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

1
(No Transcript)
2
C H A P T E R C H E C K L I S T

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

Define economics, distinguish between
micro-economics and macroeconomics, and explain
the questions of microeconomics.
Describe the work of economists as social
scientists.
Explain five core ideas that define the economic
way of thinking.
Explain why economics is worth studying.
3
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.

4
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.

5
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.

6
1.1 DEFINITIONS AND QUESTIONS

• Microeconomic Questions
• What?
• What goods and services get produced and in what
  quantities?
• How?
• How are goods and services produced?
• For Whom?
• For whom are the various goods and services
  produced?

7
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.

8
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

9
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.

10
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.

11
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.

12
1.2 ECONOMICS A SOCIAL SCIENCE

• Economist take three complementary approaches
• Natural experiments
• Statistical 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.
13
1.2 ECONOMICS A SOCIAL SCIENCE

• Statistical Investigations
• 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.

14
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.

15
1.3 THE ECONOMIC WAY OF THINKING

• Five core ideas
• Rational choice
• Cost
• Benefit
• Margin
• Incentives

16
1.3 THE ECONOMIC WAY OF THINKING

• Rational Choice
• Using the available resources to satisfy most
  effectively the wants of the person making the
  choice.
• Cost What You Must Give Up
• Opportunity cost
• The highest-valued alternative forgone.
• Sunk Cost
• A previously incurred and irreversible cost.

17
1.3 THE ECONOMIC WAY OF THINKING

• 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.

18
1.3 THE ECONOMIC WAY OF THINKING

• 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.
• Making a Rational Choice
• When we take those actions for which marginal
  benefit exceeds or equals marginal cost.

19
1.3 THE ECONOMIC WAY OF THINKING

• Responding to Incentives
• In making our choices, we respond to incentives.
• If the cost of something rises, we try to find a
  less costly alternative.
• If the benefit of something rises, we do more of
  that thing.
• Example most students believe that studying just
  before an exam has a bigger benefit that studying
  a long time before the exam. So study time
  increases as the exam gets closer.

20
1.4 WHY ECONOMICS IS WORTH STUDYING

• Two main benefits from studying economics are
• Understanding
• Expanded career opportunities
• Understanding
• Economic ideas are 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.

21
1.4 WHY ECONOMICS IS WORTH STUDYING

• Expanded Career Opportunities
• Most students of economics dont become
  economists.
• But knowledge of economics is vital in 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.

22
1.4 WHY ECONOMICS IS WORTH STUDYING
Figure 1.1 shows some earnings comparisons.

• Graduates in disciplines that teach problem
  identifying, problem solving, and strategic
  brokering are top of the earnings distribution
• engineering
• computer science
• economics

23
1.4 WHY ECONOMICS IS WORTH STUDYING
1.4 WHY ECONOMICS IS WORTH STUDYING

• The Costs of Studying Economics
• The main cost of studying economics is forgone
  leisure time.
• Most students find that economics is difficult
  and that it takes time to master.
• The trick is practice, or learning by doing.
• Benefits Versus Costs
• Weigh up your benefits and costs!

24
(No Transcript)
25
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.
26
APPENDIX MAKING AND USING GRAPHS

• Basic Idea
• A graph enables us to visualize the relationship
  between two variables.
• To make a graph, set two lines perpendicular to
  each other
• The horizontal line is called the x-axis.
• The vertical line is called the y-axis.
• The common zero point is called the origin.

27
APPENDIX MAKING AND USING GRAPHS

• Figure A1.1 How to make a graph

The horizontal axis (x-axis) measures
temperature.
The vertical axis (y-axis) measures ice cream
consumption.
28
APPENDIX MAKING AND USING GRAPHS
Point A shows that when the temperature is 40
degrees, ice cream consumption is only 5 gallons
a day.
Point B shows that when the temperature is 80
degrees, ice cream consumption jumps to 20
gallons a day.
29
APPENDIX MAKING AND USING GRAPHS

• Interpreting Data Graphs
• Scatter diagram
• A graph of the value of one variable against the
  value of another variable.
• Time-series graph
• A graph that measures time on the x-axis and the
  variable or variables in which we are interested
  on the y-axis.

30
APPENDIX MAKING AND USING GRAPHS

• Trend
• A general tendency for the value of a variable
  to rise or fall.
• Cross-section graph
• A graph that shows the values of an economic
  variable for different groups in a population at
  a point in time.

31
APPENDIX MAKING AND USING GRAPHS

• Figure A1.2(a) shows a scatter diagram.

In 1996 (marked 96), income per person was
21,100 and expenditure per person was 20,100.
The data for the 1990s show that as income
increases, expenditure also increases.
32
APPENDIX MAKING AND USING GRAPHS

• Figure A1.2(b) shows another scatter diagram.

In 1993 (marked 93) when the price of an
international phone call was 1.24 a minute, 11.4
billion minutes of calls were made.
The data show that as the price falls, the number
of calls increases.
33
APPENDIX MAKING AND USING GRAPHS

• Figure A1.2(c) shows a
• times-series graph.

The graph shows when the price of coffee was

• High and low.

• Rising and falling.

• Changing quickly and slowly.

34
APPENDIX MAKING AND USING GRAPHS

• Figure A1.2(d) shows a cross-section graph.

• The graph shows the percentage of people who
  participate in various sports activities.

35
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.

36
APPENDIX MAKING AND USING GRAPHS

• Figure A1.3(a) shows a positive (direct)
  relationship.

At a speed of 40 MPH, you travel 200 miles in 5
hourspoint A.
At a speed of 60 MPH, you travel 300 miles in 5
hourspoint B.
As the speed increases, the distance traveled in
5 hours increases proportionately.
37
APPENDIX MAKING AND USING GRAPHS

• Figure A1.3(b) shows a
• positive (direct) relationship.

As the distance sprinted increases, recovery time
increases.
But sprint twice as far and it takes more than
twice as long to recoverthe curve gets steeper.
38
APPENDIX MAKING AND USING GRAPHS

• Figure A1.3(c) shows a positive (direct)
  relationship.

As study time increases, the number of problems
worked increases.
But study twice as long and the number of
problems you work less than doublethe curve gets
less steep.
39
APPENDIX MAKING AND USING GRAPHS

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

40
APPENDIX MAKING AND USING GRAPHS

• Figure A1.4(a) shows a negative (inverse)
  relationship.

As the time playing tennis increases, the time
playing squash decreases.
Because one more hour of tennis means one hour
less of squash, the relationship between these
two variables is described by a straight line.
41
APPENDIX MAKING AND USING GRAPHS

• Figure A1.4(b) shows a negative (inverse)
  relationship.

As the journey length increases, the cost per
mile of the trip falls.
But there is a limit to how much the cost per
mile can fall, so the curve becomes less steep as
journey length increases.
42
APPENDIX MAKING AND USING GRAPHS

• Figure A1.4(c) shows a negative (inverse)
  relationship.

As leisure time increases, the number of
problems worked decreases.
But the tenth hour of leisure (the first hour of
work) decreases the number of problems worked
most, so the curve becomes steeper as leisure
time increases.
43
APPENDIX MAKING AND USING GRAPHS

• Figure A1.5(a) shows a maximum point.

• As the rainfall increases

1. The curve slopes upward as the yield per acre
rises.

• 2. The curve is flat at point A, the maximum
  yield.

3. Then slopes downward as the yield per acre
falls.
44
APPENDIX MAKING AND USING GRAPHS

• Figure A1.5(a) shows a minimum point.

• As the speed increases

1. The curve slopes downward as the cost per mile
falls.

• 2. The curve is flat at point B, the minimum cost
  per mile.

• 3. The curve slopes upward as the cost per mile
  rises.

45
APPENDIX MAKING AND USING GRAPHS

• Figure A1.6(a) shows variables that are
  unrelated.

• As the price of bananas increases, the students
  grade in economics remains at 75 percent.

The curve is horizontal.
46
APPENDIX MAKING AND USING GRAPHS

• Figure A1.6(b) shows variables that are
  unrelated.

• As rainfall in California increases, the output
  of French vineyards remains at 3 billion gallons.

The curve is vertical.
47
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.

48
APPENDIX MAKING AND USING GRAPHS

• Figure A1.7(a) shows a positive slope.

1. When ?x is 4,
2. ?y is 3.
3. Slope (?y/?x) is 3/4.
49
APPENDIX MAKING AND USING GRAPHS

• Figure A1.7(b) shows a negative slope.

1. When ?x is 4,
2. ?y is 3.
3. Slope (?y/?x) is 3/4.
50
APPENDIX MAKING AND USING GRAPHS

• Figure A1.7(c) shows the slope of a curve at a
  point.

Slope of the curve at A

• equals the slope of the red line tangent to the
  curve at A.

1. When ?x is 4,
2. ?y is 3.
3. Slope (?y/?x) is 3/4.
51
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.

52
APPENDIX MAKING AND USING GRAPHS

• Figure A1.8(a) shows the relationship between
  price and consumption, temperature remaining the
  same.

53
APPENDIX MAKING AND USING GRAPHS

• Figure A1.8(b) shows the relationship between
  temperature and consumption, price remaining the
  same.

54
APPENDIX MAKING AND USING GRAPHS

• Figure A1.8(c) shows the relationship between
  price and temperature, consumption remaining the
  same.