chiang 3e ct micro ch01 layout 1 - launchpad · 2014. 4. 4. · review the key concepts economics:...

1

STEP 1

Economics Is a Rich Discipline of Wide ScopeIn this first chapter, you are given a general introduction to economics. You will seethe scope of economics as a way of thinking about the world; then you will look athow economists go about doing economics. Next, you will be presented with thekey principles of economics; you will meet these ideas throughout the course.

This is an introductory chapter. You are not expected to memorize all the ideasand issues covered in this first chapter. Rather, use this chapter as a way of famil-iarizing yourself with the general outline and process of economics.

This Is What You Need to Know

After studying this chapter you should be able to:

■ Explain how economic analysis can be used in decision making.

■ Differentiate between microeconomics and macroeconomics.

■ Describe how economists use models.

■ Describe the ceteris paribus assumption.

■ Discuss the difference between efficiency and equity.

■ Describe the key principles of economics.

■ Apply the key principles to situations faced in your daily routine.

1Exploring Economics

Chiang_3E_CT_Micro_CH01_Layout 1 12/18/13 3:23 PM Page 1

Review the Key Concepts

Economics: The study of how individuals, firms, and society allocate limitedresources to many competing wants.

Scarcity: The result of the fact that our unlimited wants clash with limited resources.Everyone, rich and poor, faces scarcity because at a minimum our time on earthis limited. Economics focuses on the allocation of scarce resources to satisfyunlimited wants.

Incentives: The factors that motivate individuals and firms to make decisions in theirbest interest.

Microeconomics: The decision making by individuals, businesses, industries, and governments.

Macroeconomics: The broader issues in the economy, such as inflation, unemploy-ment, and national output of goods and services.

Ceteris paribus: Assumption used in economics (and other disciplines as well) thatother relevant factors or variables are held constant.

Efficiency: How well resources are used and allocated. Do people get the goods andservices they want at the lowest possible resource cost? This is the chief focusof efficiency.

Equity: The fairness of various issues and policies.

Positive question: A question that can be answered using available information or facts.

Normative question: A question that is based on societal beliefs on what should orshould not take place.

Opportunity costs: The next best alternative; what you give up to do something orpurchase something.

Work Through the Chapter Tutorials

What Is Economics About?Frequently Asked Questions

Q: What topics encompass economics?A: Economics is about almost everything. Economic analysis can be usefully

applied to topics from how businesses make decisions to how college studentsallocate their time between studying and relaxing, from how individuals deter-mine whether to “invest in themselves” by taking additional courses while onthe job to how the government deals with recessions and inflation.

Q: How is economics divided as a subject?A: Economics is separated into two broad categories: microeconomics and

macroeconomics.

Q: What is the subject matter of microeconomics?A: Microeconomics deals with individual, firm, industry, and public decision making.

For example, microeconomics deals with issues such as whether you should attend

2 Chapter 1

STEP 2

STEP 3


a concert or study, and if you study, how you allocate your study time among all your courses. Business firms consider issues such as how much output to produce and how many people to hire to produce the output. Policymakers mightuse microeconomics to determine the appropriate caps on carbon dioxide discharges to mitigate climate change.

Q: What is the subject matter of macroeconomics?A: Macroeconomics focuses on the broader economic issues confronting the nation,

such as inflation (a general increase in prices economy-wide), employment andunemployment, economic growth, and policies to pull the economy out of arecession.

Q: How does model building characterize economics?A: Economics uses a stylized approach to a number of issues. Stylized models boil

issues and facts down to their basic relevant elements. Then, using assump-tions, stylized (simple) models are developed. Not all situations are covered bythe models because economists seek to generalize about economic behavior andreach generally applicable results.

Q: What is the ceteris paribus assumption, and when is it used?A: Models often hold some important variables constant (the ceteris paribus

assumption). For example, to determine how much gasoline people will buy atdifferent prices, we hold their income constant.

Q: How are efficiency and equity related?A: Economists and policymakers often confront the tradeoff between efficiency

and equity. Efficiency reflects how well resources are used and allocated; eco-nomic analysis often focuses on ensuring that efficient outcomes result frompublic policy. Sometimes the equity or fairness of the outcome is questioned.Because equity and fairness are subjective matters, there are differences ofopinion about fairness, except at the extremes, where people generally agree.For public policy issues, economics illuminates the tradeoffs between equityand efficiency. Economists have a lot to say about efficiency, but they tend toavoid the subjective issue of equity.

Exploring Economics 3

What Is Economics About? Quick Check

Circle the Correct Answer1. (T / F ) Microeconomics concentrates on such aggre-

gates as economic growth and inflation.2. (T / F ) Ceteris paribus means that economists do eco-

nomics by creating models.3. Macroeconomics covers all except which one of the

following:a. the inflation rateb. the unemployment ratec. productivity ratesd. sales of Nike athletic shoes compared to Reeboks

4. Models are:a. useless because they are too simple.b. stylized, simple representations of reality that can lead

to important insights.

c. exact, careful representations of reality.d. quite limited in their usefulness.

5. Concerning the efficiency versus equity tradeoff:a. economists have much to say about both efficiency

and equity.b. economists have much more to say about equity than

efficiency.c. economists have much to say about efficiency but lit-

tle to say about equity.d. economists have much to say about equity but noth-

ing to say about efficiency.

Score:

Answers: 1. F; 2. F; 3. d; 4. b; 5. c


If You Got All 5 CorrectYou have a good sense of what economics is about. Go on to Key Principles of Economics in the next section.

If You Didn’t Get All of Them CorrectSpend a little time reviewing this material. It is not hard, but it provides a founda-tion for the remainder of this chapter. If you do not get this material straight, youmight get lost later. Make a quick trip through the first section of the chapter again,looking at each heading and making sure you know what is covered under eachtopic. When you have a better sense of what economics is and how economists dowhat they do, go on to Key Principles of Economics. ■

Key Principles of EconomicsFrequently Asked Questions

Q: How is economics often defined?A: Our economy has limited resources. Our wants are limitless. This means that we

face scarcity and must make tradeoffs in everything we do. Economics is oftendefined as the study of the allocation of scarce resources to competing wants.

Q: What are opportunity costs?A: Everything we do involves opportunity costs. All activities require that we spend

resources (e.g., time and money) that could be used in another activity. Thisother activity represents the opportunity cost of the current activity chosen.Opportunity costs apply to us as individuals and to societies as a whole.

Q: What benefits do specialization and trade bring?A: Trading with other countries leads to better products for consumers at lower

prices. Economies grow by producing things that give them an advantage overother countries. This is why much of what we buy today comes from othercountries. Specialization leads to tangible benefits.

Q: What is thinking at the margin?A: Rational thinking requires that you think and make decisions at the margin. For

example, making decisions at the margin for most businesses means deciding onthe next employee to hire or the next advertising campaign, and for consumersit means deciding on the next product to purchase. Businesses use marginalanalysis to determine how much output to produce and how many employeesto hire. People use marginal analysis to determine which products to buy. Gov-ernments use marginal analysis to determine levels of regulation.

Q: How do incentives affect people?A: People follow incentives. If society wants to discourage some behavior, society

can tax it, punish it, or do a host of other things that increase its costs. Con-versely, society can provide things such as tax benefits for behaviors it wishesto encourage.

Q: What do markets do?A: Markets bring buyers and sellers together. Competition for the consumer’s dol-

lar forces firms to provide products at the lowest possible price, or some otherfirm will undercut their price. New products are introduced to the market andold products disappear. This dynamism is what makes markets efficient.

4 Chapter 1


Q: What is market failure, and how is it treated?A: Though markets are usually efficient, there are recognized times when they are

not. Pollution is an example of this. Government action is often needed to pro-vide a solution to problems of market failure.

Q: Why is productivity important?A: Countries with the highest average per capita income are also the most pro-

ductive. Their labor forces are highly skilled and firms employ huge amountsof capital with these workforces. This results in immense productivity and cor-respondingly high wages for the workers. High productivity growth results inhigh economic growth, which leads to high wages and high incomes, which stim-ulate large investments in education and research. All of this activity leads tohigher standards of living.

Q: What can be done to deal with fluctuations in the overall economy?A: The overall economy moves from growth spurts to recessions, then back to

growth spurts. Economists have provided analyses that have helped govern-ments smooth fluctuations in the overall economy.


Key Principles of Economics Quick Check

Circle the Correct Answer1. (T / F) Opportunity costs arise only when money is

exchanged.2. (T / F ) Government can do things to make overall eco-

nomic fluctuations less severe.3. Which one of the following statements is not an under-

lying idea of economics?a. Markets are efficient.b. When markets fail, government can provide a solu-

tion.c. Individuals are always rational and always follow their

incentives.d. Scarcity is the economic problem.

4. Which one of the following does not improve our stan-dard of living?a. tradeb. specialization

c. productivityd. market failure

5. When we have two soft drinks on a hot day and turndown the offer of a free third soft drink because we feelthis might be too much and leave us waterlogged, weare:a. thinking irrationally because it is free.b. helping alleviate scarcity by leaving something for

someone else.c. thinking on the margin.d. using information to gain an advantage in the mar-

ket.

Score:

Answers: 1. F; 2. T; 3. c; 4. d; 5. c

If You Got All 5 CorrectYou have a good sense of the bedrock ideas in economics. Spend a few momentswith Hints, Tips, and Reminders.

If You Didn’t Get All of Them CorrectReview the material. Then go to the text and read through each heading in this sec-tion. Be sure you understand what concept is being discussed. If you are unclearabout any of the ideas, reread the relevant passage in the text, then continue. ■


Consider These Hints, Tips, and Reminders

1. This chapter is your introduction to the study of economics; treat it that way.No need to try and memorize all of the terms and topics—you will see themseveral times again throughout the course. Just read this chapter to get a senseof the breadth of economics.

2. Reading and using graphs are a different story. The Appendix to the chapterintroduces you to the graphical methods you will encounter as you learn eco-nomics. Pick up any periodical such as the New York Times, Wall Street Jour-nal, Financial Times, Newsweek, Business Week, and so on, and you will findthem filled with graphs and figures that are part of the articles. Focus more ofyour study time on the Appendix and learn to interpret and read graphs—itwill save you a lot of grief.

6 Chapter 1

STEP 4



Do the Homework for Chapter 1 Exploring Economics

STEP 5

1.2.3.4.5.

6.7.8.9.

10.

11.12.13.14.15.

16.17.18.19.20.

Instructor Time Student

Use these blanks to record your answers to the homework questions.

1. Microeconomics focuses on:a. what causes unemployment.b. what causes inflation around the world.c. decisions by firms.d. the rate of economic growth.

2. Macroeconomics is not generally concerned with:a. what causes unemployment.b. what causes inflation around the world.c. pricing decisions by corporations.d. the rate of economic growth.

3. Ceteris paribus is:a. an assumption used by economists to compli-

cate models.b. the assumption that business maximizes profits.c. the assumption used by economists that all

labor is equally productive.d. an assumption used by economists that holds

all but the issue in question constant.

4. Efficiency:a. reflects how often economists make assump-

tions about important variables.b. reflects how well resources are allocated.c. reflects the fact that all labor is equally produc-

tive.d. is an assumption used by economists that holds

important variables constant.

5. Equity refers to:a. an assumption used by economists to compli-

cate models.

b. an individual’s subjective judgment about fair-ness of policies.

c. an assumption used by economists that all laboris equally productive.

d. an assumption used by economists that holdsimportant variables constant.

6. When you cannot go to a movie and play tennis atthe same time, you are facing:a. the fact that you cannot talk and chew gum at

the same time.b. equity tradeoffs.c. an efficiency versus equity tradeoff.d. opportunity costs.

7. Over a long time, our standard of living is deter-mined by:a. government regulation.b. productivity.c. opportunity costs.d. minimum wage laws.

8. We trade with other countries because with specialization:a. we are required to by law.b. we can exploit developing nations, reducing

their incomes.c. we are unable to produce most products our-

selves.d. consumers get better products at lower prices.

Note to student: There are 8 questions in this home-work assignment.



Use the ExamPrep to Get Ready for Exams STEP 6

This sheet (front and back) is designed to help you prepare for your exams. Thechapter has been boiled down to its key concepts. You are asked to answer ques-tions, define terms, draw graphs, and, if you wish, add summaries of class notes.

What Is Economics About?Describe the following:

Microeconomics:

Macroeconomics:

Describe what ceteris paribus is and how it is used in economics:

Describe the tradeoff between efficiency and equity:

Differentiate between positive economics and normative economics:

Key Principles of EconomicsList the 7 key principles in economics and give an example of each:

Key Principle Example



Additional Study Help: Chapter-wide Practice Questions

Matching

Match the description with the corresponding term.

1. Microeconomics2. Macroeconomics3. Models4. Ceteris paribus5. Efficiency6. Equity7. Scarcity8. Opportunity costs9. Thinking at the margin

10. Productivity11. Market failure12. Specialization13. Trade

a. Occurs when markets do not do what they are sup-posed to do.

b. Fairness.c. When someone considers whether to eat an addi-

tional ice cream cone. Summed up in the phrase“the straw that broke the camel’s back.”

d. Simple, stylized descriptions of issues.e. Is considered the economic problem, resulting

from our wants being greater than availableresources.

f. Markets that provide the best quality products forthe lowest possible cost.

g. How much output we produce over a specificperiod; the greater the amount, the higher ourstandard of living will be.

h. The exchange of goods and services betweencountries or individuals.

i. When each of us concentrates on doing fewerthings well rather than many things not as well.

j. All other relevant factors held constant.k. The cost of what you have to give up.l. A part of economics that looks at the decisions of

individual consumers and businesses.m. A part of economics that looks at the decisions of

all consumers and all businesses.

Fill-In

Choose the word(s) in parentheses that completethe sentence.

1. (Macroeconomics, Microeconomics)focuses on decision making by individuals, compa-nies, and governments, while (macroeconomics,microeconomics) addresses prob-lems such as unemployment and inflation.

2. In creating models to determine how efficient and equitable policies are, economists use the concept of (efficiency, equity, ceteris paribus)

to focus attention on the importantvariables. How well resources are used and allo-cated are issues of (efficiency, equity, ceterisparibus) , while (efficiency, equity,ceteris paribus) deals with the fair-ness of policies.

True / False

Circle the correct answer.

T / F 1. Analyzing whether you will buy more VeraBradley handbags if the price drops wouldbe considered part of microeconomics.

T / F 2. Analyzing whether everyone will buy moreVera Bradley handbags if the price dropswould be considered part of macroeco-nomics.

T / F 3. Ceteris paribus means that models shouldbe as simple as possible, but no simpler.

T / F 4. Because models are stylized versions ofissues, they rarely have anything usefulto say.

T / F 5. Economists generally have more to sayabout equity than efficiency.

T / F 6. Only people who are not rich are forced tomake tradeoffs.


T / F 7. The opportunity cost of going to a concertis the price of the concert ticket.

T / F 8. Thinking “I am full, I cannot eat anothermouthful” is an example of thinking at themargin.

T / F 9. Government policymakers find little usefor economics when determining how tobring about desired changes.

T / F 10. Markets are inefficient because someone isalways better informed than someone else.

12 Chapter 1

T / F 11. Trade is a one-way street: Rich nationsbenefit at the expense of poor nations.

T / F 12. Our standard of living is linked to produc-tivity growth.

T / F 13. The opportunity cost of parking at schoolincludes the amount of time I have tosearch for a parking space.

T / F 14. If I study for chemistry rather than history,I incur no opportunity cost because nomonetary transaction takes place.

Multiple-Choice

Circle the correct answer.

1. Which of the following is not a concern of micro-economics?a. The German firm BMW builds a new auto plant

in North Carolina.b. You buy a music CD.c. Unemployment falls in the United States.d. Your sister finds a job after college.

2. Which of the following is not a concern of macro-economics?a. Inflation climbs to 5% per year.b. Unemployment rates tumble.c. Coca-Cola expands overseas.d. Productivity rises in most businesses.

3. What does ceteris paribus mean?a. All people are considered equal.b. All relevant factors are held constant.c. Only important things are considered.d. The number of variables has to be kept under

control.

4. What special insights can economics tell us aboutequity?a. Many things, because economics is a powerful

way of looking at the world.b. Some things, because economics considers peo-

ple to be rational.c. Not much, because each of us has to determine

what is fair; economics has no special compe-tence here.

d. Only limited insights, in the special case whenmarkets are completely competitive.

5. Which of the following is not an opportunity costyou incur if you see a Yankees baseball game?a. the parking fee, if you drive to the parkb. the time spent in the after-game traffic jamc. the exorbitant price paid for hot dogsd. the $50 tickets that were given to you by a

friend who could not go to the game

6. All except which one of the following is an exam-ple of thinking at the margin at an all-you-can-eatbuffet?a. I am almost full, so I will have one dessert.b. If I eat five more egg rolls, I will be so full that

I cannot eat a dessert.c. I have eaten seven egg rolls already.d. To eat another egg roll, I have to loosen my belt.

7. Pollution is an example of:a. an inequitable outcome of markets.b. market failure.c. the problems that can arise with specialization.d. not thinking on the margin.

8. A company believing that offering airline frequentflyer miles with their product will lead to increasedsales is following which key economic idea?a. People think at the margin.b. Information is important.c. People follow incentives.d. Government can deal with market failure.


Essay Problem

Answer in the space provided.

The questions below extend the material covered inthis chapter. The answers you give may not correspondcompletely with ours; don’t worry as long as they arefairly close.

1. Do you have a driver’s license? If so, you probablyhad to wait for various lengths of time to take your


initial driving test or get your license renewed.There are people who will wait in line for you ifyou pay them a fee. Why would you pay other peo-ple to do something that does not cost you in thefirst place?

2. Why should we not expect tax law to be as eco-nomically efficient in outcome as possible?

3. Is ceteris paribus unique to economics?

What’s Next

You now have an introduction to economics. You have a sense of what economicsis concerned with and how economists actually do economics. You also have beengiven an introduction to key ideas in economics. You are now ready to put thisknowledge to work.

In the next chapter, we bring in several of the concepts from this chapter inlooking at the crucial importance of economic growth. We present a simple stylizedmodel of an economy and look at the major things that generate economic growthand higher living standards.

Answers to Chapter-wide Practice Questions

Matching

1. l2. m3. d4. j

5. f6. b7. e8. k

9. c10. g11. a

12. i13. h

Fill-In1. Microeconomics, macroeconomics2. ceteris paribus, efficiency, equity

1. T2. F3. F4. F

5. F6. F7. F8. T

9. F10. F11. F12. T

13. T14. F

Multiple-Choice1. c2. c3. b

4. c5. d6. c

7. b8. c

True / False


Essay Problem1. Time is an opportunity cost. You could be doing other things with your time. For espe-

cially lengthy waits incurred by busy businesspeople, it is often worth it for them to paysomeone to wait in line. Highly paid individuals often have personal assistants to runtheir lives.

2. There is an efficiency versus equity tradeoff. Economists can propose the most econom-ically efficient tax laws, but these have to go through a political process to become law.The political process ensures that equity considerations come into play. In other words,economists can propose various tax laws, but as soon as someone says that the pro-posed law is unfair to some person or some group, politicians will take notice and fac-tor this in to the degree they think warranted.

3. No. It is common to the sciences. For example, physicists hold everything constant, thenchange one variable when they run various experiments. This is the logic behind takingone particle and seeing what happens under normal speeds, then taking the same par-ticle and accelerating nearly to the speed of light.

14 Chapter 1


Graphs, Charts, Tables, and Equations Are the Language of EconomicsYour study of economics will use a lot of graphs, some charts and tables, and a fewsimple equations. Knowing how to read, interpret, and use these methods of rep-resenting ideas and data will make your study of economics easier and make read-ing ordinary publications more enjoyable.

This Is What You Need to Know

After studying this Appendix you should be able to:

■ Describe the four simple forms of data graphs.

■ Make use of a straightforward approach to reading graphs.

■ Read linear and nonlinear graphs and know how to compute their slopes.

■ Use simple linear equations to describe a line and a shift in the line.

■ Explain why correlation is not the same as causation.

Work Through the Appendix Tutorial

Frequently Asked Questions

Q: What are the main types of graphs used to display economic data, and how do they differ?

A: There are four main types of graphs used to display and analyze economicdata: time series, scatter plots, pie charts, and bar charts. Time series

STEP 1

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15

Appendix: Working with Graphs

and Formulas


graphs plot data measures over time, whereas scatter plots plot two series(neither axis measures time) against each other. Pie charts split data intopercentage parts of the whole and display them like pie slices. Bar chartspresent discrete data values as bars, which can be shown either verticallyor horizontally.

Q: Are there any rules for reading graphs?A: There are no formal rules, but a few simple suggestions might help. First, check

the title to see what is being presented, then look to see what is measured oneach axis, and look at the graph to see if it makes logical sense. Now look care-fully at the graph to see if any interesting relationships shine through. Finally,read the caption associated with the graph to ensure you have not missed any-thing important.

Q: What is a linear relationship, and how is its slope computed?A: A linear relationship is represented by a straight line. To compute the slope of

a straight line, pick two points on the line and compute the ratio of the changein the variable on the vertical axis to the change in the variable on the horizon-tal axis (rise over run). In Figure APX-1, the slope of the line is computed byselecting two points such as a and b, then computing the ratio of changes ineach variable:

(20 � 15) / (40 � 20) � 5 / 20 � 0.25

In this simple graph, when the number of cars on the road rises by 20, the com-mute time grows by 5 minutes, or 15 seconds for each additional car.

16 Chapter 1 Appendix

FIGURE APX-1

10

5

15

20

Cars on the Road Other Than Yours (X)

Com

mut

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Tim

e in

Min

utes

(Y) 25

0 10 20 30 40 50 60

a

b

Q: How is slope computed when the relationship is nonlinear?A: To find the slope of a nonlinear curve, pick a point and find the slope of a line

tangent to that point. In Figure APX-2, the slope at point a is equal to

(16 � 13) / (30 � 20) � 3 / 10 � 0.3

Notice that in this case the rate of congestion gets worse as each additional carenters the road (the slope gets steeper as more cars travel the road). This is acrucial difference from the linear curve where the slope was constant.

Chiang_3E_CT_Micro_CH01_Layout 1 12/23/13 11:27 AM Page 16

Q: What simple equation represents a linear relationship?A: Straight lines can be represented by a simple equation of the form: Y � a � bX.

In Figure APX-3 (Figure APX-1 reproduced), Y equals commuting time, a equalsthe vertical intercept of 10 minutes (the commute time when you are the onlycar on the road), b is equal to the slope of 0.25, and X is equal to the numberof other cars on the road. Thus, the full equation is

Y � 10 � 0.25X


FIGURE APX-2

a b

10

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15

20


Com

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Tim

e in

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(Y) 25

0 10 20 30 40 50 60

FIGURE APX-3

a

b

Y = 10 + 0.25X

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20


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(Y) 25

0 10 20 30 40 50 60

Q: How can ceteris paribus be represented in both graphs and equations?A: The term ceteris paribus means to hold some additional important variables con-

stant. So, for instance, in the commuting time model above, we might be assum-ing that the number of lanes available for travel is held constant. Assume thatadding another lane reduces commuting time by 5 minutes, and removing a laneincreases commute time by 5 minutes. We can add a variable, L, to our equation,representing lane additions or decreases, so that our new equation becomes

Y � 10 � 0.25X � L

where L is equal to �5 when a lane is added and �5 when a lane is reduceddue to road work. Figure APX-4 on the next page shows the impact of this newvariable on the commute time. Adding a new lane reduces commute time for



all levels of traffic, while eliminating a lane increases commute time in all traf-fic conditions.

FIGURE APX-4

a

b

Y = 10 + 0.25X

Y = 10 + 0.25X – 5(new lane added)

Y = 10 + 0.25X + 5(one lane closed for road work)

10

5

15

20


Com

mut

ing

Tim

e in

Min

utes

(Y) 25

0 10 20 30 40 50 60

Q: Why does correlation not imply causality?A: Just because two variables are related to each other does not mean one vari-

able causes the other to change.

Key Point to RememberGraphs, tables, charts, and equations are just other ways to view data and relation-ships between variables.

Working with Graphs and Formulas Quick Check

1. Figure APX-5 shows 2006 GDP per capita for selectedcountries, and the country’s corresponding years of lifeexpectancy at birth for both men and women. Russia’sper capita GDP is roughly what percent of America’s?

China

Russia

France

Japan

United Kingdom

United States

GermanyWomen's Life Expectancy

Men's Life Expectancy

2006 GDP per Capita

9080706050403020100

a. 100%b. 1%c. 15%d. 50%

FIGURE APX-5



2. Using the same Figure, APX-5, which country has thehighest life expectancy for males/females?a. France/Germanyb. United Kingdom/United Statesc. Japan/United Kingdomd. Japan/Japan

3. Figure APX-6 shows the median (middle person) dura-tion of unemployment in weeks for each month for2002–2004. Notice that there is a spike in how long peo-ple have been unemployed each June. Which of the fol-lowing is probably the best explanation for these spikesin how long people have been unemployed?

a. Employers do not like to hire people in June becausethey don’t want to have to let new people go on vaca-tion.

b. The unemployed see the arrival of summer as achance to surf and do not bother to look for a job.

c. May and June represent graduation in both highschool and college, so the job market becomescrowded and many unemployed individuals can’t findwork.

d. Federal law restricts the number of people who caninterview for federal jobs in the summer because ofbudget limitations.

Answers: 1. c; 2. d; 3. c; 4. c; 5. b

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4. Figure APX-7 shows the relationship between the sizeof a video file in megabytes and the download time inminutes. What is the slope of the line?a. 0.4b. 0.3c. 0.2d. 0.1

5. Assume the line (relationship) in Figure APX-7 is for yourmedium-speed DSL line. Now assume you get a high-speed broadband network connection. How does thataffect the line in Figure APX-7?a. No impact.b. The line will rotate downward with a smaller slope.c. The line will rotate upward with a larger slope.d. Broadband is so fast that the line will equal the hor-

izontal axis.

Score:

FIGURE APX-6

FIGURE APX-7

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If You Got All 5 CorrectYou have a good working knowledge of how to read graphs, how to describe linearrelationships, and how to calculate the slope of a line. Enjoy the rest of the course.

If You Didn’t Get All of Them CorrectYou should review this material again. You are going to see graphs throughout thiscourse. Over the course of the semester you will be computing percentages, inter-preting simple graphs, and on a rare occasion looking at simple equations such asthose described in this section. Don’t worry about it at this point. You will get a lotof practice as the semester unfolds, and soon you won’t give it a second thought.Good luck in the course. ■


Other18.1%

Canada15.1%

Mexico11.7%

NorthSea

8.1%

OPEC:Latin America

13.1%

OPEC:Persian Gulf

23.3%

OPEC: Africa andOther 10.3%

0 1 2 3 4 5

Birthrate per Woman

China

Russia

Thailand

Brazil

United States

India

Mexico

Turkey

Tunisia

Indonesia

Early 2000s

Early 1980s

1. Figure SH APX-1, from data in an article in Busi-ness Week, February 24, 2003, shows the sourceof America’s imported oil in 2001. The UnitedStates consumed a total of 25 million barrels of oila day or 9.125 billion barrels a year. Imported oilas a percent of total consumption was 70% in 2001.The pie chart below shows where that oil came from.a. With oil prices at $30 a barrel, approximately

how much did the United States pay in 2001 forimported oil?

b. What percent of this went to OPEC?

a. How is the United States unique among thesecountries?

b. What factors might account for the wide-rangingdrop in fertility rates throughout most of theworld?

SH APX-1

SH APX-2

2. Figure SH APX-2 is based on data in the WallStreet Journal, January 24, 2003. It shows theaverage number of children born to women dur-ing the early 1980s and the early 2000s in selectedcountries.

3. Figure SH APX-3 shows educational attainment ofLatinos in Los Angeles, California, in 2001. Thesedata were included in a special survey in the Econ-omist, November 2, 2002.a. What percent of foreign-born have no college at

all? b. By the third generation, what percent have not

been to college? c. Between the second and third generations,

what is the major change?

Additional Study Help: Working with Graphs and Formulas



4. Figure SH APX-4 graphs productivity change (out-put per hour worked) to changes in aggregate out-put (GDP) for the last several decades.a. Draw a smooth curve (or line) on the graph that

shows the normal relationship between thesetwo variables.

b. Is this a positive or negative relationship thatyou graphed?

c. State the relationship in words. Does it seem tomake sense?

d. Notice the two circles. They represent years2000 and 2001. Are these points above or belowthe line you drew on the graph?

e. Could this help explain why job growth was slowin the years following the last two recessions?How?

0 20 40 60 80 100

Percent

College Diploma

Foreign-Born

2nd Generation

3rd Generation

No H.S. Diploma

H.S. Diploma Some College

5. Figure SH APX-5, using World Bank data, showsthe population in the world living on under $1 aday.a. As a percent of the world’s population, has

poverty (as defined by living on $1 a day)declined?

b. Where is poverty growing the fastest?

c. Where has poverty declined the fastest?

SH APX-4

SH APX-5

SH APX-3

2001

2002

Aggregate Output (% change)

Prod

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0.6

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1.2

1.0

1.4

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1980 1985 1990 1995 2000

Year

Popu

latio

n (b

illio

ns)

East Asia

Sub-Saharan Africa

South Asia

Rest of the World

6. Use the grid to answer the following questions.a. Plot the following equation: Y � 2 � 0.5Xb. Plot the following equation: Y � 10 – 1.5Xc. At what value of X is the value of Y equal for

both equations? d. If X � 2, what would be the difference between

the values for Y in equations a and b?



Answers to Additional Study Help: Working with Graphs and Formulas

1. a. (9.125 billion � 0.70) � $30 � 6.3875 � $30 �$191.625 billion.

b. The percent of imports from OPEC equals 23.3 �10.3 � 13.1 � 46.7%.

2. a. Fertility rates have actually risen for the United States,unlike the remainder of the countries, where it hasdropped.

b. Fertility rates may be declining in developing nationsfor many reasons, including increases in income, bet-ter access to birth control (better communicationssuch as telephones, satellite television, etc., haveincreased awareness about birth control in develop-ing nations), increased urbanization (urban house-holds have fewer children), and possibly greateraccess to education.

3. a. Approximately 82%b. A little over 50%c. Far more get college diplomas

4. a. A smooth line would be positively sloped and goroughly through the origin and up toward point Y �5; X � 10.

b. Positive relationshipc. This positive relationship suggests that when aggre-

gate output is changing very rapidly, productivity ischanging rapidly as well. Alternatively, rapidly grow-ing aggregate output is associated with rapidly grow-ing productivity. Yes, it makes sense that productiv-ity change and aggregate output change would go

together. When workers can produce more, outputmay grow more rapidly. Remember, correlation is notcausation.

d. The two circles for the current recession are abovethe line you drew in question a.

e. Productivity growth has been unusually high for thegiven change in output. This could be due to the pos-sibility that the rapid technological buildup (comput-ers, telecommunications, etc.) during the late 1990sis taking a while to be integrated into the economy.This could partly explain the rapid growth the econ-omy experienced in 2004 and 2005. Productivitygrowth could hold back job growth in the sense thatbusinesses can meet growing needs with their cur-rent number of workers—there is no need to hiremore workers.

5. a. Yes. World population has grown in the last twodecades, but world poverty has declined. One snagin these data is that they are not adjusted for infla-tion. One dollar in 1980 probably translates into twodollars today.

b. Sub-Saharan Africac. East Asia

6. a and b: See Figure SHA APX-1.c. X � 4d. The difference is 4, as shown in Figure SHA APX-1 (ver-

tical arrow).

SHA APX-1

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Y = 2 + 0.5X

Y = 10 – 1.5X


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