why study economics? to learn a way of thinking to understand society to understand global affairs...
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Why Study Economics?To Learn a Way of ThinkingTo Understand SocietyTo Understand Global AffairsTo Be an Informed Voter
The Scope of EconomicsMicroeconomics and MacroeconomicsThe Diverse Fields of Economics
The Method of EconomicsTheories and ModelsEconomic Policy
Appendix: How to Read and Understand Graphs
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Outline
1The Scope and Method
of Economics
INTRODUCTION TO ECONOMICS
Economics is the study of how individuals and societies choose to use the scarceresources that nature and previous generations have provided. The key word in thisdefinition is choose. Economics is a behavioral, or social, science. In large measure it isthe study of how people make choices. The choices that people make, when added up,translate into societal choices.
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.
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WHY STUDY ECONOMICS?There are four main reasons to study economics:
• to learn a way of thinking,• to understand society,• to understand global affairs, and • to be an informed voter.
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WHY STUDY ECONOMICS?
Three fundamental concepts:Opportunity costMarginalism, andEfficient markets
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TO LEARN A WAY OF THINKING
WHY STUDY ECONOMICS?
opportunity cost The best alternative that we forgo, or give up, when we make a choice or a decision.
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scarce Limited.
Opportunity Cost
WHY STUDY ECONOMICS?
marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.
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sunk costs Costs that cannotbe avoided, regardless of what isdone in the future, because theyhave already been incurred.
Marginalism and Sunk Costs
WHY STUDY ECONOMICS?
efficient market A marketin which profit opportunities areeliminated almost instantaneously.
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Efficient Markets—No Free Lunch
The study of economics teaches us a way of thinking and helps us make decisions.
WHY STUDY ECONOMICS?
Industrial Revolution Theperiod in England during the lateeighteenth and early nineteenthcenturies 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.
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TO UNDERSTAND SOCIETY
The study of economics is an essential part of the study of society.
WHY STUDY ECONOMICS?
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TO UNDERSTAND GLOBAL AFFAIRS
An understanding of economics is essential to an understanding of global affairs.
The events of September 11, 2001, dealt a blow to the tourism industry and left airlines in deep financial trouble.
WHY STUDY ECONOMICS?
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TO BE AN INFORMED VOTER
When we participate in the political process, we are voting on issues that require a basic understanding of economics.
A knowledge of economics is essential to be an informed voter.
Microeconomics looks at the individual unit—the household, the firm, the industry. Itsees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. Itsees and analyzes the “forest.”
THE SCOPE OF ECONOMICS
microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, business firmsand households.
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MICROECONOMICS AND MACROECONOMICS
macroeconomics The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale.
THE SCOPE OF ECONOMICS
TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns
DIVISION OF ECONOMICS PRODUCTION PRICES INCOME EMPLOYMENT
Microeconomics Production/output in individual industries and businesses How much steelHow much office spaceHow many cars
Price of individual goods and services
Price of medical carePrice of gasolineFood pricesApartment rents
Distribution of income and wealth
Wages in the auto industryMinimum wageExecutive salariesPoverty
Employment by individual businesses and industries
Jobs in the steel industryNumber of employees in a firmNumber of accountants
Macroeconomics National production/output
Total industrial outputGross domestic productGrowth of output
Aggregate price level
Consumer pricesProducer pricesRate of inflation
National income
Total wages and salaries Total corporate profits
Employment and unemployment in the economy
Total number of jobsUnemployment rate
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THE DIVERSE FIELDS OF ECONOMICS
THE METHOD OF ECONOMICSpositive economics An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describeswhat exists and how it works.
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normative economics An approach to economics that analyzes outcomes of economic behavior, evaluates them asgood or bad, and may prescribe courses of action. Also called policy economics.
THE METHOD OF ECONOMICS
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descriptive economics The compilation of data that describe phenomena and facts.
Descriptive Economics and Economic Theory
economic theory A statement or set of related statements about cause and effect, action and reaction.
THE METHOD OF ECONOMICS
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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.
THEORIES AND MODELS
THE METHOD OF ECONOMICS
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Ockham’s razor The principle that irrelevant detail should be cut away.
Maps are useful abstract representations of reality.
Using the device of ceteris paribus is one part of the process of abstraction. In formulatingeconomic theory, the concept helps us simplify reality to focus on the relationshipsthat interest us.
THE METHOD OF ECONOMICS
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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.
All Else Equal: Ceteris Paribus
THE METHOD OF ECONOMICS
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The most common method of expressing the quantitative relationship between two variables is graphing that relationship on a two-dimensional plane.
Expressing Models in Words, Graphs, and Equations
THE METHOD OF ECONOMICS
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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 thinkingabout causation: If Event A happens before Event B, it is not necessarily true that A caused B.
THE METHOD OF ECONOMICS
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The Fallacy of Composition
fallacy of composition The erroneous belief that what is true for a part is necessarily true for the whole.
THE METHOD OF ECONOMICS
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empirical economics Thecollection and use of data to testeconomic theories.
Testing Theories and Models: Empirical Economics
THE METHOD OF ECONOMICS
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ECONOMIC POLICY
Criteria for judging economic outcomes:
1. Efficiency
2. Equity
3. Growth
4. Stability
THE METHOD OF ECONOMICS
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efficiency In economics, allocative efficiency. An efficienteconomy is one that produces what people want at the least possible cost.
Efficiency
equity Fairness.
Equity
THE METHOD OF ECONOMICS
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economic growth An increase in the total output of an economy.
Growth
stability A condition in whichnational output is growing steadily, with low inflation and full employment of resources.
Stability
Review Terms and Concepts
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ceteris paribus
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, ergo propter hoc
scarce
stability
sunk costs
variable
Appendix
A graph is a two-dimensional representation of a set of numbers, or data.
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HOW TO READ AND UNDERSTAND GRAPHS
Appendix
A time series graph shows how a single variable changes over time.
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TIME SERIES GRAPH
FIGURE 1A.1 Total Disposable Personal Income in the United States: 1975–2005 (in billions of dollars)
Appendix
The Cartesian coordinate system is the most common method of graphing two variables. This system is constructed by simply drawing two perpendicular lines: a horizontal line, or X-axis, and a vertical line, or Y-axis. The axes contain measurement scales that intersect at 0 (zero). This point is called the origin.
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GRAPHING TWO VARIABLES ON A CARTESIANCOORDINATE SYSTEM
FIGURE 1A.2 A Cartesian Coordinate System
Appendix
TABLE 1A.1 Total Disposable Personal Income in the UnitedStates, 1975–2005 (in billions of dollars)
YEAR TOTAL DISPOSABLEPERSONAL INCOME
YEAR TOTAL DISPOSABLEPERSONAL INCOME
19751976197719781979198019811982198319841985198619871988
1,181.41,299.9 1,436.01,614.8 1,808.2 2,019.8 2,247.9 2,406.82,586.02,887.63,086.53,262.53,459.53,752.4
19891990199119921993199419951996199719981999200020012002200320042005
4,016.34,293.64,474.84,754.64,935.35,165.45,422.65,677.75,968.26,355.66,627.47,120.27,393.27,827.78,159.98,646.98,945.6 29 of 34
PLOTTING INCOME AND CONSUMPTION DATAFOR HOUSEHOLDS
Appendix
TABLE 1A.2 Consumption Expendituresand Income, 2003
AVERAGEINCOME
BEFORE TAXES
AVERAGECONSUMPTIONEXPENDITURES
Bottom fifth 2nd fifth3rd fifth4th fifthTop fifth
£ 8,20121,47837,54261,132
127,146
£ 18,49226,72936,21350,46881,731
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This line slopes upward, indicating that there seems to be a positive relationship between income and spending.
Points A and B, above the 45° line, show that consumption can be greater than income.
FIGURE 1A.3 Household Consumptionand Income
Appendix
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The slope of the line indicates whether the relationship between the variables is positive or negative.
Appendix
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A downward-sloping line describes a negative relationship between X and Y.
An upward-sloping line describes a positive relationship between X and Y.
FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope
Appendix
33 of 34FIGURE 1A.5 Changing Slopes Along Curves
Appendix
34 of 34FIGURE 1A.6 National Income and Consumption