CHAPTER

1

Economics:
Foundations and Models

Chapter Outline and
Learning Objectives
1.1

Three Key Economic Ideas

1.2

The Economic Problem That
Every Society Must Solve

1.3

Economic Models

1.4

Microeconomics and
Macroeconomics

1.5

A Preview of Important
Economic Terms

APPENDIX: Using Graphs and
Formulas
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Why Are Some Doctors Leaving Private Practice?
• For many years, the typical doctor operated his or her practice either alone or in partnership with other doctors. Lately, an increasing number of doctors have given up their practices and become salaried employees of hospitals.
• The movement of many doctors from running their own businesses to being salaried employees of hospitals is due to changes occurring within the U.S. health care system.
• Throughout this book, we will see that many policy issues, including changes in the U.S. medical system, involve economics. Knowledge of economics can help you to better understand and analyze many policy issues.
• AN INSIDE LOOK on page 20 discusses how health professionals may be delaying retirement because they are concerned about their finances.

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Economics in Your Life
Will There Be Plenty of Jobs Available in the Health Care Industry?
The U.S. Bureau of Labor Statistics projects that four of the six fastest growing occupations over the next 10 years will be in the medical field. But the availability of these jobs depends on the reliability of the forecasts.
What is the basis for the forecasts on the availability of jobs in health care, and how reliable are the forecasts?

In this book, we use economics to also answer these questions:
• How are the prices of goods and services determined?
• How does pollution affect the economy, and how should government policy deal with these effects?
• Why do firms engage in international trade, and how do government policies affect international trade?
• Why does government control the prices of some goods and services, and what are the effects of those controls?
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Economics: Foundations and Models
4.1

Scarcity
The situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Economics
The study of the choices people make to attain their goals, given their scarce resources.
Economic model
A simplified version of reality used to analyze realworld economic situations.

Three Key Economic Ideas
4.1

Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas:
1 People are rational.

2 People respond to economic incentives.
3 Optimal decisions are made at the margin.

People are Rational
People use all available information in making decisions. Rational people weigh the benefits and costs of all possible alternative actions.
Their decisions might turn out not to be the best, but as long as the decisions were based on available information at the time, they were rational decisions.
People may not be rational all the time, but the assumption is very useful in explaining most of the choices people make.
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People Respond to Economics Incentives

 Economists emphasize consumers and firms consistently respond to economic incentives:
Cash for clunkers – 625,000 cars sold and $3 billion rebate money gone in a month.

Free or low-cost Hawaii State sponsored Keiki
Care led many parents to switch their children’s private health insurance to government plan, which led to the end of Keiki Care in 7 months.
Estonia government provides economic incentives to encourage women to have more children. © 2012 Pearson Education, Inc. Publishing as