ECON 252 Chapter 1 – Principle and Practice of Economics

Economic Agent
Any individual or group that makes choices.

Studies how agents make choices among scarce resources and how those choices affect society. Economics is based on the study of choices, not money.

A situation of having unlimited wants in a world of limited resources.

Scarce Resources
Resources are scarce when the quantity that people want exceeds the quantity that is available.

Positive Economics
What people actually do, or makes predictions about the world that can be verified using data.

Normative Economics
Recommends what an individual or society ought to do. It depends on subjective judgments.

The study of individuals, firms, gov., etc.

The study of the whole economy.

The Three Principles of Economics
1. Optimization
2. Equilibrium
3. Empiricism

Making the best choice possible with the given information.

When everyone is optimizing; no one would be better off with a different choice.

Using data to test theories and determine what is causing things to happen in the world.

Part of Optimization. A situation in which some benefits must be given up in order to gain others.

Budget Constraints
Part of Optimization. Economists use these to describe tradeoffs. Example: allocation of time.

Opportunity Cost
Part of Optimization. The best alternative use of a resource. Optimization requires that you take into account the opportunity cost of the activities you are doing.

Cost Benefit Analysis
Part of Optimization. A calculation that considers the cost and benefits of a given activity using a common unit of measurement, like dollars.

Key Ideas of Chapter 1
1. Economics is the study of people’s choices, not money.
2. The first principle of economics is that people try to optimize; they try to choose the best available option.
3. The second principle of economics is that economic systems tend to be in equilibrium.
4. The third principle of economics is analysis that uses data, or empiricism (a.k.a. the scientific method).

Policy decisions made by the government are analyzed by
both macroeconomics and microeconomics.

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