, it is especially important to perform thought experiments in which one variable is changed, while holding everything else constant. The assumption that all other things are the same is called the ceteris-paribus assumption....