Econ

PowerPoint Lectures for
CHAPTER 1 The Scope and Method of Economics

Principles of Economics, 9e
; ;

By Karl E. Case, Ray C. Fair & Sharon M. Oster

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

CHAPTER 1 The Scope and Method of Economics

PART I INTRODUCTION TO ECONOMICS

The Scope and Method of Economics

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Prepared by: Fernando & Yvonn Quijano

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

PART I INTRODUCTION TO ECONOMICS

The Scope and Method of Economics
CHAPTER 1 The Scope and Method of Economics

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CHAPTER OUTLINE
Why Study Economics? To Learn a Way of Thinking To Understand Society To Understand Global Affairs To Be an Informed Voter The Scope of Economics Microeconomics and Macroeconomics The Diverse Fields of Economics The Method of Economics Theories and Models Economic Policy An Invitation Appendix: How to Read and Understand Graphs
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The Scope And Method Of Economics

CHAPTER 1 The Scope and Method of Economics

economics The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. The key word in this definition is choose. Economics is a behavioral, or social, science. In large measure it is the study of how people make choices. The choices that people make, when added up, translate into societal choices.

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Why Study Economics?

To Learn A Way Of Thinking

CHAPTER 1 The Scope and Method of Economics

Three fundamental concepts: Opportunity cost Marginalism, and Efficient markets

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Why Study Economics?

To Learn A Way Of Thinking

CHAPTER 1 The Scope and Method of Economics

Opportunity Cost

opportunity cost The best alternative that we forgo, or give up, when we make a choice or a decision.

scarce Limited.

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Why Study Economics?

To Learn A Way Of Thinking

CHAPTER 1 The Scope and Method of Economics

Marginalism and Sunk Costs marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

sunk costs Costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

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Why Study Economics?

To Learn A Way Of Thinking

CHAPTER 1 The Scope and Method of Economics

Efficient Markets—No Free Lunch

efficient market A market in which profit opportunities are eliminated almost instantaneously.

The study of economics teaches us a way of thinking and helps us make decisions.

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Why Study Economics?

To Understand Society

CHAPTER 1 The Scope and Method of Economics

Industrial Revolution The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.

The study of economics is an essential part of the study of society.

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Why Study Economics?

To Understand Global Affairs

CHAPTER 1 The Scope and Method of Economics

An understanding of economics is essential to an understanding of global affairs. ECONOMICS IN PRACTICE

iPod and the World
An iPod Has Global Value. Ask the (Many) Countries That Make It. The New York Times

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Why Study Economics?

To Be An Informed Citizen

CHAPTER 1 The Scope and Method of Economics

A knowledge of economics is essential to be an informed citizen.

When we participate in the political process, we are voting on issues that require a basic understanding of economics.

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The Scope of Economics

Microeconomics and Macroeconomics microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, business firms and households. macroeconomics The branch of economics that examines the economic behavior of aggregates— income, employment, output, and so on—on a national scale. Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”
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CHAPTER 1 The Scope and Method of Economics

The Scope of Economics

Microeconomics and Macroeconomics
TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns
CHAPTER 1 The Scope and Method of Economics
Divisions of Economics
Microeconomics

Production
Production/output in individual industries and businesses How much steel How much office space How many cars

Prices
Price of individual goods and services

Income
Distribution of income and wealth Wages in the auto industry Minimum wage Executive salaries Poverty

Employment
Employment by individual businesses and industries Jobs in the steel industry Number of employees in a firm Number of accountants Employment and unemployment in the economy Total number of jobs Unemployment rate

Price of medical care Price of gasoline Food prices Apartment rents

Macroeconomics

National production/output Total industrial output Gross domestic product Growth of output

Aggregate price level

National income

Consumer prices Producer prices Rate of inflation

Total wages and salaries Total corporate profits

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The Scope of Economics
The Diverse Fields of Economics
TABLE 1.2 The Fields of Economics
Comparative economic systems Econometrics examines the ways alternative economic systems function. What are the advantages and disadvantages of different systems? applies statistical techniques and data to economic problems in an effort to test hypotheses and theories. Most schools require economics majors to take at least one course in statistics or econometrics. focuses on the problems of low-income countries. What can be done to promote development in these nations? Important concerns of development economists include population growth and control, provision for basic needs, and strategies for international trade. traces the development of the modern economy. What economic and political events and scientific advances caused the Industrial Revolution? What explains the tremendous growth and progress of post—World War II Japan? What caused the Great Depression of the 1930s? examines the role of race and gender in economic theory, in economic life, and in policymaking. How has discrimination by race or gender affected the well-being of households and the distribution of income and wealth? studies the potential failure of the market system to account fully for the impacts of production and consumption on the environment and on natural resource depletion. Have alternative public policies and new economic institutions been effective in correcting these potential failures? examines the ways in which households and firms actually pay for, or finance, their purchases. It involves the study of capital markets (including the stock and bond markets), futures and options, capital budgeting, and asset valuation.

CHAPTER 1 The Scope and Method of Economics

Economic development

Economic history

Economics of race and gender Environmental economics

Finance

Continued...
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The Scope of Economics
The Diverse Fields of Economics
TABLE 1.2 The Fields of Economics (continued)
The history of economic thought, which is grounded in philosophy, studies the development of economic ideas and theories over time, from Adam Smith in the eighteenth century to the works of economists such as Thomas Malthus, Karl Marx, and John Maynard Keynes. Because economic theory is constantly developing and changing, studying the history of ideas helps give meaning to modern theory and puts it in perspective. looks carefully at the structure and performance of industries and firms within an economy. How do businesses compete? Who gains and who loses? studies trade flows among countries and international financial institutions. What are the advantages and disadvantages for a country that allows its citizens to buy and sell freely in world markets? Why is the dollar strong or weak? deals with the factors that determine wage rates, employment, and unemployment. How do people decide whether to work, how much to work, and at what kind of job? How have the roles of unions and management changed in recent years? analyzes the economic function of legal rules and institutions. How does the law change the behavior of individuals and businesses? Do different liability rules make accidents and injuries more or less likely? What are the economic costs of crime? examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create? studies the spatial arrangement of economic activity. Why do we have cities? Why are manufacturing firms locating farther and farther from the center of urban areas? 16 of 34

CHAPTER 1 The Scope and Method of Economics

Industrial organization International economics

Labor economics

Law and economics

Public economics

Urban and regional economics

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The Method of Economics

CHAPTER 1 The Scope and Method of Economics

positive economics An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

normative economics An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

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The Method of Economics

Descriptive Economics and Economic Theory

CHAPTER 1 The Scope and Method of Economics

descriptive economics The compilation of data that describe phenomena and facts.

economic theory A statement or set of related statements about cause and effect, action and reaction.

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The Method of Economics

Theories and Models

CHAPTER 1 The Scope and Method of Economics

model A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables. variable A measure that can change from time to time or from observation to observation.

Ockham’s razor The principle that irrelevant detail should be cut away.

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The Method of Economics

Theories and Models

CHAPTER 1 The Scope and Method of Economics

All Else Equal: Ceteris Paribus ceteris paribus, or all else equal A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.

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The Method of Economics

Theories and Models

CHAPTER 1 The Scope and Method of Economics

Expressing Models in Words, Graphs, and Equations The most common method of expressing the quantitative relationship between two variables is graphing that relationship on a two-dimensional plane.

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The Method of Economics

Theories and Models

CHAPTER 1 The Scope and Method of Economics

Cautions and Pitfalls The Post Hoc Fallacy post hoc, ergo propter hoc Literally, “after this (in time), therefore because of this.” A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.

The Fallacy of Composition fallacy of composition The erroneous belief that what is true for a part is necessarily true for the whole.

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The Method of Economics

Theories and Models

CHAPTER 1 The Scope and Method of Economics

Testing Theories and Models: Empirical Economics

empirical economics The collection and use of data to test economic theories.

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The Method of Economics

Economic Policy

CHAPTER 1 The Scope and Method of Economics

Criteria for judging economic outcomes: 1. Efficiency 2. Equity 3. Growth 4. Stability

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The Method of Economics

Economic Policy

CHAPTER 1 The Scope and Method of Economics

Efficiency efficiency In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.

Equity equity Fairness.

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The Method of Economics

Economic Policy

CHAPTER 1 The Scope and Method of Economics

Growth economic growth An increase in the total output of an economy.

Stability stability A condition in which national output is growing steadily, with low inflation and full employment of resources.

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An Invitation

CHAPTER 1 The Scope and Method of Economics

As you proceed, it is important that you keep track of what you have learned in earlier chapters. This book has a plan; it proceeds step by step, each section building on the last. It would be a good idea to read each chapter’s table of contents and scan each chapter before you read it to be sure you understand where it fits in the big picture.

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REVIEW TERMS AND CONCEPTS

ceteris paribus descriptive economics
CHAPTER 1 The Scope and Method of Economics

marginalism microeconomics model normative economics Ockham’s razor opportunity cost positive economics post hoc, ergo propter hoc scarce stability sunk costs variable
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economic growth economic theory economics efficiency efficient market empirical economics equity fallacy of composition Industrial Revolution macroeconomics

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APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS

A graph is a two-dimensional representation of a set of numbers, or data.
CHAPTER 1 The Scope and Method of Economics

TIME SERIES GRAPHS

A time series graph shows how a single variable changes over time.

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APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS
TIME SERIES GRAPHS
TABLE 1A.1 Total Disposable Personal Income in the United States, 1975–2006 (in billions of dollars)
Total Disposable Personal Income 1,181.4 1,299.9 1,436.0 1,614.8 1,808.2 2,019.8 2,247.9 2,406.8 2,586.0 2,887.6 3,086.5 3,262.5 3,459.5 3,752.4 4,016.3 4,293.6 Total Disposable Personal Income 4,474.8 4,754.6 4,935.3 5,165.4 5,422.6 5,677.7 5,968.2 6,355.6 6,627.4 7,120.2 7,393.2 7,827.7 8,159.9 8,646.9 8,945.6 9,501.5

CHAPTER 1 The Scope and Method of Economics

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FIGURE 1A.1 Total Disposable Personal Income in the United States: 1975–2006 (in billions of dollars) 30 of 34

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APPENDIX Appendix
HOW TO READ AND UNDERSTAND GRAPHS

GRAPHING TWO VARIABLES ON A CARTESIAN COORDINATE SYSTEM
CHAPTER 1 The Scope and Method of Economics
FIGURE 1A.2 A Cartesian Coordinate System

A Cartesian coordinate system is constructed by drawing two perpendicular lines: a vertical axis (the Y-axis) and a horizontal axis (the X-axis). Each axis is a measuring scale.

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APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS
PLOTTING INCOME AND CONSUMPTION DATA FOR HOUSEHOLDS
TABLE 1A.2 Consumption Expenditures and Income, 2005

CHAPTER 1 The Scope and Method of Economics

Average Income Before Taxes Bottom fifth 2nd fifth 3rd fifth 4th fifth Top fifth $ 9,676 25,546 42,622 67,813 147,737

Average Consumption Expenditures $ 19,120 28,921 39,098 54,354 90,469

FIGURE 1A.3 Household Consumption and Income A graph is a simple two-dimensional geometric representation of data. This graph displays the data from Table 1A.2. Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we measure household consumption. Note: At point A, consumption equals $19,120 and income equals $9,676. At point B, consumption equals $28,921 and income equals $25,546.

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APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS
SLOPE

∆Y Y2 − Y1 = ∆X X 2 − X 1
CHAPTER 1 The Scope and Method of Economics
FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope

A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y.

A negative slope indicates the opposite— when X increases, Y decreases and when X decreases, Y increases. 33 of 34

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APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS

CHAPTER 1 The Scope and Method of Economics

FIGURE 1A.5 Changing Slopes Along Curves 34 of 34

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APPENDIX
SOME PRECAUTIONS
TABLE 1A.3 Aggregate National Income and Consumption for the United States, 1930–2006 (in billions of dollars)
Aggregate National Income Aggregate Consumption $ 70.2 71.2 192.7 332.3 648.9 1,762.9 3,831.5 6,683.7 8,195.9 8,707.8 9,224.5

CHAPTER 1 The Scope and Method of Economics

1930 1940 1950 1960 1970 1980 1990 2000 2004 2005 2006

75.6 81.1 241.0 427.5 837.5 2,243.0 4,642.1 7,984.4 10,306.8 10,887.6 11,655.6

$

FIGURE 1A.6 National Income and Consumption It is important to think carefully about what is represented by points in the space defined by the axes of a graph. In this graph, we have graphed income with consumption, as in Figure 1A.3, but here each observation point is national income and aggregate consumption in different years, measured in billions of dollars.

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REVIEW TERMS AND CONCEPTS

CHAPTER 1 The Scope and Method of Economics

Cartesian coordinate system graph negative relationship origin positive relationship

slope time series graph X-axis X-intercept Y-intercept

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