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! ! Economics is the study of rational choice under conditions of scarcity. Opportunity cost is the best alternative that you give up when you make a choice. Remember that scarcity is an imbalance between what people want and what is freely available. The chart on the left explains the difference between "scarce" and "not scarce." The reason that breathable air and livable space are scarce is that people want those things. The reason that garbage is not scarce is that people do not want garbage. Rational choice means people making calculated, self-interested choices after weighing the costs and benefits of those choices. A rational agent chooses the action that is most self-satisfying.
All choices come with a cost. The real cost of choosing something is not the money you pay to get it. The real cost is the value of the next-best alternative that you gave up to make the choice you did. This is called the opportunity cost.
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1150 rev 10/26/2000
What Economists Do
! ! ! Economics employs the scientific method by asking questions, producing explanations (models), and forming hypotheses. Economists have integrated into the fields of business, government, and academia. Positive economics is predictive, or descriptive, whereas normative economics is judgmental, or evaluative.
The illustration on the right exemplifies the questions economists ask. Economists must explore all possibilities in their efforts to establish optimal economic conditions.
The example of the economic model on the left shows us how economists might answer the questions they face.
After creating the hypothesis, economists must test it in the real world by collecting data and comparing it to the model. If the data matches the predictions of the model, economists have explained a condition in the real world.
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1153 rev 10/25/2000
Economists in business help make forecasts about when to launch new products and enter foreign markets. Government economists collect data, conduct research, devise plans to finance the national debt, and make decisions regarding implementation of new taxes. Economists in academia teach, conduct research, and publish and present reports of their findings. Positive economics is economics as a predictive, descriptive social science. It answers specific questions in economics. Positive economics seeks to answer the question, How will the world work? Normative economics is about making judgments or evaluations. It is about norms, or standards of judgment. Normative economics seeks to answer the question, How should the world work?
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1153 rev 10/25/2000
info@thinkwell.com
1154 rev 10/25/2000
When we place dollar values on goods and services, the values are nominal variables. We use real variables, however, to measure actual, tangible goods and services. Look at the example on the left. When we add the nominal values of an apple and a cup of coffee, we calculate a total value of $1.75. It is much more difficult, though, to calculate the total value of an apple and a cup of coffee based on real values.
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1154 rev 10/25/2000
In the real world, all economies are mixed. The illustration on the left shows the spectrum of economic systems. Notice that the United States lies relatively closer to the laissez-faire end than China does. The role of the government is to regulate the balance of laissez-faire and planned systems.
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1155 rev 10/26/2000
The list on the left addresses some of Smiths concerns. These scenarios are certainly possible in the real world, but Smith believed that human nature without government intervention is capable of producing great wealth.
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1152 rev 10/26/2000