Economy Foundations

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Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information super highway. (Credit: Johan Larsson/Flickr)

Decisions ... decisions in the social media age

To post or not to post? Every day we are faced with a myriad of decisions, from what to have for breakfast, to which route to take to class, to the more complex—“Should I double major and add possibly another semester of study to my education?” Our response to these choices depends on the information we have available at any given moment; information economists call “imperfect” because we rarely have all the data we need to make perfect decisions. Despite the lack of perfect information, we still make hundreds of decisions a day.

And now, we have another avenue in which to gather information—social media. Outlets like Facebook and Twitter are altering the process by which we make choices, how we spend our time, which movies we see, which products we buy, and more. How many of you chose a university without checking out its Facebook page or Twitter stream first for information and feedback?

As you will see in this course, what happens in economics is affected by how well and how fast information is disseminated through a society, such as how quickly information travels through Facebook. “Economists love nothing better than when deep and liquid markets operate under conditions of perfect information,” says Jessica Irvine, National Economics Editor for News Corp Australia.

This leads us to the topic of this chapter, an introduction to the world of making decisions, processing information, and understanding behavior in markets —the world of economics. Each chapter in this book will start with a discussion about current (or sometimes past) events and revisit it at chapter’s end—to “bring home” the concepts in play.


In this chapter, you will learn about:

  • What Is Economics, and Why Is It Important?
  • Microeconomics and Macroeconomics
  • How Economists Use Theories and Models to Understand Economic Issues
  • How Economies Can Be Organized: An Overview of Economic Systems

What is economics and why should you spend your time learning it? After all, there are other disciplines you could be studying, and other ways you could be spending your time. As the Bring it Home feature just mentioned, making choices is at the heart of what economists study, and your decision to take this course is as much as economic decision as anything else.

Economics is probably not what you think. It is not primarily about money or finance. It is not primarily about business. It is not mathematics. What is it then? It is both a subject area and a way of viewing the world.

Part 1 of Lessons for the Young Economist

Lesson 01: Thinking Like an Economist

Lesson 02: How We Develop Economic Principles

Lesson 03: Economic Concepts Implied By Action

Lesson 04: "Robinson Crusoe" Economics

Test PDF eBook: 
Economy Foundations
Download Economy Foundations Test PDF eBook
21 Pages
English US
Educational Materials

Sample Questions from the Economy Foundations Test

Question: List two examples of mindless behaviors and two examples of purposeful actions.


Mindless behavior: Man sneezing because of pepper or allergies, someone flinching when a car backfires, a woman shivering because it's cold. PARTIAL CREDIT EXAMPLES (because too vague to determine if student understands the distinction): Man yelling during a dream, a bee pollinating a flower, someone going to the bathroom. Purposeful action: Man adding pepper to his soup, a soldier running after throwing a grenade, a woman buying a coat because it's cold. PARTIAL CREDIT EXAMPLES (because too vague to determine if student understands the distinction): Man yelling during a dream, a bee pollinating a flower, someone going to the bathroom.

Question: Can purposeful action be based on a faulty belief? Give examples.


There are all sorts of examples of purposeful actions that are based on false beliefs. For example, if we see a man on his knee in a fancy restaurant in front of his dinner companion, we might say, "He is proposing to that woman because he wants to spend his life with her." One of his beliefs that motivated this action is that she will say yes. But she very well might say no. Even in that case, the man's action was still purposeful; he just didn't fulfill the purpose as he had expected. In business, entrepreneurs make faulty forecasts all the time. Their actions are still purposeful, and they still fall under the scope of economic theory.

Question: Does "purposeful action" include mistakes?


Yes, it does. Purposeful action is intentional action; it is behavior that serves a purpose to the thing doing the behaving. People try to achieve certain outcomes and fail, all the time. Yet they are still acting with purpose. In this course we do not assume that people are flawless calculators, as some textbook writers do.

Question: Can we perform controlled experiments to test economic theories?


No, not in the same sense that we perform controlled experiments in (some of) the natural sciences. There is an entire field called "experimental economics," in which researchers will run experiments to test various issues that are important to some economic researchers.

Question: Why do statements about a man's actions (implicitly) involve his beliefs as well?


To say that a man acts with a purpose, we are implying that the man believes his action will achieve the result he desires. (If we didn't attribute such a belief to the man, then our description would make no sense.) This seems like a trivial point, but much of the development of economics in the twentieth century involved the growing realization among economists that expectations were important. These developments lie outside the scope of this course, but the moral is that these "foundational" issues really do have implications for cutting edge research.

Question: What does it mean when economists say preferences are subjective?


This elementary observation simply refers to the fact that people have different tastes. This is a much more straightforward way of explaining market prices, than to assume that these prices are the result of some "objective" facts (such as how much labor went into the product, etc.). The emphasis on subjective preferences will make more sense in Lesson 6 when we explain barter prices.

Question: Explain how economists derive economic principles or laws.


The economist develops principles the same way that mathematicians prove theorems in geometry. The economist starts out with the observation or assumption that people have conscious goals, and then logically deduces implications from that fact. Sample Partial Credit Answer The economist knows what it's like to be living in an economy, so he can understand what motivates other people too.

Question: Are brain and mind interchangeable terms?


No, they are not. The brain is a physical organ of the body, whereas the mind is an intangible concept that obviously bears some relationship to the brain. (Note that someone can "lose his mind" without losing his brain.) To repeat, we are not ruling out particular theories of neuroscience that claim that certain mental states are caused by particular brain states. We are making the very modest point that mental states or operations (such as anxiety, happiness, long-range planning, multiplication, etc.) are different from brain states (such as firing neurons and blood flow to the left hemisphere).

Question: Explain why the "scientific method" simply won't do well in the realm of social science.


The social sciences study people, and so the very "facts" of the social sciences involve people's minds. The natural sciences study mindless particles and can use repeatable experiments, changing one variable at a time, to test which theories are better or worse. Yet there are no controlled experiments in the social sciences, because the people have minds of their own so that we can't ever replicate the same conditions for a new "test." Sample Partial Credit Answer Social sciences study people, and so they can't use experiments.

Question: If someone sneezes when pepper is thrown in his face, is that a purposeful action?


The answer is no, because (presumably) sneezing is a reflexive behavior. It's important for the student to realize that the distinction between purposeful action and mindless behavior is not simply the difference between human bodily movements versus items in nature. As the example of lifting a leg in the student text shows, human behavior can be classified as either purposeful action or mindless behavior, depending on the circumstances.

Question: Does economics say you shouldn't give money to charity?


No! It is perfectly reasonable for an economist to donate money to the poor. The discussion in the text was referring to an illegitimate application of economic theory. Specifically, some people learn the "law of diminishing marginal utility" in standard economics courses, and then falsely conclude that a dollar confers less utility on a rich man than on a poor man. This talk is meaningless; economics says no such thing. Now if we want to justify charity on the grounds of moral obligation, that is consistent with economics. The only point here is that standard utility theory does not justify wealth redistribution the way many people think it does.

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Source:  Dr. Robert P. Murphy, Lessons for the Young Economist. (Mises Institute), (Accessed 04 April, 2014). License: Creative Commons BY
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