Transcript PPT

Introduction: What
Is Economics?
PREPARED BY:
FERNANDO QUIJANO, YVONN QUIJANO,
KYLE THIEL & APARNA SUBRAMANIAN
© 2007 Pearson/Prentice Hall Economics: Principles, Applications, and Tools, 5e O’Sullivan • Sheffrin • Perez
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1 Do people respond to incentives?
Pedaling for Television Time
2 What is the role of prices in allocating resources?
London Solves Its Congestion Problem
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1.1
WHAT IS ECONOMICS?
• scarcity
The resources we use to produce
goods and services are limited.
• economics
The study of choices when there is
scarcity.
Here are some examples of scarcity and the trade-offs associated with
making choices:
•
You have a limited amount of time. If you take a part-time job, each
hour on the job means one less hour for study or play.
•
A city has a limited amount of land. If the city uses an acre of land
for a park, it has one less acre for housing, retailers, or industry.
•
You have limited income this year. If you spend $17 on a music CD,
that’s $17 less you have to spend on other products or to save.
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1.1
WHAT IS ECONOMICS?
• factors of production
The resources used to produce goods and services; also known as production inputs.
• natural resources
Resources provided by nature and used to produce goods and
services.
• labor
The physical and mental effort people use to produce goods and
services.
• physical capital
The stock of equipment, machines, structures, and infrastructure
that is used to produce goods and services.
• human capital
The knowledge and skills acquired by a worker through education
and experience.
• entrepreneurship
The effort used to coordinate the factors of production—natural
resources, labor, physical capital, and human capital—to produce
and sell products.
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1.1
WHAT IS ECONOMICS?
Positive Versus Normative Analysis
• positive analysis
Answers the question “What is?” or “What will be?”
• normative analysis
Answers the question “What ought to be?”
Table 1.1 COMPARING POSITIVE AND NORMATIVE QUESTIONS
Positive Questions
• If the government increases the minimum wage,
how many workers will lose their jobs?
• If two office-supply firms merge, will the price of
office supplies increase?
• How does a college education affect a person’s
productivity and earnings?
• How do consumers respond to a cut in income
taxes?
• If a nation restricts shoe imports, who benefits and
who bears the cost?
Normative Questions
• Should the government increase the minimum
wage?
• Should the government block the merger of two
office-supply firms?
• Should the government subsidize a college
education?
• Should the government cut taxes to stimulate the
economy?
• Should the government restrict imports?
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1.1
WHAT IS ECONOMICS?
The Three Key Economic Questions: What, How, and Who?
The choices made by individuals, firms, and governments answer
three questions:
1 What products do we produce?
2 How do we produce the products?
3 Who consumes the products?
Economic Models
• economic model
A simplified representation of an
economic environment, often
employing a graph.
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1.2
ECONOMIC ANALYSIS AND MODERN PROBLEMS
Economic View of Traffic Congestion
To an economist, the diagnosis of the congestion problem is
straightforward. When you drive onto a busy highway during rush
hour, your car takes up space and decreases the distance between
the vehicles on the highway. The normal reaction to a shorter
distance between moving cars is to slow down. So when you enter
the highway, you force other commuters to spend more time on the
highway.
One possible solution to the congestion problem is to force people to
pay for using the road, just as they pay for gasoline and tires.
The job for the economist is to compute the appropriate congestion
tax and predict the consequences of imposing the tax.
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1.2
ECONOMIC ANALYSIS AND MODERN PROBLEMS
Economic View of Poverty in Africa
 FIGURE 1.1
Map of Africa
Africa is the world’s second-largest
continent in both area and
population, and accounts for more
than 12 percent of the world’s
human population. The countries
of sub-Saharan Africa are
highlighted in yellow.
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1.2
ECONOMIC ANALYSIS AND MODERN PROBLEMS
Economic View of Japan’s Economic Problems
Following World War II, Japan grew rapidly, with per capita income
increasing by about 4 percent per year between 1950 and 1992. But
in 1992, the economy came to a screeching halt. For the next 10
years, per capita income either decreased or increased slightly.
The challenge for economists was to develop a set of policies to get
the Japanese economy moving again.
Economists responded by designing policies to stimulate spending
by consumers and businesses and to make needed changes to the
Japanese financial system.
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1.3
THE ECONOMIC WAY OF THINKING
Four elements of the economic way of thinking:
1 Use Assumptions to Simplify
Economists use assumptions to make things simpler and focus
attention on what really matters.
2 Isolate Variables—Ceteris Paribus
Economic analysis often involves variables and how they affect
one another.
• variable
A measure of something that can take
on different values.
• ceteris paribus
The Latin expression meaning other
variables being held fixed.
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1.3
THE ECONOMIC WAY OF THINKING
3 Think at the Margin
Economists often consider how a small change in one variable
affects another variable and what impact that has on people’s
decision making.
• marginal change
A small, one-unit change in
value.
4 Rational People Respond to Incentives
A key assumption of most economic analysis is that people
act rationally, meaning that they act in their own self-interest.
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PEDALING FOR TELEVISION TIME
APPLYING THE CONCEPTS #1: Do people respond to
incentives?
To illustrate the notion that people are rational and
respond to incentives, consider an experiment conducted
by researchers at St. Luke’s Roosevelt Hospital in New
York City. The researchers addressed the following
question: If a child must pedal a stationary bicycle to run
a television set, will he watch less TV?
• Children were put into two groups:
•
Control group: Obese children randomly assigned to a TV with a
stationary bike in front of the TV – no pedaling required to watch TV.
•
Treatment group: Obese children randomly assigned to a TV with a
stationary bike in front of it – pedaling is required to watch TV.
• Outcome: The control group watched TV 21 hours on average and the treatment
group only 2 hours on average per week.
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Extra Application 3
FREAKONOMICS
Economist Steven Levitt, one of the authors of the best selling book “Freakonomics,”
answers a host of questions typically not tackled by most economists. One of the
questions is related to realtors and agency relationships. In other words, do realtors really
work for real estate sellers? Does a real estate agent have an incentive to get you the
highest price?
• According to Levitt, it is in the best interest of the realtor to convince sellers to take
an offer lower than they would receive if the property remained on the market.
• Since the percentage of the sales price that real estate salespersons receive from
selling a house is a very small fraction, a $10,000 increase in sales price might net a
real estate professional another $150 commission for a tremendous amount of
additional work.
• It is in the real estate salesperson’s best interest to convince the seller to make the
quick sale and take the first reasonable offer.
• Levitt points toward evidence that real estate professionals tend to leave their own
properties on the market longer and receive 2-3% more in sales price.
Economics is truly a social science that can be used to explain quite a bit of human
behavior.
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LONDON SOLVES ITS CONGESTION PROBLEM
APPLYING THE CONCEPTS #2: What is the role of prices in
allocating resources?
To illustrate the economic way of thinking, let’s
consider again how an economist would approach
the problem of traffic congestion.
• Use assumptions to simplify
• Isolate variables—ceteris paribus
• Think at the margin
If the government imposes a congestion tax to reduce congestion during rush hour, the
question for the economist is: How high should the tax be? Determine the cost imposed
by the marginal driver:
•
Driver forces each of 900 commuters to spend 2 extra seconds on the highway
•
Total travel time increases by 30 minutes
•
Value of time is $16 per hour
•
Appropriate congestion tax is $8.00
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1.4
PREVIEW OF COMING ATTRACTIONS:
MACROECONOMICS
• macroeconomics
The study of the nation’s economy as a
whole; focuses on the issues of inflation,
unemployment, and economic growth.
Macroeconomics explains why economies grow and change
and why economic growth is sometimes interrupted. Let’s look
at three ways we can use macroeconomics.
To Understand Why Economies Grow
Macroeconomics explains why some resources increase over
time and how an increase in resources translates into a higher
standard of living.
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Extra Application 4
MEXICO’S DRUG PROBLEM
Mexico’s proposed drug decriminalization bill is temporarily derailed as Mexican President
Fox requests changes. The move comes on the heels of U.S. criticism that the bill would
encourage “drug tourism.” The bill called for eliminating criminal penalties for all
“consumers” in possession of small amounts of many illegal drugs.
• Other provisions in the bill created broader powers designed to hit the drug trade
from the supply side such as harsher penalties for dealers.
• Critics contend that the bill’s benefits do not outweigh the costs.
• Many fear that college students and other U.S. youth that already flock south of the
border to party will now just add additional substances to abuse to the current legal
list, which concerns law enforcement agents in Mexican border towns.
Decriminalization of these drugs will initially increase
demand and push prices higher. The already lucrative
drug trade will attract new entrants into the supply side
and eventually push prices back down. The end result
should be higher drug consumption. The new equilibrium
price cannot be determined.
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1.4
PREVIEW OF COMING ATTRACTIONS:
MACROECONOMICS
To Understand Economic Fluctuations
All economies, including ones that experience a general trend
of rising per capita income, are subject to economic
fluctuations, including periods when the economy shrinks.
To Make Informed Business Decisions
A manager who studies macroeconomics will be better
equipped to understand the complexities of interest rates and
inflation and how they affect the firm.
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1.5
PREVIEW OF COMING ATTRACTIONS:
MICROECONOMICS
• microeconomics
The study of the choices made by
households, firms, and government
and how these choices affect the
markets for goods and services.
Three ways we can use microeconomic analysis are:
To Understand Markets and Predict Changes
One reason for studying microeconomics is to better
understand how markets work and to predict how various
events affect the prices and quantities of products in markets.
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1.5
PREVIEW OF COMING ATTRACTIONS:
MICROECONOMICS
To Make Personal and Managerial Decisions
On the personal level, we use economic analysis to decide
how to spend our time, what career to pursue, and how to
spend and save the money we earn. As workers, we use
economic analysis to decide how to produce goods and
services, how much to produce, and how much to charge for
them.
To Evaluate Public Policies
We can use economic analysis to determine how well the
government performs its roles in the market economy.
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Extra Application 5
THE MAKING OF A ROCKPRENEUR
Entrepreneurs take many forms but all provide a service to the economy. Job creation,
and sometimes industry creation, continues to fuel economic growth. Individuals, allowed
to pursue their own self-interests, will provide benefits to the greater economy much like
Adam Smith wrote over 200 years ago.
• Former Blink 182 guitarist Tom DeLonge’s new company generated more than
$3 million in 2005 sales.
• The company sells designer footwear and optics and has plans to branch
into other clothing lines tied to rock groups and musicians
• Anthony Cardenas, former bass player for Great White, now co-owns a CD
duplication company.
• The forty-year old began playing with technology and coupled that expertise
with the demand by musicians for reasonably priced high quality CD
duplication.
• Founded in 2002, DiskFaktory generated $3.7 million in sales during 2005.
Many of the skills needed to make it in the music business, including creativity and
drive, are transferable to other venues.
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ceteris paribus
marginal change
economics
microeconomics
economic model
natural resources
entrepreneurship
normative analysis
factors of production
physical capital
human capital
positive analysis
labor
scarcity
macroeconomics
variable
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Single Variables
▼ FIGURE 1A.1
Graphs of Single Variables
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Single Variables
 FIGURE 1A.2
Time-Series Graph
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Single Variables
 FIGURE 1A.2 (cont’d.)
Time-Series Graph
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Two Variables
► FIGURE 1A.3
Basic Elements of a Two-Variable Graph
One variable is measured along the
horizontal or x axis, while the other
variable is measured along the vertical
or y axis. The origin is defined as the
intersection of the two axes, where the
values of both variables are zero. The
dashed lines show the values of the
two variables at a particular point.
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Two Variables
► FIGURE 1A.4
Relationship Between Hours Worked
and Income
There is a positive relationship between
work hours and income, so the income
curve is positively sloped. The slope of
the curve is $8: Each additional hour of
work increases income by $8.
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Two Variables
• positive relationship
A relationship in which two variables
move in the same direction.
• negative relationship
A relationship in which two variables
move in opposite directions.
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Computing the Slope
• slope of a curve
The vertical difference between two points (the
rise) divided by the horizontal difference (the run).
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Moving Along the Curve Versus Shifting the Curve
► FIGURE 1A.5
Movement Along a Curve Versus
Shifting the Curve
To draw a curve showing the relationship
between hours worked and income, we fix
the weekly allowance ($40) and the wage
($8 per hour). A change in the hours
worked causes movement along the
curve, for example, from point b to point c.
A change in any other variable shifts the
entire curve. For example, a $50 increase
in the allowance (to $90) shifts the entire
curve upward by $50.
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Negative Relationships
 FIGURE 1A.6
Negative Relationship Between CD Purchases
and Downloaded Songs
There is a negative relationship between the
number of CDs and downloaded songs that a
consumer can afford with a budget of $360. The
slope of the curve is $12: Each additional CD (at
a price of $12 each) decreases the number of
downloadable songs (at $1 each) by 12 songs.
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Nonlinear Relationships
► FIGURE 1A.7
Nonlinear Relationships
(A) Study time There is a positive and
nonlinear relationship between study time
and the grade on an exam. As study time
increases, the exam grade increases at a
decreasing rate. For example, the second
hour of study increased the grade by 4
points (from 6 points to 10 points), but the
ninth hour of study increases the grade
by only 1 point (from 24 points to 25
points).
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USING GRAPHS AND PERCENTAGES
USING GRAPHS
Graphing Nonlinear Relationships
► FIGURE 1A.7 (cont’d.)
Nonlinear Relationships
(B) Production cost There is a positive
and nonlinear relationship between the
quantity of grain produced and total
production cost. As the quantity increases,
the total cost increases at an increasing
rate. For example, to increase production
from 1 ton to 2 tons, production cost
increases by $5 (from $10 to $15) but to
increase the production from 10 to 11 tons,
total cost increases by $25 (from $100 to
$125).
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USING GRAPHS AND PERCENTAGES
COMPUTING PERCENTAGE CHANGES AND USING
EQUATIONS
Computing Percentage Changes
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USING GRAPHS AND PERCENTAGES
COMPUTING PERCENTAGE CHANGES AND USING
EQUATIONS
Using Equations to Compute Missing Values
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negative relationship
positive relationship
slope of a curve
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