ECONOMICS

SECOND EDITION
ROBERT E. HALL
STANFORD UNIVERSITY
MARC LIEBERMAN
NEW YORK UNIVERSITY

CHAPTER 1
WHAT IS ECONOMICS
 Chapter 1
Economics, Scarcity and Choice

Economics is the study of choice under condi

tions of scarcity.
• Scarcity and Individual Choice

As individuals, we face a scarcity of time and s

pending power. Given more of either, we coul
d each have more of the goods and services t
hat we desire.
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 Scarcity and Social Choice
• Goals of our society?

a high standard of living, clean air, safe str

eets, good schools, and more.
• Society also has to make choices becaus
e it faces a scarcity of resources, things
we use to make goods and services that h
elp us achieve our goals.
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 Economic Resources
• Labor is the time human beings spent prod
ucing goods and services.
• Capital consists of the tools people use to
produce goods and services
physical capital: building, machines
human capital: skills of workers
• Land is the physical space on which produc
tion takes places; the natural resources, i.e.
oil, iron, coal, lumber.
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 • Entrepreneurship: ability to recognize a m
arket for a product or service, and to combi
ne/coordinate the other three resources to
produce such a product or service for sale.

As a society, our resources--land, labor, an

d capital--are in sufficient to produce all the
goods and services we might desire. In oth
er words, society faces a scarcity of resour
ces.

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 Scarcity and Economics
• The scarcity of resources--
and the choices it forces us to make--
is the source of all of the problems you
will study in economics.
• Economic units: households, businesses
, government, all faces scarcity and have
to make the best choices for themselves

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 The World of Economics
• Microeconomics and Macroeconomics
• Positive and Normative Economics
• Why economists disagrees.

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 Why Study Economics?
• To understand the world better.
• To gain self-confidence
• To achieve social change
• To help prepare for other careers
• To become an economist

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 The Methods of Economics
• The heavy reliance on models.
A model is an abstract representation of rea
lity.
• A model should be as simple as possible to
accomplish its purpose.
• Ex. a map
• economic models have other purposes besi
des education; can help make good decisio
ns (choices).
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 • Every economic model begins with assumpti
ons about the world.
• There are two types of assumptions:
• Simplifying assumption: a way of making a m
odel simpler without affecting any of its impor
tant conclusions
• Critical assumption: assumption that affects t
he conclusions of a model in important ways.

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 • The insight is this: There is a remarkable
similarity in the types of models that econ
omists build, the assumptions that underli
e those models, and what economists act
ually do with them.
In fact, you will see that economists follo
w the same four-step procedure to analyz
e almost any economic problem.

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 • Using mathematical concepts and a spe
cial vocabulary. Why?
to express more precisely than with ordi
nary language. And to stay clear of unn
ecessary confusion.
• Math: equation for a straight line, conce
pt of a slope, calculation of percentage
changes (see Appendix)
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 Active Studying means:
• reading with a pencil in your hand and a bl
ank sheet of paper in front of you.
• closing books periodically and reproducing
what you have learned.
• listing the steps in each logical argument, r
etracing the cause-and-effect steps, and dr
awing the graphs that represent the model
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 Active Studying also means:
• thinking about the basic principles of ec
onomics and how they relate to what yo
u are learning.

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