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CHAPTER 1 THE NATURE OF ECONOMICS I Definition Economics is a social science concerned with the efficient utilization of scarce resources in order to maximally satisfy societys unlimited wants II Functions of Economics The production distribution and consumption of goods and services III Benefits of Economics A Most historical social and economic changes have economic backgrounds B Governments are increasingly relying on economists for decision-making C Economics teaches us that in the real world every decision we make involves opportunity costs or tradeoffs D Economics helps the citizenry understand how the market the government and world politics function E Economics helps the voters make wise public choices at elections F Economics helps people in their personal and business decision-making IV Types of Economics A Macroeconomics A study of economic aggregates and policies on the national level including income output the price level and trade B Microeconomics A study of how consumers households firms markets and industries make their economic decisions V Rationality Assumption Rational people will not make decisions that will cause them to be worse off than before VI The Invisible Hand Concept The idea that while the participants of the market pursue their self interest they automatically promote the public welfare Thus government must play only a limited role VII The Methodology of Economics A Theories General statements about cause and effect in economic life B Models Formal statements of theories showing the relationship between two or more variables C Inductive Logic Moving from facts to principles Facts-Theories-Policies D Deductive Logic Moving from a hypothesis to its proof E ceteris paribus - all other things being equal assumption VIII Approaches to Economics A Descriptive Positive Economics Describes what exists and how it works B Normative Applied Economics
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