Chapter 1
Introducing the Economic Way of Thinking
CHAPTER SUMMARY
Scarcity permeates the entire human experience. Scarcity means we are unable to have as much as
we would like to have. Our wants are unlimited. But, our production capabilities are limited by our
factors of production, which include land, labor (the entrepreneur is a special type of labor) and capital
(plant and equipment). Because we are faced with scarcity we must make choices. Choices are made at
the "macro" and "micro" level. Macroeconomics is concerned with the entire economic system, whereas
microeconomics is concerned with some particular segment of the economy.
Economics can be further subdivided into positive ("what is") and normative ("what ought to be")
economic analysis. We would all be well advised to first have a firm grasp of "what is" before we argue
"what ought to be." This takes us to a look at how economists derive positive economic theories---a look
at the methodology of economics. That methodology is the same scientific methodology used in all
sciences---it is the process of induction and deduction. Theories can be expressed: 1) verbally, or in
written form, 2) as a numerical table, 3) graphically, or 4) mathematically. Theories are helpful to
understanding the relationship between economic variables but should be used with caution. Two
common pitfalls to clear thinking are the failure to understand the ceteris paribus assumption and
confusing association and causation. This chapter concludes with a review of careers in economics.
The appendix to this chapter focuses on how theories can be expressed graphically. Graphs are visual
aids that help us see the direct or inverse relationship between two or more sets of data or variables.
NEW CONCEPTS INTRODUCED
scarcity labor economics entrepreneurship ceteris paribus
resources capital macroeconomics normative economics
land model microeconomics positive economics
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Understand that if there was no scarcity there would be no such thing as economics. Economics is
the study of scarcity and how we deal with it.
2. Understand that scarcity exists because we are unable to produce as much as we would like (our
wants are unlimited while our means of production are limited).
3. Understand that we try to do the best we can with what we have---to maximize our production with
our limited resources (factors of production).
4. List the factors of production: land, labor, and capital.
5. Distinguish between "macro" and "micro."
6. Distinguish between "positive" and "normative" economic analysis.
7. Explain why economists are interested in relationships between economic variables.
8. Explain why theories enable us to discern relationships between economic variables.
9. Know how theories can be expressed.
10. Explain the limitations to the use of theories.
1
,2 Economics for Today
CHAPTER OUTLINE
I. Preview
II. The Problem of Scarcity
III. Scarce Resources and Production
a. Land
b. Labor
c. Capital
Exhibit 1 "Three Categories of Resources"
IV. Economics: The Study of Scarcity and Choice
a. Macroeconomics
b. Microeconomics
V. The Methodology of Economics
a. Problem Identification
b. Model Development
c. Testing a Theory
Exhibit 2 "The Steps in the Model-Building Process"
Checkpoint: "Can You Prove There Is No Trillion-Dollar Person?"
VI. Hazards of the Economic Way of Thinking
a. The Ceteris Paribus Assumption
b. Association versus Causation
Checkpoint: "Should Nebraska State Join a Big-Time Athletic Conference?"
You're The Economist: Analyze the Issue
"Mops and Brooms, the Boston Snow Index, the Super Bowl, and Other Economic Indicators"
Applicable Concept: association versus causation.
VII. Why do Economists Disagree?
a. Positive Economics
b. Normative Economics
You're The Economist: Analyze the Issue
"Does Raising The Minimum Wage Help The Working Poor?" Applicable Concept: positive and
normative analysis.
VII. Careers in Economics
Exhibit 3 "Average Yearly Salary Offers for Selected Majors"
VIII. List of Key Concepts
IX. Summary
, Chapter 1: Introducing the Economic Way of Thinking 3
X. Summary of Conclusion Statements
a. Financial capital by itself is not productive; instead, it is only a paper claim on economic
capital.
b. A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied.
c. The fact that one event follows another does not necessarily mean that the first event caused
the second event.
d. Forecasts of economists can differ because, using the same methodology, economists can
agree that event A causes event B, but disagree over the assumption that event A will occur.
e. When opinions or points of view are not based on facts, they are scientifically untestable.
XI. Study Questions and Problems
XII. Checkpoint Answers
XIII. Practice Quiz
HINTS FOR EFFECTIVE TEACHING
1. Try to use this chapter for generating as much interest in economics as possible. Don't feel too
pressed for time. Treat this chapter thoroughly---especially, "theories." It will be time well spent.
(Some additional comments with respect to theories are found below.)
You may want to start the class by asking students what they want to get out of the class---what they
always wanted to know and were afraid to ask. Let them know that there is no such thing as a "silly"
question. (Establishing a rapport with your students at the first opportunity will pay off!) Although
you may field some questions which are best treated in some detail later, go ahead and survey the
issues at hand and indicate that they will be treated in more detail later when it is more logical to do
so---but for now ask them to note that these issues stem from the fact that we are faced with scarcity.
Moreover, you will probably be given the opportunity to stress the difference between "positive" and
"normative" economic analysis---the difference between "fact" and "opinion." For the “You’re the
Economist” on the minimum wage, be sure to note that you will return to this issue in Chapter 4 as an
application of supply and demand analysis. Finally, take the opportunity to show by your actions that
you will be keeping the course as application-oriented, or "user-friendly" as possible.
2. Indicate that in economics, capital is not money! It is defined as "plant and equipment." Students
often get "capital" and "money" confused.
3. Point out that scarcity is not a synonym for poverty. Even "rich" nations like the United States (and
rich people) are faced with scarcity because they are unable to have as much as they would like to
have.
4. Give some examples of economic investigations and ask students to distinguish between whether they
are of concern to "macro" or "micro."
5. Indicate that theories are realistic because they are based on facts. Theories are practical because
they avoid unnecessary detail and enhance our understanding of relationships among economic
variables. Theories (general statements about the causal relationship between variables based on
facts) are extremely useful in developing workable policies to address a real-world problem. In sum,
stress that economists derive economic theories because they are useful in the development of
economic policies designed to solve real-world economic problems.
6. Indicate that there are really three forces at play in the real world in which we all live: economic,
social and political. These three forces are often in conflict. Sound or rational economic reasoning
doesn't always prevail---especially when it comes to developing "economic" policy in a political
environment.
, 4 Economics for Today
CRITICAL THINKING /GROUP DISCUSSION QUESTIONS
1. Why isn't money a resource
It isn't used in the production process; it merely facilitates trade.
2. Respond to the following statement: "Theories are of no use to me because they are not very practical.
All I need are the facts because they speak for themselves."
Facts don't speak for themselves. Facts are meaningless unless there is a theory to tie them
together.
3. Does economics help to teach us how to approach problems, or does it provide us with a set of
answers to problems?
It teaches us "how to think." It doesn't provide us with answers.
4. To what extent do you think normative economic analysis, as opposed to positive economic analysis
determines our nation's public policy decisions made by government? Why? Is that "good" or "bad?"
Why?
This is debatable.
5. What are our nation's major macroeconomic goals? Are they in conflict with each other?
Full employment, low inflation, and high rates of economic growth are our nation's major
macro goals. Also note that they are often in conflict with each other. For example, full
employment and more rapid growth create higher rates of inflation.
CLASSROOM GAMES
Approximately 170 non-computerized economic games (experiments) for use in the classroom are
available for free at http://www.marietta.edu/~delemeeg/games/. The following games are recommended
to help teach some of the concepts in this chapter:
There are no recommended games for this chapter.
ANSWERS TO: "You're the Economist: Analyze the Issue"
MOPS AND BROOMS, THE BOSTON SNOW INDEX, THE SUPER BOWL, AND OTHER
ECONOMIC INDICATORS
Do you believe any of the above indicators are examples of causation? Explain.
Each example involves association and not causation.
DOES RAISING THE MINIMUM WAGE HELP THE WORKING POOR?
1. Identify two positive and two normative statements given concerning raising the minimum wage. List
other minimum wage arguments not discussed in the Economics in Practice, and classify them as
either positive or normative economics.
"In 1938 Congress enacted. . ." (positive economics)
"Today a minimum wage worker. . . deplorable annual increase." (normative economics)
"Only a small percentage. . . are full-time workers below the poverty line." (positive economics)
"They say it is outrageous that a worker can work full-time and. . ." (normative economics)
Introducing the Economic Way of Thinking
CHAPTER SUMMARY
Scarcity permeates the entire human experience. Scarcity means we are unable to have as much as
we would like to have. Our wants are unlimited. But, our production capabilities are limited by our
factors of production, which include land, labor (the entrepreneur is a special type of labor) and capital
(plant and equipment). Because we are faced with scarcity we must make choices. Choices are made at
the "macro" and "micro" level. Macroeconomics is concerned with the entire economic system, whereas
microeconomics is concerned with some particular segment of the economy.
Economics can be further subdivided into positive ("what is") and normative ("what ought to be")
economic analysis. We would all be well advised to first have a firm grasp of "what is" before we argue
"what ought to be." This takes us to a look at how economists derive positive economic theories---a look
at the methodology of economics. That methodology is the same scientific methodology used in all
sciences---it is the process of induction and deduction. Theories can be expressed: 1) verbally, or in
written form, 2) as a numerical table, 3) graphically, or 4) mathematically. Theories are helpful to
understanding the relationship between economic variables but should be used with caution. Two
common pitfalls to clear thinking are the failure to understand the ceteris paribus assumption and
confusing association and causation. This chapter concludes with a review of careers in economics.
The appendix to this chapter focuses on how theories can be expressed graphically. Graphs are visual
aids that help us see the direct or inverse relationship between two or more sets of data or variables.
NEW CONCEPTS INTRODUCED
scarcity labor economics entrepreneurship ceteris paribus
resources capital macroeconomics normative economics
land model microeconomics positive economics
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Understand that if there was no scarcity there would be no such thing as economics. Economics is
the study of scarcity and how we deal with it.
2. Understand that scarcity exists because we are unable to produce as much as we would like (our
wants are unlimited while our means of production are limited).
3. Understand that we try to do the best we can with what we have---to maximize our production with
our limited resources (factors of production).
4. List the factors of production: land, labor, and capital.
5. Distinguish between "macro" and "micro."
6. Distinguish between "positive" and "normative" economic analysis.
7. Explain why economists are interested in relationships between economic variables.
8. Explain why theories enable us to discern relationships between economic variables.
9. Know how theories can be expressed.
10. Explain the limitations to the use of theories.
1
,2 Economics for Today
CHAPTER OUTLINE
I. Preview
II. The Problem of Scarcity
III. Scarce Resources and Production
a. Land
b. Labor
c. Capital
Exhibit 1 "Three Categories of Resources"
IV. Economics: The Study of Scarcity and Choice
a. Macroeconomics
b. Microeconomics
V. The Methodology of Economics
a. Problem Identification
b. Model Development
c. Testing a Theory
Exhibit 2 "The Steps in the Model-Building Process"
Checkpoint: "Can You Prove There Is No Trillion-Dollar Person?"
VI. Hazards of the Economic Way of Thinking
a. The Ceteris Paribus Assumption
b. Association versus Causation
Checkpoint: "Should Nebraska State Join a Big-Time Athletic Conference?"
You're The Economist: Analyze the Issue
"Mops and Brooms, the Boston Snow Index, the Super Bowl, and Other Economic Indicators"
Applicable Concept: association versus causation.
VII. Why do Economists Disagree?
a. Positive Economics
b. Normative Economics
You're The Economist: Analyze the Issue
"Does Raising The Minimum Wage Help The Working Poor?" Applicable Concept: positive and
normative analysis.
VII. Careers in Economics
Exhibit 3 "Average Yearly Salary Offers for Selected Majors"
VIII. List of Key Concepts
IX. Summary
, Chapter 1: Introducing the Economic Way of Thinking 3
X. Summary of Conclusion Statements
a. Financial capital by itself is not productive; instead, it is only a paper claim on economic
capital.
b. A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied.
c. The fact that one event follows another does not necessarily mean that the first event caused
the second event.
d. Forecasts of economists can differ because, using the same methodology, economists can
agree that event A causes event B, but disagree over the assumption that event A will occur.
e. When opinions or points of view are not based on facts, they are scientifically untestable.
XI. Study Questions and Problems
XII. Checkpoint Answers
XIII. Practice Quiz
HINTS FOR EFFECTIVE TEACHING
1. Try to use this chapter for generating as much interest in economics as possible. Don't feel too
pressed for time. Treat this chapter thoroughly---especially, "theories." It will be time well spent.
(Some additional comments with respect to theories are found below.)
You may want to start the class by asking students what they want to get out of the class---what they
always wanted to know and were afraid to ask. Let them know that there is no such thing as a "silly"
question. (Establishing a rapport with your students at the first opportunity will pay off!) Although
you may field some questions which are best treated in some detail later, go ahead and survey the
issues at hand and indicate that they will be treated in more detail later when it is more logical to do
so---but for now ask them to note that these issues stem from the fact that we are faced with scarcity.
Moreover, you will probably be given the opportunity to stress the difference between "positive" and
"normative" economic analysis---the difference between "fact" and "opinion." For the “You’re the
Economist” on the minimum wage, be sure to note that you will return to this issue in Chapter 4 as an
application of supply and demand analysis. Finally, take the opportunity to show by your actions that
you will be keeping the course as application-oriented, or "user-friendly" as possible.
2. Indicate that in economics, capital is not money! It is defined as "plant and equipment." Students
often get "capital" and "money" confused.
3. Point out that scarcity is not a synonym for poverty. Even "rich" nations like the United States (and
rich people) are faced with scarcity because they are unable to have as much as they would like to
have.
4. Give some examples of economic investigations and ask students to distinguish between whether they
are of concern to "macro" or "micro."
5. Indicate that theories are realistic because they are based on facts. Theories are practical because
they avoid unnecessary detail and enhance our understanding of relationships among economic
variables. Theories (general statements about the causal relationship between variables based on
facts) are extremely useful in developing workable policies to address a real-world problem. In sum,
stress that economists derive economic theories because they are useful in the development of
economic policies designed to solve real-world economic problems.
6. Indicate that there are really three forces at play in the real world in which we all live: economic,
social and political. These three forces are often in conflict. Sound or rational economic reasoning
doesn't always prevail---especially when it comes to developing "economic" policy in a political
environment.
, 4 Economics for Today
CRITICAL THINKING /GROUP DISCUSSION QUESTIONS
1. Why isn't money a resource
It isn't used in the production process; it merely facilitates trade.
2. Respond to the following statement: "Theories are of no use to me because they are not very practical.
All I need are the facts because they speak for themselves."
Facts don't speak for themselves. Facts are meaningless unless there is a theory to tie them
together.
3. Does economics help to teach us how to approach problems, or does it provide us with a set of
answers to problems?
It teaches us "how to think." It doesn't provide us with answers.
4. To what extent do you think normative economic analysis, as opposed to positive economic analysis
determines our nation's public policy decisions made by government? Why? Is that "good" or "bad?"
Why?
This is debatable.
5. What are our nation's major macroeconomic goals? Are they in conflict with each other?
Full employment, low inflation, and high rates of economic growth are our nation's major
macro goals. Also note that they are often in conflict with each other. For example, full
employment and more rapid growth create higher rates of inflation.
CLASSROOM GAMES
Approximately 170 non-computerized economic games (experiments) for use in the classroom are
available for free at http://www.marietta.edu/~delemeeg/games/. The following games are recommended
to help teach some of the concepts in this chapter:
There are no recommended games for this chapter.
ANSWERS TO: "You're the Economist: Analyze the Issue"
MOPS AND BROOMS, THE BOSTON SNOW INDEX, THE SUPER BOWL, AND OTHER
ECONOMIC INDICATORS
Do you believe any of the above indicators are examples of causation? Explain.
Each example involves association and not causation.
DOES RAISING THE MINIMUM WAGE HELP THE WORKING POOR?
1. Identify two positive and two normative statements given concerning raising the minimum wage. List
other minimum wage arguments not discussed in the Economics in Practice, and classify them as
either positive or normative economics.
"In 1938 Congress enacted. . ." (positive economics)
"Today a minimum wage worker. . . deplorable annual increase." (normative economics)
"Only a small percentage. . . are full-time workers below the poverty line." (positive economics)
"They say it is outrageous that a worker can work full-time and. . ." (normative economics)
