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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. 1 of 38
Chapter 1: Economics: Foundations and Models
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CHAPTER 1
Economics:
Foundations
and Models
Chapter 1: Economics: Foundations and Models
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CHAPTER 1
Chapter Outline and
Learning Objectives
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Economics: Foundations and Models
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Economics: Foundations and Models
4.1
resources.
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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.
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1.1 LEARNING OBJECTIVE
Making Will Women Have More Explain these three key economic ideas:
People are rational. People respond to
the Babies if the Government incentives. Optimal decisions are made
at the margin.
Connection Pays Them To?
YOUR TURN: Test your understanding by doing related problem 1.7 at the end of
this chapter.
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1.1 LEARNING OBJECTIVE
Explain these three key economic ideas:
Solved Problem 1-1 People are rational. People respond to
incentives. Optimal decisions are made
Apple Computer Makes a at the margin.
YOUR TURN: For more practice, do related problems 1.4, 1.5, and 1.6 at the end
of this chapter.
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1.2 LEARNING OBJECTIVE
The Economic Problem That Discuss how an economy answers these
Every Society Must Solve questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?
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1.2 LEARNING OBJECTIVE
The Economic Problem That Discuss how an economy answers these
Every Society Must Solve questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
Centrally Planned Economies the goods and services produced?
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1.2 LEARNING OBJECTIVE
The Economic Problem That Discuss how an economy answers these
Every Society Must Solve questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
The Modern “Mixed” Economy the goods and services produced?
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1.2 LEARNING OBJECTIVE
The Economic Problem That Discuss how an economy answers these
Every Society Must Solve questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
Efficiency and Equity the goods and services produced?
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1.2 LEARNING OBJECTIVE
The Economic Problem That Discuss how an economy answers these
Every Society Must Solve questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
Efficiency and Equity the goods and services produced?
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1.3 LEARNING OBJECTIVE
Economic Models Understand the role of models
in economic analysis.
data.
5. Retain the revised model to help answer similar economic
questions in the future.
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1.3 LEARNING OBJECTIVE
Economic Models Understand the role of models
in economic analysis.
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1.3 LEARNING OBJECTIVE
Economic Models Understand the role of models
in economic analysis.
YOUR TURN: Test your understanding by doing related problem 3.7 at the end of this
chapter.
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1.3 LEARNING OBJECTIVE
Economic Models Understand the role of models
in economic analysis.
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1.4 LEARNING OBJECTIVE
Microeconomics and Distinguish between microeconomics
Macroeconomics and macroeconomics.
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1.5 LEARNING OBJECTIVE
A Preview of Important Become familiar with important
economic terms.
Economic Terms
• Entrepreneur • Profit
• Innovation • Household
• Technology • Factors of production or
• Firm, company, or economic resources
business • Capital
Chapter 1: Economics: Foundations and Models
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AN INSIDE LOOK
at Policy >> Do Immigrants Displace or
Complement Domestic Workers?
Chapter 1: Economics: Foundations and Models
Figure 1 Foreign-Born Scientists and Engineers as Figure 2 Foreign Recipients of U.S. Science
a Percentage of All Scientists and Engineers in the and Engineering Doctorates, 1985–2005
United States
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KEY TERMS
Macroeconomics Scarcity
Marginal analysis Trade-off
Market Voluntary exchange
Market economy
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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).
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
Using graphs to draw conclusions about cause and In panel (b), we see that more lawn mowers are
effect can be hazardous. In panel (a), we see that used in a neighborhood during times when the
there are fewer leaves on the trees in a neighborhood grass grows rapidly and fewer lawn mowers are
when many homes have fires burning in their fire used when the grass grows slowly. Concluding that
places. We cannot draw the conclusion that the fires using lawn mowers causes the grass to grow faster
cause the leaves to fall because we have an omitted would be making the error of reverse causality.
variable—the season of the year.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
$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.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
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LEARNING OBJECTIVE
Appendix Review the use of graphs
and formulas.
Formulas
Formula for a Percentage Change
One important formula is the percentage change.
GDP2008 GDP2007
x 100
Chapter 1: Economics: Foundations and Models
GDP2007
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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
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
Chapter 1: Economics: Foundations and Models
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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
The Area of a Triangle
The area of a triangle is equal
to 1⁄2 multiplied by its base
multiplied by its height.
Chapter 1: Economics: Foundations and Models
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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:
2. Make sure you are using the correct formula for the
problem you are solving.
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