Chapter 1 Summary: The Nature and Method of Economics
Economics is defined as the study of the "efficient use of scarce resources" for the production of goods and services that "achieve the maximum satisfaction of economic wants." Economic perspective is founded on resource scarcity and choice, the assumption of rational behavior, and marginalism. Knowledge of economics for the non-economist adds to good citizenship and is thus valuable for consumers, workers, and politicians.
Economists use the scientific method to form and test hypotheses of cause-effect relationships. Economists do this to formulate theories, laws, and principles that help them explain real-world relationships and predict real-world outcomes. Good economic policy is designed to identify and solve economic problems to the fullest extent possible, while protecting society's shared goals of economic growth and efficiency, full employment, price-level stability, economic freedom, equitable distribution of income, economic security, and a reasonable balance in international trade and finance. Some of these goals are compatible while others require trade-offs to accomplish.
Macroeconomics supports these goals as they relate to the examination of the economy as a whole, while microeconomics supports these goals as they relate to the examination of specific units and institutions. Both macroeconomics and microeconomics issue positive and normative statements. Positive statements state "facts" (what is) while normative statements express "value judgments" (what ought to be). The study of both macroeconomics and microeconomics encounters pitfalls in the way of biases and preconceptions, vague use of terminology, difficulty in establishing clear cause-effect relationships, and fallacy of composition, which is the logical error of believing that what is true for the individual is also true for the group.
Graphs employing variables that are positively (or directly) related and variables that are negatively (or indirectly) related are used in economics to represent economic relationships. Directly related relationships show a rising upward slope, while indirectly related relationships show a dropping downward slope.
The slope of a curve expresses the cause-effect relationship between variables, with an upslope showing a positive relationship and a downslope showing a negative relationship. A straight line curve shows no relationship as it represents the ratio of the vertical (cause) change to the horizontal (effect) change between any two variable sets, or points. The slope of a vertical line is infinite and the slope of a horizontal line is zero. The slope of a curved relationship line is determined by calculating the slope of a straight line tangent to the curve at a given point.