Chapter 1
The Nature and Method of
Economics
Buffland Economics
Definition of
Economics
•
•
Study of how society
uses its scarce
resources to satisfy its
unlimited wants
Study of how society
goes about the business
of life
Buffland Economics
The Economic
Problem
•
Scarce resources – money,
time, products

Resources – inputs, factors of
production
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Labor – physical and mental efforts
(wage)
Capital – plant and equipment
(interest)
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–
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Physical
Human – education
Land – plots of land and natural
resources (rent)
Entrepreneurial ability – management
(profits)
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 Unlimited wants –
physical, material,
intellectual, emotional,
spiritual etc
• Goods – tangible
• Service – intangible
 Requires choices
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Economic
Perspective (Tenets
of Economics)
•
Scarcity and Choice – Scarce goods
have a cost

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Goods provide utility (satisfaction)
Bads (pollution) provide disutility
(dissatisfaction)
Scarcity

•
Resources to make these goods are scarce
–
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•

Make yourself scarce
Time
Money
Choices must be made
•
Opportunity Costs – value of the best alternative
not chosen
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• Rational Behavior – We choose
with a purpose and are rational
– We try to maximize our utility –
material and otherwise
• Marginalism: Benefits and costs
– We think at the margin (the
next one)
– Marginal Benefits > Marginal Costs,
pursue
– Marginal Benefits = Marginal Costs,
stop
• Incentives matter
– Prices act as signals
• Values are subjective
– We like different things: means more
choices
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Economic Decision
Makers
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Households - largest
Firms
Government
Rest of the World
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Branches of
Economics
• Macroeconomics – the whole
economy
–
•
Macroeconomic Goals
» Economic growth
» Full employment
» Price Stability
» Economic Freedom
Microeconomics – individual
units
–
Microeconomic goals
» Economic Efficiency
» Equitable Distribution of
Income
» Economic Security
» Balance of Trade
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Economic
Methodology
•
Scientific Method

Economic theory or model – makes
predictions and is a simplification of reality

Observation – What do you want to
explain?

Model Building
•
Identify the relevant variables and form a
cause and effect relationship
–
•
State assumptions
–
–
•
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Functional Relationship
»
Pot = f(labor,…)
Ceteris Paribus – other things remain the same
(constant) p13
Behavioral assumptions – Rational self-interest
State the hypothesis
Measurement and testing
Theory or Law
•
Accept or reject and return to the beginning
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• Economists Toolbox –
interpreting data
 Verbal or written
 Schedule
 Graphical
 Mathematical
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Types of Economics
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•
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Theoretical Economics – Generalizing about
economic behavior

To predict human behavior in the market

Laws, Theories and Principles are used
to predict
•
Generalizations about the average
person or group
Descriptive Economics – Gathering
Economic facts relevant to a problem
Quantitative Economics – Mathematical and
statistical approach
Policy Economics – resolve specific problems
by controlling economic behavior
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
Economic
Statements
Positive – “what is”
Normative – “what should
be”
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Fallacies of
Presentation
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Composition – what is good for one
is good for all
False Cause – If b follows a, then a
caused b
Criticizing the opposition
Special pleading – giving only one
side
Appeal to “Authority” – make sure
your endorser is an authority
Appeal to the people – “everybody
else does”
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