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

20

18

16

14

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

60

0

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)

40

30

20

10

010 20 30 40

A B C D

Y

X

Variables X and Y areindependent (neither variable

is related to the other).

40

30

20

10

010 20 30 40

A

B

C

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

10

40

30

20

10

010 20 30 40

(a)

A

B

C

D

X

Y

Y

X

40

30

20

10

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)

40

30

20

10

010 20 30 40

A B C D

Y

X

40

30

20

10

010 20 30 40

Y

X

The 45 Line The 45 Line

a

20

20

Y

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

E

F

G

POINT INPART (b)

60

65

70

75

80

85

90

GRADE INECONOMICS

0

1

2

3

4

5

6

HOURS SPENTSTUDYING

ECONOMICS

90

85

80

75

70

65

60

GRADE INSOCIOLOGY

6

5

4

3

2

1

0

HOURS SPENTSTUDYING

SOCIOLOGY

Production Possibilities Frontier for Grades Production Possibilities Frontier for Grades

a

Grade in Soc io logy

90

85

80

75

70

65

6065 70 75 80 90

A

B

C

D

E

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)

50

40

30

20

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