A Lecture Presentation in PowerPoint

to accompany

Prepared by Alanna Holowinsky, Red River College

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A Lecture Presentation in PowerPoint

to accompany

Exploring Economics
by Robert L. Sexton, Peter Fortura, and Colin C. Kovacs

Copyright 2010 Nelson Education Limited .

Chapter 1 The Role and Method of Economics

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Chapter 1
1.1 Economics: A Brief Introduction 1.2 Economic Theory 1.3 Scarcity 1.4 Opportunity Cost 1.5 Marginal Thinking 1.6 Incentives Matter 1.7 Specialization and Trade 1.8 Market Prices Coordinate Economic Activity
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1.1 Economics: A Brief Introduction

Why Study Economics?

develops a disciplined method of thinking provides problem-solving tools for both personal and professional life sheds light on many social issues such as education, discrimination, crime, and unemployment

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1.1 Economics: A Brief Introduction

What is Economics?

economics is the study of the allocation of our limited resources to satisfy our unlimited wants. Resources: - inputs used to produce goods and services.

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1.1 Economics: A Brief Introduction

What is Scarcity?

scarcity means that our wants exceed our limited resources. The Economic Problem: - scarcity forces us to make choices - choices are costly because we must give up other opportunities that we value
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1.1 Economics: A Brief Introduction

Macroeconomics:

the study of the aggregate, or total economy. looks at economic problems as they influence the whole of society includes topics such as inflation, business cycles, unemployment, and economic growth.

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1.1 Economics: A Brief Introduction

Microeconomics:

deals with the smaller units within the economy. attempts to understand the decision making behaviour of firms and households and their interaction in markets for particular goods or services.

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1.1 Economics: A Brief Introduction

Microeconomics looks at the trees;

Macroeconomics looks at the forest.

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1.2 Economic Theory

Economic Theories:

statements used to explain and predict behaviour in the real world. economists focus on the most important parts of a problem. like maps: show most important information, exclude minor details

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1.2 Economic Theory

What Is a Hypothesis?

Hypothesis: a testable proposition. in economics: a testable proposition about how people will behave or react to a change in economic circumstances

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1.2 Economic Theory

What Is a Hypothesis?

Empirical analysis uses data to test whether a hypothesis is valid. if hypothesis is consistent with real-world observations, it is accepted as theory difficult because controlled experimentation is seldom possible in economics

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1.2 Economic Theory

What Is Ceteris Paribus?

Latin for holding everything else constant. means isolating a variable to assess its effect

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1.2 Economic Theory

Example of Ceteris Paribus:

Hypothesis: if I study harder, I will perform better on a test Other variables can affect outcome: - slept in on day of exam - studied the wrong material Hypothesis true if hold these other variables constant
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1.2 Economic Theory

Correlation vs Causation:

Correlation: events that usually occur

together - icy roads, reduced speeds, more accidents

Causation: one event causes another event

to occur - reduced speeds do not cause more accidents; icy roads do
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1.2 Economic Theory

Fallacy of Composition:
- incorrect view that what is true for the
individual is also true for the group - for example, standing up at a concert to see better only works if others do not do the same thing.

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1.2 Economic Theory

Positive Analysis:
- an objective, testable statement - average income is $30,000

Normative Analysis:
- a subjective, non-testable item about what should be - incomes should be more equally distributed
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1.2 Economic Theory

Why Do Economists Disagree?

disagreement is common in most disciplines. the majority of disagreements in economics stem from normative issues.

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1.3 Scarcity
Scarcity:

exists when human wants exceed available resources the scarce resources used in the production of goods and services are: - labour - land - capital - entrepreneurship
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1.3 Scarcity
Labour

physical and mental effort expended by people in the production of goods and services. all natural resources used in the production of goods and services

Land

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1.3 Scarcity
Capital

the equipment and structures used to produce goods and services. buildings, tools, machines and factories. includes human capital: the productive knowledge and skill people receive from education and training.

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1.3 Scarcity
Entrepreneurs

combine labour, land and capital to produce goods and services. decide what and how to produce. look for ways to improve production techniques, create new products. take risks, driven by the chance to make profits.
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1.3 Scarcity
Goods

items that we value or desire.

Services

intangible acts for which people are willing to pay.

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1.4 Opportunity Cost

Opportunity Cost:

the value of the best forgone alternative that was not chosen. scarcity forces us to make choices to get more of anything that is desirable, you must accept less of something else.

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1.5 Marginal Thinking

Marginal Thinking:

focuses on marginal, or additional, choices. marginal choices involve the effects of adding to or subtracting from the current situation. not whether to eat, sleep, or study, but how much of each

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1.5 Marginal Thinking

The Rule of Rational Choice:

individuals will only do something if expected marginal benefits are greater than expected marginal costs E(MB) > E(MC)

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1.5 Marginal Thinking

How Much Pollution?

must weigh expected marginal benefits of a

cleaner environment against the expected marginal costs of a cleaner environment zero pollution levels would be too costly in terms of what we would have to give up - all forms of travel - grow your own food, etc.
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1.6 Incentives Matter

People Respond to Incentives:

people often respond to incentives in predictable ways. they react to changes in expected marginal benefits and expected marginal costs economists use this information to predict what will happen when the benefits and costs of any choice are changed

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1.6 Incentives Matter

People Respond to Incentives:

if the benefits of an activity, like crime, rise and/or the costs fall, economists expect the amount of that activity to rise. if the benefits of an activity fall and/or if the costs rise, economists expect the amount of that activity to fall.

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1.6 Incentives Matter

Positive Incentives

encourage consumption or production, for example a subsidy.

Negative Incentives

discourage consumption or production, for example a tax.

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A subsidy on hybrid electric vehicles (HEVs) would be a positive incentive that would encourage greater production and consumption of these vehicles.
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1.7 Specialization and Trade

Specialization

concentrating on the production of one, or a few, goods.

Comparative Advantage

producing a good or service at a lower opportunity cost than other producers.

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1.7 Specialization and Trade

Specialization:

we all specialize to some extent: fix computers, sell cars, cut hair rely on others to produce most of the goods and services we want. the income earned is used to buy goods and services from others (trade).

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1.7 Specialization and Trade

Advantages of Specialization:

acquire greater skill through repetition. avoid wasted time in shifting from one task to another. do the types of work for which each person is best suited. promote the use of specialized equipment.

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1.7 Specialization and Trade

Advantages of Trade:

increases wealth by making both parties better off (or they wouldn't trade). allows a person or nation to specialize in products that it produces better and trade for products that others produce better. for example, Canada produces wheat, Brazil produces coffee, then they trade
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1.8 Market Prices Coordinate Activity

Market System:

one method of allocating resources among competing uses buyers and sellers indicate their wants through action and inaction. prices communicate information about the relative value of resources. results in shift of resources from less valued to more valued uses
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1.8 Market Prices Coordinate Activity

Price Controls:

government-mandated minimum or maximum prices. strip the market price of its meaning for both consumers and suppliers.

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1.8 Market Prices Coordinate Activity

Market Failure:

when the economy fails to allocate resources efficiently on its own. the economy produces too little (scientific research) or too much (pollution). government can improve society's well-being by intervening.

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1.8 Market Prices Coordinate Activity

Market Failure:

market economy does not always communicate accurately. market power, lack of competition can distort market prices. these situations can also lead to government intervention.

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1.8 Market Prices Coordinate Activity

Inequitable Distribution:

no guarantee that a market economy will provide everyone with adequate food, shelter and health care. inequities can cause strong disagreements: what is fair for one person may seem highly unfair to someone else.

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