Chapter Introduction
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After studying this chapter you should be able to:
- Explain how economic analysis can be used in decision making.
- Differentiate between microeconomics and macroeconomics.
- Describe how economists use models.
- Describe the ceteris paribus assumption.
- Discuss the difference between efficiency and equity.
- Describe the key principles in economics.
- Apply the key principles to situations faced in your daily routine.
Perched high atop the 3,000-foot vertical monolith known as El Capitan, a climber gazes out upon a perfect view of Yosemite National Park. Holding onto the wall with no rope, one tiny slip of the foot will lead to certain death. Welcome to the sport of free soloing, an extreme form of rock climbing done without ropes or harnesses. Does this sound thrilling? Or perhaps crazy? Or even irrational? These are common thoughts that come to mind when people talk about the new wave of risky adventure sports. Would you think that whether or not to participate in such an activity is an economic question?
Most people probably wouldn’t. But this example resembles an economic problem in many ways. Free soloing involves a challenge, one with a benefit (a sense of accomplishment) and a cost (both monetary and physical risks). It involves tradeoffs—the thousands of hours spent practicing and perfecting the climbing techniques needed to be successful. And it involves societal beliefs about whether such activities should be regulated or even banned. Benefits, costs, tradeoffs, regulation: These are the foundations for making a decision using the tools of economic thinking, as we will see. Nearly all decisions made by individuals, firms, and governments in pursuit of an objective or goal can be understood using these economic concepts.
By the end of this course, you will come to understand that economics involves all types of decisions, from small everyday decisions on how to manage one’s time to world-changing decisions made by the president of the United States. Consumers make decisions about what clothes to buy and what foods to eat. Businesses must decide what products to make and how much of each product to stock on store shelves. Indeed, one cannot escape making decisions, and the outcomes of these decisions affect not only our own lives but those of entire societies and countries.
You still might be asking yourself: Why should I study economics? First, you will spend roughly the next 40 years working in an economic environment: paying taxes, experiencing ups and downs in the overall economy, investing money, and voting on various economic issues. It will benefit you to know how the economy works. More important, economic analysis gives you a structure from which you can make decisions in a more rational manner. Economics teaches you how to make better and wiser decisions given your limited resources. This course may well change the way you look at the world. It can open your eyes to how you make everyday decisions from what to buy to where you choose to live.
Like our opening example, economic analysis involves decisions that are not just “economic” in the general sense of the term. Certainly economic thinking may change your views on spending and saving, on how you feel about government debt, and on your opinion of environmental policies or globalization. But you also may develop a different perspective on how much time to study for each of your courses this term, or where you might go for Spring Break this year. Such is the wide scope of economic analysis.
In this introductory chapter, we take a broad look at economics. We take a brief look at a key method of economic analysis: model building. Economists use stylized facts and the technique of holding some variables constant to develop testable theories about how consumers, businesses, and governments make decisions. Then we turn to a short discussion of some key principles of economics to give you a sense of the guiding concepts you will come across in this book.
This introductory chapter will give you a sense of what economics is, what concepts it uses, and what it finds to be important. Do not go into this chapter thinking you have to memorize these concepts. Rather, use this chapter to get a sense of the broad scope of economics. You will be given many opportunities to understand and use these concepts throughout this course. Return to this chapter at the end of the course and see if everything has now become crystal clear.