Chapter 1 What is Economics About
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Transcript of Chapter 1 What is Economics About
Chapter 1
What is Economics About
Chapter 1
What is Economics About
Appendix A
Working with Diagrams
Types of Relationships between variables
• Direct– Positive
• Inverse– Negative
• No Relationship– Variables are independent
Two-Variable Diagram Representing an Inverse Relationship
Two-Variable Diagram Representing an Inverse Relationship
a
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18
16
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12
0
Price of CDs ($)
Quantity Demanded of CDs100 120 140 160 180
The variables priceand quantitydemanded areinversely related.
Demand for CDs
A
B
C
D
E
Two-Variable Diagram Representing a Direct Relationship
Two-Variable Diagram Representing a Direct Relationship
a
360
300
240
180
120
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Consumption ($)
Income ($)
100 200 300 400 500
The variablesincome andconsumption aredirectly related.
A
B
C
D
E
F
Two Diagrams Representing Independence between Two
Variables
Two Diagrams Representing Independence between Two
Variables
a
(b)(a)
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010 20 30 40
A B C D
Y
X
Variables X and Y areindependent (neither variable
is related to the other).
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010 20 30 40
A
B
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D
Y
X
Variables X and Yare independent.
Slope
• Used to see how a variable changes in response to another variable changing
horizontal
vertical
X
YSlope
To calculate slope
• Find two points on any straight line
21
21
12
12
XX
YYor
XX
YY
What sign do you expect the slope to have?
• Direct relationship– Positive
• Inverse relationship– Negative
• No Relationship– 0 or infinity
Calculating Slopes Calculating Slopes
a
YX
= +10+5
= +2Slope =Slope=Y
= = –1–10
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010 20 30 40
(a)
A
B
C
D
X
Y
Y
X
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010 20
(b)
A
B
C
D
X
Y
15
(negative slope)X
(positive
Calculating SlopesCalculating Slopes
a
010
+100
Slope =Y
= = `X(infinite slope)
A
B
C
D
Slope =Y
= = 0X(zero slope)
(d)(c)
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010 20 30 40
A B C D
Y
X
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010 20 30 40
Y
X
The 45 Line The 45 Line
a
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X
A
45
Line45
0
Homework• Chapter 1
–Questions 4, 5, 7, 8
• Chapter 1 Appendix–Questions 6, 7, 9
In-class exercise 1
Do we understand Chapter 1?
Appendix B
Should you major in Economics??
Five myths about economics and an economics major
• Economics is all mathematics and statistics• Economics is only about inflation, interest rates,
unemployment, and other such things• People become economists only if they want to
“make money”• Economics wasn’t very interesting in high
school, so it isn’t going to be interesting now• Economics is a lot like business, but business is
more marketable
Chapter 2 Economic Activities:
Producing and Trading
Chapter 2 Economic Activities:
Producing and Trading
Efficiency
• Efficiency of Production is goal
• If a firm is producing the max possible given available resources and technology
Production Possibility Frontier(PPF)
• Shows all possible combinations of goods for a particular economy at a particular point in time, given its resources and technology constraints
Production Possibilities Frontier for Grades
Production Possibilities Frontier for Grades
a
(a)
A
B
C
D
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F
G
POINT INPART (b)
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GRADE INECONOMICS
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HOURS SPENTSTUDYING
ECONOMICS
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65
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GRADE INSOCIOLOGY
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HOURS SPENTSTUDYING
SOCIOLOGY
Production Possibilities Frontier for Grades Production Possibilities Frontier for Grades
a
Grade in Soc io logy
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6065 70 75 80 90
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B
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F
Grade in Economics
ProductionPos s ibilities
Frontier (PPF)
Part (b)
60 85
G
H
(Soc . 90, Econ. 60)
(Soc . 85, Econ. 65)
Where are we on the PPF?
• Can we be on the PPF?– Yes!– efficient
• Can we be under the PPF?– Yes!– Inefficient
• Can we be over the PPF?– NO
Two types of Production Possibility Frontiers
Constant Opportunity Costs
• STRAIGHT LINE
• DOWNWARD SLOPED (inverse relationship)
• 1 to 1 relationship (slope constant)
Production Possibilities Frontier (Constant Opportunity Costs)
Production Possibilities Frontier (Constant Opportunity Costs)
a
COMBINATIONCOMPUTERS AND TELEVISION SETS
(number of units per year)POINT INPANEL (b)
A
B
C
D
E
F
A
B
C
D
E
F
50,000
40,000
30,000
20,000
10,000
0
and
and
and
and
and
and
0
10,000
20,000
30,000
40,000
50,000
Part (a)
Production Possibilities Frontier (Constant Opportunity Costs)
Production Possibilities Frontier (Constant Opportunity Costs)
a
Co mpute rs (thous ands per ye ar)
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30
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10
0 10 20 30 40 50
A
B
C
D
E
F
Tele vis io n Sets (tho us ands pe r year)
A s traight-line PPFillus trate s cons tantopportunity c os ts .
Part (b)
Second Type of PPF
Changing Opportunity Costs
• BOWED OUT PPF
• Real world PPF
• Changing slope with every point
Production Possibilities Frontier (Changing Opportunity Costs)
Production Possibilities Frontier (Changing Opportunity Costs)
a
COMBINATIONCOMPUTERS AND TELEVISION SETS
(number of units pe r year)POINT IN
PANEL (b)
A
B
C
D
A
B
C
D
50,000
40,000
25,000
0
and
and
and
and
0
20,000
40,000
60,000
Part (a)
Production Possibilities
Frontier (Changing
Opportunity Costs)
Production Possibilities
Frontier (Changing
Opportunity Costs)
a
Computers (thous ands per year)
50
40
30
20
10
0 10 20 30 40 50
Televis ion Sets (thous ands per year)
Part (b)
60
B
C
A
D
25
A bowed outward
(concave) PPF illus trates
increas ing opportunity
cos ts .
Law of Increasing Opportunity Costs
• Goes along with CHANGING OPPORTUNITY COSTS
• As more of a good is produced the opportunity cost to produce that good increases.
A Summary Statement about Increasing
Opportunity Costs and a Production
Possibilities Frontier That Is Bowed
Outward (Concave Downward)
A Summary Statement about Increasing
Opportunity Costs and a Production
Possibilities Frontier That Is Bowed
Outward (Concave Downward)
a
} 5
60 70 110 120
30
50
B
C
A
D
Hous es
Good X
20
10 10
0
95100
Economic Concepts illustrated by PPF
• Scarcity
• Choice
• Opportunity Costs
• Law of Increasing Opportunity Costs