The World of Economics

The Many Uses of Economic Tools

Economics was first developed to study the production and distribution of goods and services. he boundaries of the field are much broader now. For example, economists have expanded their sights from the wealth of nations to the health of nations, with goals to get more out of our limited health care resources.

The decision-making framework at the heart of economics applies to everything from when to get married and where to give birth to whether to commit crime and how to reduce drug- related deaths. Believe it or not, the tools of economics can even explain the outbreak of war or peace.

Likewise, the tools of economics shed light on topics as surprising as cheating on standardized tests, participation in terrorism, bribery of public officials, and the popularity of reality television shows. There are more surprises to come. For now, be assured that the tools of economics apply to a pleasing assortment of questions. Our goal in writing this book is to provide you with those tools. In this module we will take a closer look at what economists study and give you a roadmap of what’s ahead.

Microeconomics and Macroeconomics

Economics is divided into two major areas: microeconomics and macroeconomics.

Microeconomics is the study of how people make decisions and how those decisions affect others in the economy. Our discussion in What Is Economics of the opportunity cost of a movie is an example of microeconomics, because it is about how you make decisions. The decisions people make when running a business are also examined in microeconomics.

Examples of questions explored in the microeconomics sections of this course include the following:

• How many hours should you work for pay each week?
• Is a college education a good investment?
• How will faster Internet connections affect the film industry?
• How does a natural disaster like the Gulf oil spill in 2010 affect the price businesses charge for fish in the United States and the earnings of people who fish for a living?

Macroeconomics is the study of the economy as a whole. This includes the ups and downs of the economy and the interactions between its various parts. Our earlier discussions of production Possibilities and economic growth are examples of macroeconomics.

The following questions are addressed in the macroeconomics sections of this course:

• Why do the prices of goods and services tend to rise over time?
• What effect does government borrowing have on the economy?
• Why are some nations poor and others rich?
• Why is an economy sometimes not able to provide jobs for everyone who wants to work?

Positive and normative economics

Beyond covering questions on everything from the macroeconomics of the world economy to the microeconomics of your Saturday afternoon, economics covers questions both on the way things are and about the way things should be.

Positive economics is the study of what the world is like and why it works the way it does. It is about facts and cause- and- effect relationships.

Positive questions include the following:

• How many teenagers live in poverty?
• Do people buy more or less Coke when their incomes increase?
• How do salary limits for professional soccer players affect team performance?

Economists seek answers to questions like these with scientific methods rather than relying on opinions about what is good or bad. Positive economics also allows predictions to be made. By studying how one thing, like the availability of jobs, affects another thing, like the amount of crime, we can make predictions such as this: a country that is losing jobs can expect more crime. The predictions are not always right, but they help individuals, businesses, and governments plan for the future.

Normative economics is the study of the way things should be rather than the way things are. Normative economics brings opinions and ideals into the process of answering questions. Normative questions include the following:

• Should our country do more to help the poor?
• Should Coke be sold in high school vending machines?
• Should college athletes be paid?

Different people have different opinions. Although there are no right or wrong answers, economics still helps us think about normative questions. For example, economics helps us study the efficiency of plans to help the poor, so that any efforts that are made will serve as many people as possible. Consider the plan, adopted in several cities, to limit the amount of money owners can charge for apartments.

Economists studied the situation and found that with these limits, fewer apartments were made available, housing shortages increased, and fewer people were served than under alternative programs.

The language of economics

It’s been said that economists have their own language. There’s some truth to that.

Economists assign precise meanings to words and sometimes use them in special ways. You’ve already seen that in economics, capital is anything long lasting that is created by humans and used to produce goods and services. In ordinary language, people use capital to mean money. An entrepreneur might say, “I want to open up a restaurant, but first I need to raise enough capital to buy cooking equipment.” To an economist, the cooking equipment itself is capital.

The word market is another with special meaning in economics. In standard English, a market is a place where you buy goods, such as a supermarket, a fl ea market, or a farmers’ market. In economics, a market is not a place but a collection of buyers and sellers, wherever they may be.

The market for cellular phone service in the United States, for example, includes everyone in the country who buys cellular phone service and every company that sells it. The market is made up of the buyers and sellers themselves rather than being a particular location where they happen to be when they buy or sell phone service.

In your economic explorations you will discover many more words with distinct meanings in this field. You’ll also learn new words and phrases, like opportunity cost, that are used almost exclusively in economics. Understanding this language will help you grasp what you read and hear about the economy and share what you learn, clearly and precisely, with others.

To help you find and learn important terms, this book presents each key term in three different places. You will find definitions in the text, in the page margin, and in the glossary at the back of the book