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Practical Guide To Contemporary Economics

Practical Guide To Contemporary Economics


Key concepts discussed in this chapter: economics as a social science, positive economics, normative economics, economic model, economic theory, economic way of thinking, production possibilities frontier (PPF), opportunity cost, productive efficiency, allocative efficiency, Pareto efficiency, specialization, absolute advantage, comparative advantage

1.1 Economics as a science

As a matter of fact, all key economic questions and problems arise because human wants exceed the resources available to satisfy them. Our inability to satisfy all our wants is called scarcity. Faced with scarcity we must make choices. We must choose the available alternatives. Therefore, economics as a science can be defined as follows:

Economics: Social science that studies the choices that individuals, businesses, government and the entire society make as they cope with scarcity

The subject matter of economics is divided into two main components:


Microeconomics is the study of the choices that individual economic agents make, the interaction of these choices, and the influence that governments exert on these choices. The key word in understanding microeconomics is individual.

Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, households, businesses and governments make. The key word in understanding macroeconomics is aggregate.

Modeling in economics

The task of economic science is first to discover and catalogue positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. This task can be broken into three steps:

1. Observing and measuring
2. Model building
3. Testing Observing and measuring result in economists

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