cfo10e ch01macro crs 1click

5/13/2018 CFO10e Ch01macro CRS 1click - slidepdf.com

http://slidepdf.com/reader/full/cfo10e-ch01macro-crs-1click 1/53

P A

R T

I I n t r o d u c t i o n t o E c o n o m

i c s

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Prepared by: Fernando Quijano & Shelly TefftCASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICST E N T H E D I T I O N



2 of 53

P A

R T


i c s




3 of 53

P A R T


i c s


1

PART I INTRODUCTION TO ECONOMICS

The Scope and

Method of EconomicsCHAPTER OUTLINE

Why Study Economics?To Learn a Way of Thinking

To Understand Society

To Understand Global Affairs

To Be an Informed Citizen

The Scope of EconomicsMicroeconomics and

Macroeconomics

The Diverse Fields of Economics

The Method of EconomicsDescriptive Economics and

Economic Theory

Theories and Models

Economic Policy

An Invitation

Appendix: How to Read

and Understand Graphs



P A R T


i c s


economics The study of howindividuals and societies choose to usethe scarce resources that nature andprevious generations have provided.

Economics is the study of how individuals and societies chooseto use the scarce resources that nature and previous generationshave provided. The key word in this definition is choose.

Economics is a behavioral, or social, science. In large measure, itis the study of how people make choices. The choices that peoplemake, when added up, translate into societal choices.

4 of 37



5 of 53

P A R T


i c s


What is economics?

a. Economics is the study of money and financial systems.

b. Economics is the study of business.c. Economics is a behavioral science that studies how people make choices.

d. Economics is a natural science that studies the resources that nature and

previous generations have provided.



6 of 53

P A R T

I I n t r o d u c t i o n t o E c o n o m i c s


What is economics?

a. Economics is the study of money and financial systems.

b. Economics is the study of business.c.c. Economics is a behavior al science that studies how people makeEconomics is a behavior al science that studies how people make

choices.choices.

d. Economics is a natural science that studies the resources that nature and

previous generations have provided.



7 of 53

P A R T



Three fundamental concepts:

Opportunity cost

Marginalism

Efficient markets

To Learn a Way of Thinking

Why Study Economics?



8 of 53

P A R T





Opportunity Cost

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

scarce Limited.



9 of 53

P A R T



What is opportunity cost?

a. Opportunity cost refers to costs that cannot be avoided, regardless of what is done in

the future, because they have already been incurred.

b. Opportunity cost is the value of what we give up by not making the alternative choice.c. Opportunity cost is a business concept that explains why it is important to consider

the additional cost of production, not just the initial cost, in making production

decisions.

d. Opportunity cost is a cost associated with the allocation of abundant resources

among alternative uses.

e. Opportunity cost is a monetary measure of cost that takes into account only explicitcosts, or costs that can be counted.



10 of 53

P A R T



What is opportunity cost?

a. Opportunity cost refers to costs that cannot be avoided, regardless of what is done in

the future, because they have already been incurred.

b.b. Oppor tunity cost is the value of what we give up by not making the alternativeOppor tunity cost is the value of what we give up by not making the alternativechoice.choice.

c. Opportunity cost is a business concept that explains why it is important to consider the

additional cost of production, not just the initial cost, in making production decisions.

d. Opportunity cost is a cost associated with the allocation of abundant resources among

alternative uses.

e. Opportunity cost is a monetary measure of cost that takes into account only explicitcosts, or costs that can be counted.



11 of 53

P A R T





Marginalism

marginalism The process of analyzing theadditional or incremental costs or benefitsarising from a choice or decision.

sunk costs Costs that cannot be avoided

because they have already been incurred.



12 of 53

P A R T





Efficient Markets²No Free Lunch

efficient market A market in whichprofit opportunities are eliminatedalmost instantaneously.

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



13 of 53

P A R T



To Understand Society


Industrial Revolution The period inEngland during the late eighteenth and earlynineteenth centuries in which newmanufacturing technologies and improvedtransportation gave rise to the modern factorysystem and a massive movement of thepopulation from the countryside to the cities.

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



14 of 53

P A R T



To Understand Global Affairs


An understanding of economics is essentialto an understanding of global affairs.

To Be an Informed Citizen

To be an informed citizen requires a basicunderstanding of economics.



15 of 53

P A R T



E C O N O M I C S I N P R A C T I C E

iPod and the World

A sticker that says ³Made in China´ can often bemisleading.

Indeed, for the iPod, which is composed of manysmall parts, it is almost impossible to accurately

tell exactly where each piece was producedwithout pulling it apart.

From an economics point of view one often has to dig a little deeper to seewhat is really going on.



16 of 53

P

A R T



Microeconomics and Macroeconomics

The Scope of Economics

microeconomics The branch of economics thatexamines the functioning of individual industriesand the behavior of individual decision-makingunits²that is, firms and households.

Microeconomics looks at the individual unit²the household,the firm, the industry. It sees and examines the ³trees.´Macroeconomics looks at the whole, the aggregate. It seesand analyzes the ³forest.´

macroeconomics The branch of economicsthat examines the economic behavior of aggregates²income, employment, output, andso on²on a national scale.



17 of 53

P

A R T



Microeconomics and Macroeconomics


TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns

Divisions

of Economics Production Prices Income Employment

Microeconomics Pr oduction/output in

individual indust r ies and businesses

How much steelHow much office

spaceHow many cars

Pr ice of individual

goods and ser vices

Price of medical carePrice of gasolineFood prices

Apartment rents

Dist r ibution of

income and wealth

Wages in the autoindustry

Minimum wageExecutive salariesPoverty

Employment by

individual businessesand indust r ies

Jobs in the steelindustry

Number of employeesin a firm

Number of accountants

Macroeconomics N ational

pr oduction/output

Total industrial outputGross domestic

productGrowth of output

Agg r egate pr ice level

Consumer pricesProducer pricesRate of inflation

N ational income

Total wages andsalaries

Total corporateprofits

Employment and

unemployment inthe economy

Total number of jobsUnemployment rate



18 of 53

P

A R T



Which of the following statements is correct?

a. The aggregate price level is a subject of concern in microeconomics.

b. A study of employment in the semiconductor industry would be categorized

as a microeconomic study.

c. The production and growth of output in the domestic economy is a

microeconomic concern.

d. Microeconomics is an in-depth study of aggregate economic behavior.

e. Microeconomics includes the study of fiscal and monetary policies, or

government policies designed to steer the economy in the right direction.



19 of 53

P

A R T

I I n t r o d u c t i o n t o E c o n o

m i c s


Which of the following statements is correct?

a. The aggregate price level is a subject of concern in microeconomics.

b.b. A study of employment in the semiconductor industr y would beA study of employment in the semiconductor industr y would be

categorized as a microeconomic study.categorized as a microeconomic study.

c. The production and growth of output in the domestic economy is a

microeconomic concern.

d. Microeconomics is an in-depth study of aggregate economic behavior.

e. Microeconomics includes the study of fiscal and monetary policies, or

government policies designed to steer the economy in the right direction.



20 of 53

P

A R T


m i c s




TABLE 1.2 The Fields of Economics

Behavior al economics uses psychological theories relating to emotions and social context to helpunderstand economic decision making and policy. Much of the work in behavioraleconomics focuses on the biases that individuals have that affects the decisionsthey make.

C ompar ative economic systems

examines the ways alternative economic systems function. What are theadvantages and disadvantages of different systems?

Economet r ics applies statistical techniques and data to economic problems in an effort to testhypotheses and theories. Most schools require economics majors to take at leastone course in statistics or econometrics.

Economic development focuses on the problems of low-income countries. What can be done to promotedevelopment in these nations? Important concerns of development for economistsinclude population growth and control, provision for basic needs, and strategies for

international trade.Economic histor y traces the development of the modern economy. What economic and political events

and scientific advances caused the Industrial Revolution? What explains thetremendous growth and progress of post-World War II Japan? What caused theGreat Depression of the 1930s?

Continued...



21 of 53

P

A R T


m i c s




TABLE 1.2 The Fields of Economics (continued)

Envi r onmental economics 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 incorrecting these potential failures?

F inance 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 bondmarkets), futures and options, capital budgeting, and asset valuation.

Health economics analyzes the health care system and its players: government, insurers, health careproviders, and patients. It provides insight into the demand for medical care, healthinsurance markets, cost-controlling insurance plans (HMOs, PPOs, IPAs),government health care programs (Medicare and Medicaid), variations in medicalpractice, medical malpractice, competition versus regulation, and national healthcare reform.

The histor y of economic

thought,

which is grounded in philosophy, studies the development of economic ideas andtheories 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 thehistory of ideas helps give meaning to modern theory and puts it in perspective.

Indust r ial or ganization looks carefully at the structure and performance of industries and firms within aneconomy. How do businesses compete? Who gains and who loses?

Continued...



22 of 53

P

A R T


m i c s




TABLE 1.2 The Fields of Economics (continued)

Inter national economics studies trade flows among countries and international financial institutions. What arethe advantages and disadvantages for a country that allows its citizens to buy andsell freely in world markets? Why is the dollar strong or weak?

Labor economics 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?

Law and economics analyzes the economic function of legal rules and institutions. How does the lawchange the behavior of individuals and businesses? Do different liability rules makeaccidents and injuries more or less likely? What are the economic costs of crime?

P ublic economics examines the role of government in the economy. What are the economic functionsof government, and what should they be? How should the government finance theservices that it provides? What kinds of government programs should confront the

problems of poverty, unemployment, and pollution? What problems doesgovernment involvement create?

U r ban and r egional

economics

studies the spatial arrangement of economic activity. Why do we have cities? Whyare manufacturing firms locating farther and farther from the center of urban areas?



23 of 53

P

A R T


m i c s


E C O N O M I C S I N P R A C T I C E

Trust and Gender

While many transactions happen inanonymous markets in which buyersand sellers don¶t know one another,there are many other occasions inwhich markets operate more

effectively if individuals develop sometrust in one another.

In experiments run at the University of Wisconsin and the University of Miami,researchers conclude, ³We find thatmen trust more than women, andwomen are more trustworthy than men.´



24 of 53

P

A R T


m i c s


The Method of Economics

positive economics An approach to economics thatseeks to understand behavior and the operation of systems without making judgments. It describes whatexists and how it works.

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



25 of 53

P

A R T


m i c s


Descriptive Economics and Economic Theory


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.



26 of 53

P

A R T


m i c s


Theories and Models


model A formal statement of a theory, usuallya mathematical statement of a presumedrelationship between two or more variables.

variable A measure that can change from timeto time or from observation to observation.

Ockham¶s razor The principle that irrelevantdetail should be cut away.



27 of 53

P

A R T


m i c s


If you apply your own values to judge economic decisions, which category of

economics would you be applying?

a. Normative economics.b. Positive economics.

c. Descriptive economics.

d. Economic theory.

e. Empirical economics.



28 of 53

P

A R T


m i c s


If you apply your own values to judge economic decisions, which category of

economics would you be applying?

a.

a.

Norm

ative e

conomics.Norm

ative e

conomics.

b. Positive economics.

c. Descriptive economics.

d. Economic theory.

e. Empirical economics.



29 of 53

P

A R T


m i c s


All Else Equal: C eter is P ar ibus

ceteris paribus, or all else equal A device

used to analyze the relationship betweentwo variables while the values of other variables are held unchanged.

Theories and Models


Using the device of ceter is par ibus is one part of the process of

abstraction. In formulating economic theory, the concept helpsus simplify reality to focus on the relationships that interest us.



30 of 53

P

A R T


m i c s


Economic models are:

a. Precise representations of reality that include as many details as possible in

order to accurately predict behavior.b. Simplifications of reality that focus only on key relationships and ignore less

relevant details.

c. General interpretations of cause and effect.

d. Analytical interpretations of economic behavior involving a good deal of the

surrounding social and political structure of society.

e. Devices that usually make it impossible to isolate the impact of a singlefactor.



31 of 53

P

A R T


m i c s


Economic models are:

a. Precise representations of reality that include as many details as possible in

order to accurately predict behavior.b.b. Simplifications of r eality that focus only on key r elationships andSimplifications of r eality that focus only on key r elationships and

ignor e less r elevant details.ignor e less r elevant details.

c. General interpretations of cause and effect.

d. Analytical interpretations of economic behavior involving a good deal of the

surrounding social and political structure of society.

e. Devices that usually make it impossible to isolate the impact of a singlefactor.



32 of 53

P

A R T


m i c s


Expressing Models in Words, Graphs, and Equations

Theories and Models


Methods of expressing the quantitative relationship between two variables:

Gr aphing (as presented in appendix)

Equations, for example:

C = .90 Y and S = .10Y

If over time U.S. households collectively spend, or consume, 90percent of their income and save 10 percent of their income, wecould then write:

where C is consumption spending, Y is income, and S is saving.



33 of 53

P

A R T


m i c s


Cautions and Pitfalls

Theories and Models


The Post Hoc F allacy

post hoc, ergo propter hoc Literally, ³after this (in time), therefore because of this.´ Acommon error made in thinking aboutcausation: If Event A happens before EventB, it is not necessarily true that A caused B.

The F allacy of C omposition

fallacy of composition The erroneousbelief that what is true for a part isnecessarily true for the whole.



34 of 53

P

A R T


m i c s


Testing Theories and Models: Empirical Economics

Theories and Models


empirical economics The collection and use

of data to test economic theories.



35 of 53

P

A R T


m i c s


Economic Policy


Criteria for judging economic outcomes:

1. Efficiency

2. Equity

3. Growth

4. Stability



36 of 53

P

A R T


m i c s


Efficiency

Economic Policy


Equity

efficiency In economics, allocative efficiency. An

efficient economy is one that produces whatpeople want at the least possible cost.

equity Fairness.



37 of 53

P

A R T



Growth

Economic Policy


Stability

economic growth An increase in the total

output of an economy.

stability A condition in which nationaloutput is growing steadily, with low inflationand full employment of resources.



38 of 53 P

A R T



You cannot begin to understand how a societyfunctions without knowing something about itseconomic history and its economic system.

Learning to think in this very powerful way will

help you better understand the world.

As you proceed, it is important that you keep trackof what you have learned in earlier chapters. Thisbook has a plan; it proceeds step-by-step, eachsection building on the last. Make sure you

understand where it fits in the big picture.

An Invitation



39 of 53 P

A R T



Which of the following criteria for judging economic outcomes refers to producing

what people want at the least possible cost?

a. Efficiency.

b. Equity.c. Growth.

d. Stability.

e. All of the above.



40 of 53

P A R T



Which of the following criteria for judging economic outcomes refers to producing

what people want at the least possible cost?

a.a. Efficiency.Efficiency.

b. Equity.c. Growth.

d. Stability.

e. All of the above.



41 of 53

P A R T



R E V I E W T E R M S A N D C O N C E P T S

ceter is par ibus, or all else equal

descriptive economics

economic growth

economic theory

economics

efficiency

efficient market

empirical economics

equity

fallacy of composition

Industrial Revolution

macroeconomics

marginalism

microeconomics

model

normative economics

Ockham¶s razor

opportunity cost

positive economics

post hoc, er go pr opter hoc

scarce

stability

sunk costs

variable



42 of 53

P A R T



A graph is a two-dimensional representationof a set of numbers, or data.

How to Read and Understand Graphs

CHAPTER 1 APPENDIX

A time series graph shows how a singlemeasure or variable changes over time.

Time Series Graphs



43 of 53

P A R T




Time Series GraphsTABLE 1A.1 Total Disposable

Personal Income in the United States,

1975±2009 (in billions of dollars)

Year

Total

Disposable

Personal

Income Year

Total

Disposable

Personal

Income

197519761977197819791980198119821983198419851986198719881989199019911992

1,187.31,302.31,435.01,607.31,790.8 2,002.72,237.12,412.72,599.82,891.53,079.33,258.83,435.33,726.33,991.44,254.04,444.94,736.7

19931994199519961997199819992000200120022003200420052006200720082009

4,921.65,184.35,457.05,759.66,074.66,498.96,803.37,327.27,648.58,009.78,377.88,889.49,277.39,915.7

10,403.110,806.410,923.6

c FIGURE 1A.1 Total Disposable Personal

Income in the United States: 1975±2009 (in

billions of dollars)

CHAPTER 1 APPENDIX



44 of 53

P A R T



Graphing Two Variables on a Cartesian Coordinate System

Appendix

e 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.


CHAPTER 1 APPENDIX



45 of 53

P A R T



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 $22,304

and income equals $10,263.

At point B, consumption equals $31,751 and

income equals $27,442.

TABLE 1A.2 Consumption Expenditures

and Income, 2008

Average Incomebefore Taxes

Average Consumption

Expenditures

Bottom fifth2nd fifth

3rd fifth4th fifthTop fifth

$ 10,26327,442

47,19674,090

158,652

$ 22,30431,751

42,65958,63297,003

f FIGURE 1A.3 Household Consumption and

Income

Plotting Income and Consumption Data for Households


CHAPTER 1 APPENDIX



46 of 53

P A R T



Slope

d FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope

2 1

2 1

Y Y Y

X X X

(!

(


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 opposite²

when X increases, Y decreases; and when

X decreases, Y increases.

CHAPTER 1 APPENDIX



47 of 53

P A R T



Refer to the figure below. The expression of the slope of the line between points A

and B equals:

a.

b.

c.

d.

e.

Y Y

X X 2 1

2 1

Y X

Y X

2 2

1 1

X X Y Y

2 1

2 1

X Y

Y X

2 1

2 1

X X

Y Y

2 1

1 2



48 of 53

P A R T



Refer to the figure below. The expression of the slope of the line between points A

and B equals:

a.a.

b.

c.

d.

e.

Y Y

X X 2 1

2 1

Y X

Y X

2 2

1 1

X X Y Y

2 1

2 1

X Y

Y X

2 1

2 1

X X

Y Y

2 1

1 2



49 of 53

P A R T



c FIGURE 1A.5 Changing Slopes along Curves


Slope

CHAPTER 1 APPENDIX



50 of 53

P A R T

I I n t r o d u c t i o n t o E c o n

o m i c s


Refer to the figure below. According to this graph, the relationship between hours

of study time and points on the exam is as follows:

a. The relationship is first positive and then it turns negative.

b. Positive but diminishing.c. Positive and increasing.

d. Negative.

e. Nonexistent.



51 of 53

P A R T


o m i c s


Refer to the figure below. According to this graph, the relationship between hours

of study time and points on the exam is as follows:

a. The relationship is first positive and then it turns negative.

b.b. Positive but diminishing.Positive but diminishing.c. Positive and increasing.

d. Negative.

e. Nonexistent.



52 of 53

P A R T


o m i c s


TABLE 1A.3 Aggregate National Income and Consumption for the United States,

1930±2009 (in billions of dollars)

Aggregate National Income Aggregate Consumption

193019401950196019701980

1990200020052006200720082009

82.990.9263.9473.9929.52433.0

5059.88938.9

11,273.812,031.212,448.212,635.212,280.0

70.171.3

192.2331.8648.3

1,755.8

3,835.56,830.48,819.09,322.79,826.4

10,129.910,089.1

f FIGURE 1A.6 National Income and

Consumption

Some Precautions

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 differ ent year s, measured in billions

of dollars.

CHAPTER 1 APPENDIX



P A R T


o m i c s

Cartesian coordinate system

graph

negative relationship

origin

positive relationship

slope

time series graph

X -axis

X -intercept

Y -axis

Y -intercept

A P P E N D I X R E V I E W T E R M S A N D C O N C E P T S

cfo10e ch01macro crs 1click

Documents