Transcript Economics R. Glenn Hubbard, Anthony Patrick O`Brien, 3e

Chapter 1: Economics: Foundations and Models
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
1 of 38
Chapter 1: Economics: Foundations and Models
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
2 of 38
CHAPTER
1
Economics:
Chapter 1: Economics: Foundations and Models
Foundations
and Models
Bill Gates, chairman of
Microsoft, testified
before Congress in
2008 that limiting the
number of foreign
technical workers
allowed into the United
States was resulting in
a “critical shortage of
scientific talent.”
Prepared by:
Fernando Quijano
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
3 of 38
CHAPTER
1
Chapter Outline and
Learning Objectives
Economics:
Foundations
and Models
1.1 Three Key Economic Ideas
Explain these three key economic ideas: People are
rational. People respond to incentives. Optimal
decisions are made at the margin.
1.2 The Economic Problem That Every Society
Must Solve
Chapter 1: Economics: Foundations and Models
Discuss how an economy answers these questions:
What goods and services will be produced? How will
the goods and services be produced? Who will
receive the goods and services produced?
1.3 Economic Models
Understand the role of models in economic analysis.
1.4 Microeconomics and Macroeconomics
Distinguish between microeconomics and
macroeconomics.
APPENDIX: Using Graphs and Formulas
Review the use of graphs and formulas.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
4 of 38
Economics: Foundations and Models
Chapter 1: Economics: Foundations and Models
In this book, we use economics to answer questions such as the
following:
•
How are the prices of goods and services determined?
•
How does pollution affect the economy, and how should
government policy deal with these effects?
•
Why do firms engage in international trade, and how do
government policies affect international trade?
•
Why does government control the prices of some goods
and services, and what are the effects of those controls?
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
5 of 38
Economics: Foundations and Models
4.1
Chapter 1: Economics: Foundations and Models
Scarcity A situation in which unlimited wants
exceed the limited resources available to fulfill
those wants.
Economics The study of the choices people
make to attain their goals, given their scarce
resources.
Economic model A simplified version of
reality used to analyze real-world economic
situations.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
6 of 38
1.1 LEARNING OBJECTIVE
Three Key Economic Ideas
Explain these three key economic ideas:
People are rational. People respond to
incentives. Optimal decisions are made
at the margin.
Market A group of buyers and sellers of a good
or service and the institution or arrangement by
which they come together to trade.
Chapter 1: Economics: Foundations and Models
Throughout this book, as we study how people make choices
and interact in markets, we will return to three important ideas:
1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.
Marginal analysis Analysis that
involves comparing marginal
benefits and marginal costs.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
7 of 38
1.1 LEARNING OBJECTIVE
Chapter 1: Economics: Foundations and Models
Making Will Women Have More
the Babies if the Government
Connection Pays Them To?
Explain these three key economic ideas:
People are rational. People respond to
incentives. Optimal decisions are made
at the margin.
More than 45 countries in
Europe and Asia have taken
steps to try to raise their
birthrates. These policies
suggest that people may
respond to economic
incentives even when
making the very personal
decision of how many
children to have.
YOUR TURN: Test your understanding by doing related problem 1.4 at the end of
this chapter.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
8 of 38
Making
the
Connection Total Fertility Rate at Taiwan
Chapter 1: Economics: Foundations and Models
總生育率係指平均每位婦女一生中所生育之子女數(The average
number of children that would be born to a woman over her lifetime)
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
9 of 38
The Economic Problem That
Every Society Must Solve
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
Trade-off The idea that because of scarcity,
producing more of one good or service means
producing less of another good or service.
Chapter 1: Economics: Foundations and Models
Opportunity cost The highest-valued
alternative that must be given up to engage in
an activity.
Trade-offs force society to make choices when answering
the following three fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
10 of 38
The Economic Problem That
Every Society Must Solve
Chapter 1: Economics: Foundations and Models
Centrally Planned Economies
versus Market Economies
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
Centrally planned economy An
economy in which the government
decides how economic resources will
be allocated.
Market economy An economy in
which the decisions of households
and firms interacting in markets
allocate economic resources.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
11 of 38
The Economic Problem That
Every Society Must Solve
Chapter 1: Economics: Foundations and Models
The Modern “Mixed” Economy
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
Mixed economy An economy in
which most economic decisions result
from the interaction of buyers and
sellers in markets but in which the
government plays a significant role in
the allocation of resources.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
12 of 38
The Economic Problem That
Every Society Must Solve
Efficiency and Equity
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
Chapter 1: Economics: Foundations and Models
Productive efficiency A situation in
which a good or service is produced at
the lowest possible cost.
Allocative efficiency A state of the
economy in which production is in
accordance with consumer
preferences; in particular, every good
or service is produced up to the point
where the last unit provides a
marginal benefit to society equal to
the marginal cost of producing it.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
13 of 38
The Economic Problem That
Every Society Must Solve
Efficiency and Equity
1.2 LEARNING OBJECTIVE
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
Chapter 1: Economics: Foundations and Models
Voluntary exchange A situation that
occurs in markets when both the
buyer and seller of a product are
made better off by the transaction.
Equity The fair distribution of
economic benefits.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
14 of 38
1.3 LEARNING OBJECTIVE
Economic Models
Understand the role of models
in economic analysis.
To develop a model, economists generally follow these steps:
1. Decide on the assumptions to use in developing the model.
2. Formulate a testable hypothesis.
Chapter 1: Economics: Foundations and Models
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain well the economic
data.
5. Retain the revised model to help answer similar economic
questions in the future.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
15 of 38
1.3 LEARNING OBJECTIVE
Economic Models
Understand the role of models
in economic analysis.
The Role of Assumptions in Economic Models
Economic models make behavioral
assumptions about the motives of consumers
and firms.
Chapter 1: Economics: Foundations and Models
Forming and Testing Hypotheses in Economic Models
Economic variable Something measurable
that can have different values, such as the
wages of software programmers.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
16 of 38
1.3 LEARNING OBJECTIVE
Economic Models
Understand the role of models
in economic analysis.
Normative and Positive Analysis
Chapter 1: Economics: Foundations and Models
Positive analysis Analysis
concerned with what is.
Normative analysis Analysis
concerned with what ought to be.
Don’t Let This Happen to YOU!
Don’t Confuse Positive Analysis with Normative Analysis
YOUR TURN: Test your understanding by doing related problem 3.9 at the end of this
chapter.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
17 of 38
1.3 LEARNING OBJECTIVE
Chapter 1: Economics: Foundations and Models
Making Should the Host Governments
the Protect the Migrant Workers?
Connection
Understand the role of models
in economic analysis.
Like many other policy debates, the
debate over the immigration of skilled
workers has both positive and
normative elements.
The debate over the immigration of
skilled workers demonstrates that
economics is often at the center of
important policy issues.
Should host governments protect migrant
workers?
YOUR TURN: Test your understanding by doing related problem 3.7 at the end of this chapter.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
18 of 38
1.3 LEARNING OBJECTIVE
Chapter 1: Economics: Foundations and Models
the role of models
Making The Protection of Migrant Workers Understand
in economic analysis.
the of Taiwan Government
Connection
▪引進方面：如勞委會推動「仲介評
鑑制度」、 建立「直接聘僱」機
制…等。
▪聘僱方面：行政院推動「營造業人
力供需機制」、外國人受聘僱適用
從事就業服務法第四十六條。
▪管理方面：依「雇主聘僱外國人許
可及管理辦法」之規定。
▪申訴方面：外勞24小時諮詢保護專
線、諮詢服務中心與服務站…等。
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
19 of 38
AN INSIDE
LOOK
Chapter 1: Economics: Foundations and Models
at Policy
>> Do Immigrants Displace or
Complement Domestic Workers?
Figure 1 Foreign-Born Scientists and Engineers as
a Percentage of All Scientists and Engineers in the
United States
Figure 2 Foreign Recipients of U.S. Science
and Engineering Doctorates, 1985–2005
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
20 of 38
AN INSIDE
LOOK
at Policy
>> Foreign Recipients of Taiwan .
Chapter 1: Economics: Foundations and Models
Science and Engineering Doctorates, 2005
2007年外籍專業人員國籍分佈
39.12
日本
3.37
菲律賓
4.13
南韓
亞洲地區 69.33
2.92
新加坡
2.8
香港
亞洲其他 16.99
10.74
美國
3.02
美洲地區 15.37 加拿大
美洲其他 1.61
2.64
英國
2.86
德國
歐洲地區 12.39
2.33
法國
歐洲其他 4.57
澳大利亞 1.81
0.43
紐西蘭
2.9
其他地區
0.43
南非
他洲其他 0.23
總計
100
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
21 of 38
1.3 LEARNING OBJECTIVE
Economic Models
Understand the role of models
in economic analysis.
Chapter 1: Economics: Foundations and Models
Economics as a Social Science
Because economics studies the actions of
individuals, it is a social science. Economics is
therefore similar to other social science
disciplines, such as psychology, political
science, and sociology. As a social science,
economics considers human behavior—
particularly decision-making behavior—in
every context, not just in the context of
business.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
22 of 38
Chapter 1: Economics: Foundations and Models
Microeconomics and
Macroeconomics
1.4 LEARNING OBJECTIVE
Distinguish between microeconomics
and macroeconomics.
Microeconomics The study of how
households and firms make choices,
how they interact in markets, and how
the government attempts to influence
their choices.
Macroeconomics The study of the
economy as a whole, including topics
such as inflation, unemployment, and
economic growth.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
23 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Using Graphs and Formulas
Chapter 1: Economics: Foundations and Models
A graph is like a street
map—it is a simplified
version of reality.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
24 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of One Variable
FIGURE 1A-1
Chapter 1: Economics: Foundations and Models
Bar Graphs and Pie Charts
Values for an economic variable are often displayed as a bar graph or as a pie chart.
In this case, panel (a) shows market share data for the U.S. automobile industry as a bar graph, where the
market share of each group of firms is represented by the height of its bar.
Panel (b) displays the same information as a pie chart, with the market share of each group of firms
represented by the size of its slice of the pie.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
25 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of One Variable
FIGURE 1A-2
Chapter 1: Economics: Foundations and Models
Time-Series Graphs
Both panels present time-series graphs of Ford Motor Company’s worldwide sales during each year from
2001 to 2008. Panel (a) has a truncated scale on the vertical axis, and panel (b) does not.
As a result, the fluctuations in Ford’s sales appear smaller in panel (b) than in panel (a).
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
26 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
FIGURE 1A-3
Chapter 1: Economics: Foundations and Models
Plotting Price and Quantity
Points in a Graph
The figure shows a twodimensional grid on which we
measure the price of pizza along
the vertical axis (or y-axis) and
the quantity of pizza sold per
week along the horizontal axis (or
x-axis).
Each point on the grid represents
one of the price and quantity
combinations listed in the table.
By connecting the points with a
line, we can better illustrate the
relationship between the two
variables.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
27 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Slopes of Lines
FIGURE 1A-4
Chapter 1: Economics: Foundations and Models
Calculating the Slope
of a Line
We can calculate the slope
of a line as the change in
the value of the variable on
the y-axis divided by the
change in the value of the
variable on the x-axis.
Because the slope of a
straight line is constant, we
can use any two points in
the figure to calculate the
slope of the line.
For example, when the price
of pizza decreases from $14
to $12, the quantity of pizza
demanded increases from
55 per week to 65 per week.
So, the slope of this line
equals –2 divided by 10,
or –0.2.
Slope 
Slope 
Change in value on the vertical axis

Δy
Change in value on the horizontal axis
Δx
($12  $14)
2
Δ Price of pizza
Δ Quantity of pizza

Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
(65  55)


Rise
Run
  0.2
10
28 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Taking into Account More Than Two Variables on a Graph
FIGURE 1A-5
Chapter 1: Economics: Foundations and Models
Showing Three Variables on a
Graph
The demand curve for pizza shows the
relationship between the price of pizzas
and the quantity of pizzas demanded,
holding constant other factors that
might affect the willingness of
consumers to buy pizza.
If the price of pizza is $14 (point A), an
increase in the price of hamburgers
from $1.50 to $2.00 increases the
quantity of pizzas demanded from 55 to
60 per week (point B) and shifts us to
Demand curve2.
Or, if we start on Demand curve1 and
the price of pizza is $12 (point C), a
decrease in the price of hamburgers
from $1.50 to $1.00 decreases the
quantity of pizza demanded from 65 to
60 per week (point D) and shifts us to
Demand curve3.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
29 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Positive and Negative Relationships
FIGURE 1A-6
Chapter 1: Economics: Foundations and Models
Graphing the Positive
Relationship between
Income and Consumption
In a positive relationship
between two economic
variables, as one variable
increases, the other variable
also increases. This figure
shows the positive relationship
between disposable personal
income and consumption
spending.
As disposable personal income
in the United States has
increased, so has consumption
spending.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
30 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Determining Cause and Effect
FIGURE 1A-7
Chapter 1: Economics: Foundations and Models
Determining Cause and Effect
Using graphs to draw conclusions about cause and
effect can be hazardous. In panel (a), we see that
there are fewer leaves on the trees in a neighborhood
when many homes have fires burning in their fire
places. We cannot draw the conclusion that the fires
cause the leaves to fall because we have an omitted
variable—the season of the year.
In panel (b), we see that more lawn mowers are
used in a neighborhood during times when the
grass grows rapidly and fewer lawn mowers are
used when the grass grows slowly. Concluding that
using lawn mowers causes the grass to grow faster
would be making the error of reverse causality.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
31 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Are Graphs of Economic Relationships Always Straight Lines?
Chapter 1: Economics: Foundations and Models
The graphs of relationships between two
economic variables that we have drawn so
far have been straight lines.
The relationship between two variables is
linear when it can be represented by a
straight line.
Few economic relationships are actually
linear.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
32 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Slopes of Nonlinear Curves
FIGURE 1A-8
Chapter 1: Economics: Foundations and Models
The Slope of a Nonlinear Curve
The relationship between the quantity
of iPods produced and the total cost of
production is curved rather than linear.
In panel (a), in moving from point A to
point B, the quantity produced
increases by 1 million iPods, while the
total cost of production increases by
$50 million.
Farther up the curve, as we move from
point C to point D, the change in
quantity is the same—1 million iPods—
but the change in the total cost of
production is now much larger: $250
million.
Because the change in the y variable
has increased, while the change in the
x variable has remained the same, we
know that the slope has increased.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
33 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Graphs of Two Variables
Slopes of Nonlinear Curves
FIGURE 1A-8 (continued)
The Slope of a Nonlinear Curve
Chapter 1: Economics: Foundations and Models
In panel (b), we measure the slope of
the curve at a particular point by the
slope of the tangent line. The slope of
the tangent line at point B is 75, and
the slope of the tangent line at point C
is 150.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
34 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Formulas
Formula for a Percentage Change
One important formula is the percentage change.
Chapter 1: Economics: Foundations and Models
The percentage change is the change in some economic
variable, usually from one period to the next, expressed as a
percentage.
 GDP2008  GDP2007 

 x 100
GDP2007


Percentage change  (
Value in the second period - Value in the first period
) x 100
Value in the first period
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
35 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Formulas
Formulas for the Areas of a Rectangle and a Triangle
Area of a rectangle  base x height
FIGURE 1A-9
Chapter 1: Economics: Foundations and Models
Showing a Firm’s Total
Revenue on a Graph
The area of a rectangle is
equal to its base multiplied by
its height.
Total revenue is equal to
quantity multiplied by price.
Here, total revenue is equal
to the quantity of 125,000
bottles times the price of
$2.00 per bottle, or $250,000.
The area of the greenshaded rectangle shows the
firm’s total revenue.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
36 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Formulas
Formulas for the Areas of a Rectangle and a Triangle
Area of a triangle  1/2 x base x height
FIGURE 1A-10
Chapter 1: Economics: Foundations and Models
The Area of a Triangle
The area of a triangle is equal
to 1⁄2 multiplied by its base
multiplied by its height.
The area of the blue-shaded
triangle has a base equal to
150,000 – 125,000, or 25,000,
and a height equal to $2.00 –
$1.50, or $0.50.
Therefore, its area equals 1⁄2
× 25,000 × $0.50, or $6,250.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
37 of 38
LEARNING OBJECTIVE
Appendix
Review the use of graphs
and formulas.
Formulas
Summary of Using Formulas
Whenever you must use a formula, you should follow these
steps:
Chapter 1: Economics: Foundations and Models
1. Make sure you understand the economic concept
that the formula represents.
2. Make sure you are using the correct formula for the
problem you are solving.
3. Make sure that the number you calculate using the
formula is economically reasonable. For example, if
you are using a formula to calculate a firm’s revenue
and your answer is a negative number, you know you
made a mistake somewhere.
Copyright © 2010 Pearson Education, Inc. · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
38 of 38