Economics - Introduction | Economics

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Study GuideEconomics–Introduction1. Economic Policy1.1 What Is Economic Policy?Economic policy refers to the actions taken to guide or manage a country’s economy. These actionsare usually planned and carried out by the government. The main purpose of economic policy is toinfluence how the economy behaves and performs.Governments make economic policies when they decide:•How much money to spend and where to spend it•How much tax people and businesses should pay•How income should be redistributed, such as helping lower-income groups•How much money should circulate in the economyAll of these decisions affect jobs, prices, income, and overall economic health.1.2 How Do Economists Study Economic Policy?Economists study economic policies in two main ways:positive economicsandnormativeeconomics. Each approach has a different purpose.1.3 Positive Economics: Explaining “What Is”Positive economics focuses on describing and explaining how the economy works. It does not involveopinions or personal beliefs about what is good or bad. Instead, it looks at facts and data.A key feature of positive economics is that its ideas can be tested. Economists can collect data andcheck whether a statement is true or false.Example:“An increase in the supply of money leads to an increase in prices.”This statement belongs to positive economics because economists can test it by examining real dataon money supply and prices.

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Study Guide1.4 Normative Economics: Deciding “What Should Be”Normative economics is about making judgments and expressing opinions on how the economyshould perform or how policies should be designed. These ideas are based on values, not just facts.Because normative statements depend on personal or social values, they cannot be tested or provenusing data.Example:“The inflation rate is too high.”This is a normative statement because it reflects an opinion. Different people may disagree on whatlevel of inflation is acceptable.Most disagreements among economists happen in the area of normative economics, since valuesand opinions can vary widely.1.5 Goals of Economic PolicyThe goals of economic policy are based on what society believes the economy should achieve. Sincethese goals involve value judgments, they fall under normative economics.Even though people may disagree on priorities, several goals are widely accepted by mosteconomists:1. Economic GrowthEconomic growth means that the real incomes of consumers and firms increase over time. Thisincrease is measured after adjusting for inflation, so it reflects actual improvements in livingstandards.2. Full EmploymentThe goal of full employment is to ensure that everyone who is willing and able to work can find a job.It does not mean zero unemployment, but it aims to minimize joblessness as much as possible.

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Study Guide3. Price StabilityPrice stability means keeping the general level of prices stable over time.•Rising prices are calledinflation•Falling prices are calleddeflationBoth inflation and deflation can create economic problems, so governments try to avoid large orsudden changes in prices.SummaryEconomic policy shapes how an economy grows, creates jobs, and maintains stable prices. Byunderstanding the difference between positive and normative economics, students can better see whyeconomists sometimes agree on facts but disagree on policy choices.2. Economic Analysis2.1 What Is Economic Analysis?Economic analysis mainly usesmarginal analysis.Marginal analysis means looking atsmall changes—what happens if weadd one more unitorremove one unitof something.2.2 Marginal Benefits and Marginal CostsLet’s understand this with an example.Suppose an employer is thinking about hiringone more worker.•Marginal Benefit:•This is theextra value of goods or servicesthat the new worker can produce.•Marginal Cost:•This is theextra cost, mainly thewages, that the employer must pay the new worker.Decision Rule:•Ifmarginal benefit > marginal cost, hiring the worker makes sense.•Ifmarginal benefit < marginal cost, the worker should not be hired.Economic decisions are made bycomparing benefits and costs at the margin.

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Study Guide2.3 Ceteris Paribus: “All Else Held Constant”In real life, many factors affect decisions at the same time.This can make analysis confusing.For example, whether students attend college depends on:•Family income•Tuition fees•Value of a college degreeIf tuition rises, enrollment may change—but incomes and job prospects may also be changing.To clearly studyone factor at a time, economists use theceteris paribus assumption.•Ceteris paribusis Latin for“all other things held constant.”•It means we changeonly one factorand assume all others stay the same.Example statement:“An increase in tuition reduces college enrollment,ceteris paribus.”This means tuition changed, but everything else stayed the same.

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