©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 11

Chapter 1Chapter 1

SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGESLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

The Nature and Method of The Nature and Method of EconomicsEconomics

““Want is a growing giant whom the coat Want is a growing giant whom the coat of Have was never large enough to of Have was never large enough to

cover.”cover.”-Ralph Waldo Emerson-Ralph Waldo Emerson

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 22

In this chapter you will learnIn this chapter you will learn

1.11.1 The Ten Key Concepts to retain for a lifetime The Ten Key Concepts to retain for a lifetime

1.21.2 About the economic way of thinking About the economic way of thinking

1.31.3 How economists construct theories How economists construct theories

1.4 1.4 The distinction between microeconomics and The distinction between microeconomics and macroeconomicsmacroeconomics

1.51.5 The pitfalls to objective thinking The pitfalls to objective thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 33

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 44

Ten Key ConceptsTen Key Concepts

The IndividualThe Individual1.1. Facing trade-offsFacing trade-offs

2.2. Opportunity CostsOpportunity Costs

3.3. Choosing a Little More or LessChoosing a Little More or Less

4.4. The Influence of IncentivesThe Influence of Incentives

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Ten Key ConceptsTen Key Concepts

Interaction Among IndividualsInteraction Among Individuals5.5. Specialization & TradeSpecialization & Trade

6.6. The Effectiveness of MarketsThe Effectiveness of Markets

7.7. The Role of GovernmentsThe Role of Governments

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 66

Ten Key ConceptsTen Key Concepts

The Economy as a Whole & the The Economy as a Whole & the Standard of LivingStandard of Living

8.8. Production & the Standard of LivingProduction & the Standard of Living

9.9. Money & InflationMoney & Inflation

10.10. Inflation-Unemployment trade-offInflation-Unemployment trade-off

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 77

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 88

The Economic PerspectiveThe Economic Perspective

• Scarcity & ChoiceScarcity & Choice

• Rational behaviourRational behaviour

• Marginal Analysis: Benefits & CostsMarginal Analysis: Benefits & Costs

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 99

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1010

Economic MethodologyEconomic Methodology

The scientific method:The scientific method:• observe the worldobserve the world• formulate hypothesesformulate hypotheses• test by comparing actual outcomes to the test by comparing actual outcomes to the

hypothesized predictionshypothesized predictions• accept, reject, modify hypotheses as indicatedaccept, reject, modify hypotheses as indicated• continue testing against the factscontinue testing against the factstheory or modeltheory or modellaw or principlelaw or principle

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1111

Economic MethodologyEconomic Methodology

Deriving TheoriesDeriving Theories

• TerminologyTerminology

• GeneralizationsGeneralizations

• Other-Things-Equal AssumptionOther-Things-Equal Assumption

• AbstractionsAbstractions

• Graphical ExpressionGraphical Expression

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1212

Economic MethodologyEconomic Methodology

Policy EconomicsPolicy Economics

• State the goalState the goal

• Determine the policy optionsDetermine the policy options

• Implement & evaluate the policy that was Implement & evaluate the policy that was selectedselected

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1313

THEORETICAL ECONOMICSTHEORETICAL ECONOMICS

POLICY ECONOMICSPOLICY ECONOMICS

TheoriesTheories

FactsFacts

Figure 1-1Figure 1-1

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1414

Economic GoalsEconomic Goals

• economic growtheconomic growth

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1515

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1616

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

• economic efficiencyeconomic efficiency

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1717

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

• economic efficiencyeconomic efficiency

• price-level stabilityprice-level stability

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1818

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

• economic efficiencyeconomic efficiency

• price-level stabilityprice-level stability

• economic freedomeconomic freedom

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 1919

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

• economic efficiencyeconomic efficiency

• price-level stabilityprice-level stability

• economic freedomeconomic freedom

• equitable distribution of incomeequitable distribution of income

cheeseplease

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2020

Economic GoalsEconomic Goals

• economic growtheconomic growth

• full employmentfull employment

• economic efficiencyeconomic efficiency

• price-level stabilityprice-level stability

• economic freedomeconomic freedom

• equitable distribution of incomeequitable distribution of income

• economic securityeconomic security

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2121

Economic GoalsEconomic Goals

• economic growtheconomic growth• full employmentfull employment• economic efficiencyeconomic efficiency• price-level stabilityprice-level stability• economic freedomeconomic freedom• equitable distribution of incomeequitable distribution of income• economic securityeconomic security• balance of tradebalance of trade

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2222

Economic GoalsEconomic Goals

• subject to interpretationsubject to interpretation

• may be complementarymay be complementary

• may conflict, requiring trade-offsmay conflict, requiring trade-offs

• priorities must be setpriorities must be set

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2323

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2424

MacroeconomicsMacroeconomics

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2525

MicroeconomicsMicroeconomics

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2626

Positive & Normative EconomicsPositive & Normative Economics

POSITIVE STATEMENTS.…POSITIVE STATEMENTS.…• based upon facts & cause-and-effect based upon facts & cause-and-effect

relationshipsrelationships• what iswhat is• without value judgmentswithout value judgmentsNORMATIVE STATEMENTS…NORMATIVE STATEMENTS…• based upon subjective beliefsbased upon subjective beliefs• what ought to bewhat ought to be

predictions are positivepredictions are positiveif they are based on what if they are based on what

future facts will befuture facts will be

predictions are positivepredictions are positiveif they are based on what if they are based on what

future facts will befuture facts will be

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2727

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2828

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 2929

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

• BiasesBiases

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 3030

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

• BiasesBiases

• Loaded TerminologyLoaded Terminology

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 3131

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

• BiasesBiases

• Loaded TerminologyLoaded Terminology

• DefinitionsDefinitions

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 3232

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

• BiasesBiases

• Loaded TerminologyLoaded Terminology

• DefinitionsDefinitions

• Fallacy of CompositionFallacy of Composition

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 3333

Pitfalls to Objective ThinkingPitfalls to Objective Thinking

• BiasesBiases

• Loaded TerminologyLoaded Terminology

• DefinitionsDefinitions

• Fallacy of CompositionFallacy of Composition

• Causation FallaciesCausation Fallacies– Post Hoc FallacyPost Hoc Fallacy– Correlation versus CausationCorrelation versus Causation

• A Look AheadA Look Ahead

??

©2005 McGraw-Hill Ryerson Ltd.©2005 McGraw-Hill Ryerson Ltd. Chapter 1Chapter 1 3434

Chapter 1 TopicsChapter 1 Topics

1.1 1.1 Ten Key Concepts to Retain for a Ten Key Concepts to Retain for a LifetimeLifetime

1.2 1.2 The Economic PerspectiveThe Economic Perspective

1.3 1.3 Economic MethodologyEconomic Methodology

1.4 1.4 Macroeconomics & MicroeconomicsMacroeconomics & Microeconomics

1.5 1.5 Pitfalls to Objective ThinkingPitfalls to Objective Thinking