1'1 DEFINITIONS AND QUESTIONS

1
1.1 DEFINITIONS AND QUESTIONS

• All economic questions and problems arise because
  human wants exceed the resources available to
  satisfy them.
• Scarcity
• The condition that arises because the available
  resources are insufficient to satisfy wants.
• Faced with scarcity, we must make choiceswe must
  choose among the available alternatives.
• The choices we make depend on the incentives we
  face.

2
1.1 DEFINITIONS AND QUESTIONS

• Incentive
• An incentive is a reward or a penaltya carrot
  or a stickthat encourages or discourages an
  action.
• Economics
• The social science that studies the choices that
  we make as we cope with scarcity and the
  incentives that influence and reconcile our
  choices.
• The subject has two broad divisionsmicroeconomics
  and macroeconomics.

3
1.1 DEFINITIONS AND QUESTIONS

• Microeconomics
• Microeconomics The study of the choices that
  individuals and businesses make, the way these
  choices interact, and the influence that
  governments exert on these choices.
• Macroeconomics
• Macroeconomics The study of the aggregate (or
  total) effects on the national economy and the
  global economy of the choices that individuals,
  businesses, and governments make.

4
1.1 DEFINITIONS AND QUESTIONS

• Macroeconomic Questions
• The three big issues that macroeconomics tries to
  understand are
• The standard of living
• The cost of living
• Economic fluctuationsrecessions and expansions

5
1.1 DEFINITIONS AND QUESTIONS

• The Standard of Living
• Standard of living
• The level of consumption of goods and services
  that people enjoy, on the average it is measured
  by average income per person.
• Goods and services
• The objects that people value and produce to
  satisfy human wants. Goods are physical objects,
  and services are work done for people.

6
1.1 DEFINITIONS AND QUESTIONS

• For most people achieving a high standard of
  living means finding a good job.
• Unemployment
• The state of being available and willing to work
  but unable to find suitable work.

7
1.1 DEFINITIONS AND QUESTIONS

• The Cost of Living
• Cost of living
• The number of dollars it takes to buy the goods
  and services that achieve a given standard of
  living.
• Inflation
• A situation in which the cost of living is rising
  and the value of money is shrinking.

8
1.1 DEFINITIONS AND QUESTIONS

• Economic Fluctuations Recessions and Expansions
• Business cycle
• A periodic but irregular up-and-down movement in
  production and jobs.
• The worst recession ever was the Great
  Depression.
• Great Depression
• A period during the 1930s in which the economy
  experienced its worst-ever recession.

9
(No Transcript)
10
1.2 ECONOMICS A SOCIAL SCIENCE

• Goal of economists is to discover how the
  economic world works. Economists distinguish
  between
• Positive statements What is
• Normative statements What ought to be
• The task of economic science
• To discover and catalog positive statements that
  are consistent with what we observe in the world
  and that enable us to understand how the economic
  world works.

11
1.2 ECONOMICS A SOCIAL SCIENCE

• The task can be broken into three steps
• Observing and measuring
• Model building
• Testing
• Observing and Measuring
• Items such as
• Quantities of resources
• Wages and work hours
• Prices and quantities of goods and services
• Taxes and government spending
• Volume of international trade

12
1.2 ECONOMICS A SOCIAL SCIENCE

• Model Building
• Economic model
• A description of some aspect of the economic
  world that includes only those features of the
  world that are needed for the purpose at hand.

13
1.2 ECONOMICS A SOCIAL SCIENCE

• Testing
• A models predictions might correspond to or
  conflict with the data.
• Economic theory
• A generalization that summarizes what we
  understand about the economic choices that people
  make and the economic performance of industries
  and nations.

14
1.2 ECONOMICS A SOCIAL SCIENCE

• Unscrambling Cause and Effect
• The central idea that economists use to
  unscramble cause and effect is ceteris paribus.
• Ceteris Paribus
• Ceteris paribus means other things being
  equal.
• But ceteris paribus can be a problem in
  economics when testing a model.

15
1.2 ECONOMICS A SOCIAL SCIENCE

• Economist take three complimentary approaches
• Natural experiments
• Econometric investigations
• Economic experiments

Natural Experiments A situation that arises in
the ordinary course of economic life in which the
one factor of interest is different and other
things are equal.
16
1.2 ECONOMICS A SOCIAL SCIENCE

• Econometric Investigations
• Economic investigations use statistical tools.
• Correlation
• The tendency for the values of two variables to
  move in a predictable and related way.
• Post hoc fallacy
• The error of reasoning that a first event causes
  a second event because the first occurred before
  the second.

17
1.2 ECONOMICS A SOCIAL SCIENCE

• Economic Experiments
• Economic experiments put real subjects in a
  decision making situation and vary the influence
  of interest to discover how the subjects respond
  to one factor at a time. A relatively new
  approach.

18
1.3 MACROECONOMIC IDEAS

• Four core ideas
• Macroeconomic performance results from rational
  choices that respond to incentives.
• The standard of living improves when production
  per person increases.
• The cost of living rises when the quantity of
  money increases faster than production.
• Economic fluctuations result from expenditure and
  productivity flucutations.

19
1.3 MACROECONOMIC IDEAS

• Rational Choice and Incentives
• A rational choice is one that uses the available
  resources to most effectively satisfy the wants
  of the person making the choice.
• Cost What You Must Give Up
• Opportunity cost
• The highest-valued alternative forgone.

20
1.3 MACROECONOMIC IDEAS

• Benefit Gain Measured by What You Are Willing to
  Give Up
• Benefit
• The gain or pleasure that something brings.
• On the Margin
• Margin
• A choice that is made by comparing all the
  relevant alternatives systematically and
  incrementally.

21
1.3 MACROECONOMIC IDEAS

• Marginal cost
• The cost of a one-unit increase in an activity
• Marginal benefit
• What you gain when you get one more unit of
• something.
• We make a rational choice when we take those
  actions for which marginal benefit exceeds or
  equals marginal cost.

22
1.3 MACROECONOMIC IDEAS

• The Standard of Living and Productivity
• The dollar value of production increases for
  three reasons
• Prices and wages rise
• The number of people employed increases
• Productivity increases
• Productivity
• Total production per person employed.
• Only an increase in productivity brings an
  improvement in the standard of living.

23
1.3 MACROECONOMIC IDEAS

• The Cost of Living and the Quantity of Money
• A rising cost of living, called inflation, means
  that more dollars are needed to buy the same
  fixed quantity of goods and services.
• Inflation is caused by an increase in the
  quantity of money that is not matched by an
  increase in the quantity of goods and services.

24
1.3 MACROECONOMIC IDEAS

• Expenditure and Productivity Fluctuations
• The business cycle is the least well understood
  aspect of macroeconomic performance.
• The sources of economic fluctuations can be
  grouped into
• Expenditure fluctuations
• Productivity fluctuations

25
1.3 MACROECONOMIC IDEAS

• Expenditure Fluctuations
• Expenditure fluctuations can arise from changes
  in interest rates or from changes in profit
  opportunities.
• Productivity Fluctuations
• Productivity fluctuations can arise from negative
  shocks such as an oil price hike or from positive
  events like the spread of information-age
  technologies.

26
1.3 MACROECONOMIC IDEAS

• Smoothing the Business Cycle
• Economic fluctuations are undesirable recession
  brings unemployment and overly strong expansion
  brings inflation.
• Macroeconomics tries to develop techniques for
  smoothing the business cycle.

27
1.4 WHY ECONOMICS IS WORTH STUDYING

• Two main benefits from studying economics are
• Understanding
• Expanded career opportunities
• Understanding
• Economic ideas is all around you. You cannot
  ignore them.
• As you progress with you study of economics,
  youll gain a deeper understanding of what is
  going on around you.

28
1.4 WHY ECONOMICS IS WORTH STUDYING

• Expanded Career Opportunities
• Most students of economics dont become
  economists.
• But knowledge of economics is vital is many
  fields such as banking, finance, business,
  management, insurance, real estate, law,
  government, journalism, health care and the arts.
• Economics graduates are not the highest-paid
  professional, but they are close to the top.

29
A P P E N D I X C H E C K L I S T

• When you have completed your study of this
  appendix, you will be able to

Interpret a scatter diagram, a time-series graph,
and a cross-section graph.
Interpret the graphs used in economic models.
Define and calculate slope.
Graph relationships among more than two variables.
30
APPENDIX MAKING AND USING GRAPHS

• Interpreting Graphs Used in Economic

• Positive relationship or direct relationship
• A relationship between two variables that move in
  the same direction.

• Linear relationship
• A relationship that graphs as a straight line.

31
(No Transcript)
32
(No Transcript)
33
(No Transcript)
34
APPENDIX MAKING AND USING GRAPHS

• Negative relationship or inverse relationship
• A relationship between two variables that move in
  opposite directions.

35
(No Transcript)
36
(No Transcript)
37
(No Transcript)
38
(No Transcript)
39
(No Transcript)
40
(No Transcript)
41
(No Transcript)
42
APPENDIX MAKING AND USING GRAPHS

• The Slope of a Relationship
• Slope
• The change in the value of the variable measured
  on the y-axis divided by the change the value of
  the variable measured on the x-axis.
• Slope ?y ?x.

43
(No Transcript)
44
(No Transcript)
45
APPENDIX MAKING AND USING GRAPHS

• Relationships Among More Than Two Variables
• To graph a relationship that involves more than
  two variables, we use the ceteris paribus
  assumption.
• Ceteris Paribus
• other things remaining the same.
• Figure A1.8 shows the relationships between ice
  cream consumed, the temperature, and the price of
  ice cream.

46
(No Transcript)