Chapter 1
Overview
Economics, Scarcity, and Choice
Scarcity and Individual Choice
Scarcity and Individual Choice
Scarcity and Social Choice
Scarcity and Economics
Scarcity and Economics
Microeconomics
Macroeconomics
Positive and Normative Economics
Why Economists Disagree
Why Study Economics
Why Study Economics
The Methods of Economics
Economic Models: Assumptions and Conclusions
The Three Step Process
Math, Jargon, and Other Concerns…
How to Study Economics
Math Review
Tables and Graphs
Straight-line Graphs
Straight-line Graphs
Curved Lines
Linear Equations
Linear Equations
Linear Equations
Linear Equations
Linear Equations
Line Shift
Curves Shift
Shifts vs. Movements Along a Line
Practice Question 1
Practice Question 2
Practice Question 3
796.00K
Category: economicseconomics

Economics. Principles and applications by

1.

ECONOMICS
Principles and Applications
by
Robert E.
HALL
ECONOMICS: Principles and Applications, 4e
HALL & LIEBERMAN
© 2008 Thomson South-Western
Marc
LIEBERMAN
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University

2. Chapter 1

What is Economics ?

3. Overview

• What is economics?
Definition, scarcity, and choice
The world of economics
o
Micro vs. Macro
o Positive vs. Normative
Why and how to study economics
The methods of economics
• Math review
3

4. Economics, Scarcity, and Choice

• Economics
– Study of choice under conditions of
scarcity
• Scarcity
– Situation in which the amount of
something available is insufficient to
satisfy the desire for it
4

5. Scarcity and Individual Choice

• Unlimited variety of scarcities, based on
two basic limitations:
1. Scarce time

Limited number of hours in each day to
satisfy our desires
2. Scarce

spending power
Cannot afford to buy more of the things
we want
5

6. Scarcity and Individual Choice

• Limitations force each of us to make
choices
• Economists study
– Choices
– Consequences of those choices
– Indirect effects of individual choice on our
society
6

7. Scarcity and Social Choice

• Society faces a scarcity of resources
• Categories of resources:
– Labor
– Capital
• Human capital
• Capital stock
– Land/natural resources
– Entrepreneurship
7

8. Scarcity and Economics

• Problems studied in economics: the
scarcity of resources—and the choices it
forces us to make
– Households – have limited income to
allocate among goods and services
– Firms – production is limited by costs of
production
– Government agencies – the budget is
limited, so goals must be carefully
chosen
8

9. Scarcity and Economics

• Economists study the decisions made by
households, firms, and governments to
– Explain how our economic system
operates
– Forecast the future of our economy,
– Suggest ways to make that future even
better
9

10. Microeconomics

• Micro comes from the Greek word
mikros, meaning “small”
• Studies the behavior of individual
households, firms, and governments
– Choices they make
– Interaction in specific markets
• Focuses on individual parts of an
economy
10

11. Macroeconomics

• Macro comes from the Greek word
makros, meaning “large”
• Studies the behavior of the overall
economy
• Focuses on big picture and ignores fine
details
11

12. Positive and Normative Economics

• Positive economics: how the economy
works
– Can be true or false
– Can be tested by looking at the facts
• Normative economics: what should be
– Value judgments, identify problems, and
prescribe solutions
– Cannot be proved or disproved by the
facts alone
12

13. Why Economists Disagree

• The difference of opinion may be
positive in nature
– Facts are being disputed
• The disagreement can be normative
– Facts are not being disputed
• When economists have different values,
they may arrive to different conclusions
• Disagreement - over goals and values
13

14. Why Study Economics

• To understand the world better
– Global events and personal phenomena
• To achieve social change
– Understand the origins of social
problems
– Design more effective solutions
14

15. Why Study Economics

• To help prepare for other careers
– A wide range of careers deal with
economic issues on many levels
• To become an economist
– Develop a body of knowledge that could
lead you to become an economist in the
future
15

16. The Methods of Economics

• Use economic models to develop
economic theories
• Economic models are built with words,
diagrams, and mathematical statements
• Economic models
– Abstract representation of reality
– Should be as simple as possible to
accomplish its purpose
16

17. Economic Models: Assumptions and Conclusions

• Two types of assumptions:
– Simplifying assumptions
• Essential features can stand out more
clearly
– Critical assumptions
• Affect the conclusions of a model in
important ways
• If critical assumptions are wrong, the model
will be wrong
17

18. The Three Step Process

• Economists follow the same three-step
process to analyze almost any economic
problem:
– The first two steps explain how
economists build an economic model
– The last step explains how they use the
model.
18

19. Math, Jargon, and Other Concerns…

• Economic jargon
– Special words that allow economists to
more precisely express themselves
• Math
– High school level algebra and geometry
• We will covers some of the basic math
concepts that you will need tomorrow
19

20. How to Study Economics

• Economics must be studied actively, not
passively
• Active study
– Reproduce what you have learned
– List the steps in each logical argument
– Retrace the cause-and-effect steps
– Draw the graphs
– Basic principles
• relate to what you are learning
20

21. Math Review


Tables and graphs
– Tables
– Straight-line graphs
– Curved lines
Linear equations
Lines and curves shift
Shifts vs. movements along a line
21

22. Tables and Graphs

• TABLE A.1 Advertising and Sales at Len & Harry’s
22

23. Straight-line Graphs

• FIGURE A.1 A Graph of Advertising and Sales
Sales ($1,000 per month)
54
51
E
39
36
D
C
27
24
F
B
A
18
2
3
6
7
11
12
Advertising
($1,000 per month)
23

24. Straight-line Graphs

• Slope of a straight line =
Change in vertical variable / Change in
horizontal variable
Y
=
X
24

25. Curved Lines

• FIGURE A.2 Measuring the Slope of a Curve
Sales
($1,000 per
month)
1. The slope of this
curve at point B…
32
31
C
27
B
24
21
18
4. sales increase from 21
to 27 units (ΔY= 6). So
the curve's slope at
point B is =6/3= 2.
D
2. is the slope of the
straight line tangent
to the curve at point B.
H
A
3. Along the tangent line,
when advertising
increases from 0 to 3
units (ΔX = 3)
1 2 3 4 5 6 7 8 9
Advertising ($1,000
per month)
25

26. Linear Equations


Y = a+bX
a: vertical intercept
b: slope
Exercise: what is the linear equation
for advertisement example in Figure
A.1?
• Y = 18+3X
26

27. Linear Equations

• Remember : Y= 18+3X
• For example, how much expenses
are necessary to secure a sale
$39,000?
• Y = $39 now
• $39 = 18 + 3X
• X = (39 – 18)/3 = 7
27

28. Linear Equations

FIGURE A.3 Straight Lines with Different Slopes and Vertical Intercepts
Y
Y
b>0
a>0
a
0
X
0
X
28

29. Linear Equations

FIGURE A.3 Straight Lines with Different Slopes and Vertical Intercepts
Y
Y
b=0
a
a=0
0
X
0
X
29

30. Linear Equations

FIGURE A.3 Straight Lines with Different Slopes and Vertical Intercepts
Y
Y
a
b<0
0
X
0
X
a<0
30

31. Line Shift

• FIGURE A.4 Shifts in the Graph of Advertising and Sales
Sales
($1,000 per
Month)
July
44
C'
June
36
C
September
C''
6
Advertising
($1,000 per Month)
31

32. Curves Shift

• FIGURE A.5 Shifts of Curved Lines
a)
b)
Y
Y
C’
C
C
C’
An increase in Z causes an
increase in Y at any value of X
X
An increase in Z causes a
decrease in Y at any value of X
X
32

33. Shifts vs. Movements Along a Line

• Suppose Y is the dependent variable,
which is measured on one of the axis. If
the independent variable measured on
the other axis changes, we move along
the line.
• But if any other independent variable
changes, the entire line shirts.

34. Practice Question 1

50
40
30
20
y=16-4x
10
y=12-4x
y=15-5x
0
0
1
2
3
4
5
-10
-20
-30
34

35. Practice Question 2

SAT on Hours
1600
1400
1200
1000
800
600
400
200
0
0
20
40
60
80
100
120
35

36. Practice Question 3

Readers on Advertising
160
140
120
100
80
60
40
20
0
0
5
10
15
20
25
30
36
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