Chapter 1 introduces you to economics—the social science that studies how individuals, institutions, and society make the optimal best choices under conditions of scarcity. The first section of the chapter describes the three key features of the economic perspective. This perspective first recognizes that all choices involve costs and that these costs must be involved in an economic decision. The economic perspective also incorporates the view that to achieve a goal, people make decisions that reflect their purposeful self-interest. The third feature considers that people compare marginal benefits against marginal costs when making decisions and will choose the situation where the marginal benefit is greater than the marginal cost. You will develop a better understanding of these features as you read about the economic issues in this book.
Economics relies heavily on the scientific method to develop theories and principles to explain the likely effects from human events and behavior. It involves gathering data, testing hypotheses, and developing theories and principles. In essence, economic theories and principles (and related terms such as laws and models) are generalizations about how the economic world works.
Economists develop economic theories and principles at two levels. Microeconomics targets specific units in the economy. Studies at this level research such questions as how prices and output are determined for particular products and how consumers will react to price changes. Macroeconomics focuses on the whole economy, or large segments of it. Studies at this level investigate such issues as how to increase economic growth, control inflation, or maintain full employment. Studies at either level have elements of positive economics, which investigates facts or cause-and-effect relationships, or normative economics, which incorporates subjective views of