Module 1: The Study of Economics

Module 2: Introduction to Macroeconomics

Module 3: The Production Possibilities Curve Model

Module 4: Comparative Advantage and Trade

Appendix: Graphs in Economics

Economics by Example: What’s to Love About Economics?

The annual meeting of the American Economic Association draws thousands of economists, young and old, famous and obscure. There are booksellers, business meetings, and quite a few job interviews. But mainly the economists gather to talk and listen. During the busiest times, 60 or more presentations may be taking place simultaneously, on questions that range from the future of the stock market to who does the cooking in two-earner families.

What do these people have in common? An expert on the stock market probably knows very little about the economics of housework, and vice versa. Yet an economist who wanders into the wrong seminar and ends up listening to presentations on some unfamiliar topic is nonetheless likely to hear much that is familiar. The reason is that all economic analysis is based on a set of common principles that apply to many different issues.

Some of these principles involve individual choice—for economics is, first of all, about the choices that individuals make. Do you choose to work during the summer or take a backpacking trip? Do you download a new album or go to a movie? These decisions involve making a choice from among a limited number of alternatives—limited because no one can have everything that he or she wants. Every question in economics at its most basic level involves individuals making choices.

But to understand how an economy works, you need to understand more than how individuals make choices. None of us lives like Robinson Crusoe, alone on an island—we must make decisions in an environment that is shaped by the decisions of others. Indeed, in our global economy even the simplest decisions you make—say, what to have for breakfast—are shaped by the decisions of thousands of other people, from the banana grower in Costa Rica who decided to grow the fruit you eat to the farmer in Iowa who provided the corn in your cornflakes. And because each one of us depends on so many others—and they, in turn, depend on us—our choices interact. So, although all economics at a basic level is about individual choice, in order to understand behavior within an economy we must also understand economic interaction—how my choices affect your choices, and vice versa.

Many important economic interactions can be understood by looking at the markets for individual goods—for example, the market for corn. But we must also understand economy-wide interactions in order to understand how they can lead to the ups and downs we see in the economy as a whole.

In this section we discuss the study of economics and the difference between microeconomics and macroeconomics. We also introduce the major topics within macroeconomics and the use of models to study the macroeconomy. Finally, we present the production possibilities curve model and use it to understand basic economic activity, including trade between two economies. Because the study of economics relies on graphical models, an appendix on the use of graphs follows the end of this section.