Lecture 1. What is Economics? Economics, Scarcity and Choices Microeconomics and Macroeconomics...
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Transcript of Lecture 1. What is Economics? Economics, Scarcity and Choices Microeconomics and Macroeconomics...
Lecture 1. What is Economics?
• Economics, Scarcity and Choices
• Microeconomics and Macroeconomics
• Positive Economics and Normative Economics
• Why study Economics
• The method of Economics
Economics, Scarcity, and Choice
• A good definition of economics– Study of choice under conditions of
scarcity
• Scarcity– Situation in which the amount of
something available is insufficient to satisfy the desire for it (Human beings have unlimited wants and needs in general)
Scarcity and Individual Choice
• Two basic limitations for individuals– Scarce time– Scarce spending power
• Limitations force each of us to make choices• The scarcity of resources—and the choices it
forces us to make—is the source of all of the problems studied in economics
• Examples: Dating & Getting A in this class
Microeconomics
• Study of behavior of individual households, firms, and governments
• Choices they make• Interaction in specific markets
• Focuses on individual parts of an economy, rather than the whole
• Examples: How many management trainee jobs will open up for college
graduates? How would U.S. phone companies be affected by a tax on imported
cell phones?
Macroeconomics
• Study of the economy as a whole• Focuses on big picture and ignores fine
details• Examples: Instead of focusing on the production of carrots, it looks at GDP. Instead of focusing on the employment of management trainees, it
considers total employment (or unemployment rate) in the economy. Instead of asking why credit card loans carry high interest rate than
home mortgage loans, it asks what makes interest rates in general rise or fall.
Why Economists Disagree
• Two economists asked whether the States should eliminate all government-imposed barriers to trading with the rest of the world. The first economist says, ‘Yes.’ but the other says, ‘No’.– The two economists may disagree about what will happen if
trade barriers were eliminated. In this case, the disagreement is positive.
– Both economists might agree that opening up international trade would benefit most Americans, but harm some of them.
• The first economist might put more emphasis on benefits to the overall economy
• The second economist might put more emphasis on preventing harm to a particular group.
In this case, the disagreement is normative.
Positive Economics
• Study of how economy works
• Accuracy of positive statements can be tested and quantified.
• Examples: An decrease in the personal income tax will increase the growth rate of the economy.
Normative Economics
• Use Value Judgment to study what should be
• Normative statements cannot be proved or disproved by the facts alone
• Example: The goal of any country’s economic policy should be to increase the well-being of its poorest, most vulnerable citizens.
The Methods of Economics
• Model. What is a model?– A Model is an Abstract representation of
reality.– A Model should be as simple as possible to
accomplish its purpose.– A model should contain the right amount of
details.
Assumptions and Conclusions
• Simplifying assumptions• Way of making a model simpler without affecting
any of its important conclusions• Example: When we study the behavior of
consumers, we assume that there are only two goods to choose from.
• Critical assumptions• Affect conclusions of a model in important ways• Example: When we study the behavior of business
firms, we assume that firms try to earn the highest possible profit.
Why Study Economics
• To Understand the World Better
• To Achieve Social Change
• To Help prepare for Other Careers
• To become an Economist– Median annual wage and salary earnings of
economists were $72,780 in May 2004. Check out http://stats.bls.gov/oco/ocos055.htm
How to Study Economics
• Economics must be studied actively, not passively
• What does active studying mean?– Closing the book periodically and reproducing what
you have learned– Reading with a pencil in your hand and a blank sheet
of paper in front of you– Listing the steps in each logical argument– Retracing the cause-and-effect steps in each model– Drawing the graphs that represent the model– Thinking about the basic principles of economics and
how they relate to what you are learning
Appendix: Tables and Graphs
Advertising ($1,000s per Month)
Sales ($1,000s per Month)
2 46 3 49 6 58 7 61
11 73 12 76
Table A.1 Advertising and Sales at Len & Harry’s
Appendix: Tables and Graphs
Advertising ($1,000 per Month)
Sales ($1,000 per
Month
1
A
2 3 4 5 6 7 8 9 10 11 12
404649
58
76
B
CD
EF
61
73
Measuring the Slope of a Curve
1
A
2 3 4 5 6 7 8 9
40
43
46
49
54
B
CD53
H
Advertising ($1,000 per Month)
Sales ($1,000 per
Month 2. is the slope of the straight line tangent to the curve at point B.
3. Along the tangent line, when advertising increases from 0 to 3 units (ΔX = 3)
1. The slope of this curve at point B . . .
4. sales increase from 43 to 49 units (ΔY= 6). So the curve's slope at point B is = 6/3 = 2.
Shifts in the Graph of Advertising and Sales
6
58
C''
C'
C
July
September
June
64
Advertising ($1,000 per Month)
Sales ($1,000 per
Month