Economics for Today, 8th Edition Solution Manual

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1Chapter1Introducing the Economic Way of ThinkingCHAPTER SUMMARYScarcity permeates the entire human experience. Scarcity means we are unable to have as much aswe would like to have. Our wants are unlimited. But, our production capabilities are limited by our factorsof production, which include land, labor (the entrepreneur is a special type of labor) and capital (plant andequipment). 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, whereasmicroeconomics 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 handle on "what is" before we argue"what ought to be." This takes us to a look at how economists derive positive economic theories---a lookat the methodology of economics. That methodology is the same scientific methodology used in allsciences---it is the process of induction and deduction. Theories can be expressed: 1) verbally, or inwritten form, 2) as a numerical table, 3) graphically, or 4) mathematically. Theories are helpful tounderstanding the relationship between economic variables but should be used with caution. Twocommon pitfalls to clear thinking are the failure to understand theceteris paribusassumption andconfusingassociationandcausation.The appendix to this chapter focuses on how theories can be expressed graphically. Graphs are visualaids that help us see thedirectorinverserelationship between two or more sets of data or variables.scarcitylaboreconomicsentrepreneurshipceteris paribusNEW CONCEPTS INTRODUCEDresourcescapitalmacroeconomicsnormative economicslandmodelmicroeconomicspositive economicsAfter completing this chapter, students should be able to:INSTRUCTIONAL OBJECTIVES1.Understand that if there was no scarcity there would be no such thing as economics. Economics isthe 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 (ourwants 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 withour 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.

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