An Economic Way of Thinking
Factors That Contribute To Wealth
- Natural resources
- Labor
- Institutions
Natural resources
Countries with abundant natural resources, such as oil and gas, may have an advantage in terms of economic growth. However, natural resources are not always a guarantee of wealth, as countries with few natural resources can still be wealthy if they have other advantages, such as a skilled workforce or a good education system.
Labor
A country's workforce is another important factor in its wealth. A country with a large and productive workforce is more likely to be wealthy than a country with a small and unproductive workforce. Productivity can be improved through education, training, and technology.
Institutions
The rules and regulations that govern a country's economy can also play a role in its wealth. Good institutions, such as a strong legal system and a fair tax system, can help to promote economic growth.
Other factors
- Entrepreneurship
- Innovation
- Trade
Smith's Observations
- Adam Smith argued that people want more than just the basic necessities of life.
- They also want things that make life easier, more convenient, and more entertaining.
- The more of these things people have, the richer they are, at least in economic terms.
What is Economics All About?
- Economics is about understanding the choices that people and businesses make.
- It is about how these choices affect the distribution of resources and the overall well-being of society.
- Economics is also about understanding the forces that drive economic growth and development.
Economic Enigmas
- Economists study economic enigmas, or puzzles and riddles that can be explained through economic analysis.
- For example, why does popcorn sold at the movies cost more than at a grocery store?
- Or why are so many products sold for $2.99 and so few for $3.00?
Economics
- The study of how people use their limited resources to satisfy their unlimited wants.
- Resources are anything used to produce an economic good or a service.
- Wants are what people desire, but not all wants can be satisfied.
- Scarcity is the condition in which there are not enough resources to satisfy all wants.
Microeconomics
The study of economic decision making by individuals, households, and businesses. Focuses on how these individual units interact with each other and with the market. Macroeconomics
Macroeconomics
The study of the workings of an economy as a whole. Focuses on topics such as economic growth, inflation, and unemployment.
The Science of Decision-Making
- Economics is also the study of how people make choices.
- When people cannot have everything they want, they must make choices about how to allocate their resources.
- Economists study how people make these choices and how they are affected by the choices of others.
Seven Economical Principles
Scarcity Forces Tradeoffs
People have unlimited wants but limited resources, so they must make choices.
Cost-Benefit Principle
People make choices based on the expected costs and benefits.
Thinking at the Margin
Most decisions involve choices about a little more or a little less of something.
Incentives Matter
People respond to incentives in generally predictable ways.
Trade Makes People Better Off
By focusing on what we do well and then trading with others, we can all get more of what we want.
Markets Coordinate Trade
Markets are usually the best way to coordinate exchanges between buyers and sellers.
Future Consequences Count
People take into account the future consequences of their choices.
The Scientific Method
Economists use the scientific method to study how the economy works.
Questioning and Hypothesizing
Economists start by asking a question about how the economy works.
Conducting Studies and Collecting Information
To test their hypothesis, economists conduct studies and collect information.
Analyzing the Information
Once economists have collected the information, they analyze it to see if it supports their hypothesis.
Evaluating the Hypothesis
Finally, economists evaluate their hypothesis and decide whether it is supported by the evidence.
Economic Models
A simplified representation of reality that often allows economists to focus on the effects of one change at a time. Models also help economists structure their thinking.
Types of Economic Models
Mathematical models, computer models, diagrammatic models, and verbal models
Limitations
- Models are an approximation of how people, in general, act. As such, models cannot accurately predict all behavior all of the time.
- Economists who construct models must make assumptions. These assumptions can limit the applicability of the model.