Copyright 2002, Pearson Education Canada1 Principles of Macroeconomics 2nd Canadian Edition by Case,...

Copyright 2002, Pearson Education Canada1

Principles of Macroeconomics

2nd Canadian Edition by Case, Fair, Strain, and Veall

PowerPoint Presentation Slides to Accompany the Text

By Mark Karscig, Central Missouri State UniversityPeter Ibbott, Kings College - University of Western Ontario

Richard E. Mueller, University of Lethbridge


The Scope and Methods of Economics

Chapter 1


A Definition of Economics

Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.


Another Definition of Economics

Economics is the study of how scarce resources are allocated among conflicting demands.


Four Main Reasons to Study Economics...

To learn a way of thinkingTo understand societyTo understand global affairsTo be an informed voter


1. To Learn a Way of Thinking...

Three Fundamental Concepts of Economic Thinking

Opportunity Cost Marginalism Information, Incentives, and Market

Coordinations


Opportunity Costs

The opportunity cost of something is that which we give up when we make that choice or decision.

The implication is that all decisions involve trade-offs.

“There’s no such thing as a free lunch!!”


Question to Consider

What is the opportunity cost of your attending university?

Include all forgone options in your consideration.


Marginalism

In weighing the costs and benefits of a decision, it is important to weigh only the costs that are contingent upon the decision.

Do not include sunk costs Sunk costs are the costs that cannot be avoided,

regardless of what is done in the future, because they have already been incurred.


Information, Incentives, and Market Coordination

Prices, wages, and profits in market economies have the capacity to provide the information and incentives to coordinate the decisions of individual decision-makers.

Are these market solutions always desirable? Perhaps not if they interfere with the public good,

and lead, for example, to poverty or environmental degradation.


2. Understanding Society

Present and past economic decisions have an enormous influence on the character of life in a society.

The state of our physical environment, the level of material well-being, and the nature and number of jobs are all products of the economic system.


3. To Understand Global Affairs

Impact of globalization, trade negotiationsEnd of apartheidGulf WarPoverty and Starvation in Africa and AsiaThe Asian TigersThe European UnionCollapse of the Soviet Union


4. To be an informed voter…

Canadian politics is dominated by the debates over economic policy.

To critically assess the platform of each political party requires a basic understanding of economics.


The Scope of Economics

Microeconomics

The branch of economics that examines the functioning of individual industries and the behaviour of individual decision-making units -- business firms and households and the effects of government economic policy on these units.


The Scope of Economics

Macroeconomics

The branch of economics that examines the economic behaviour of aggregates -- income, employment, output and so on...


The Scope of Economics (Table 1.1)

EXAMPLES OF MICROECONOMIC & MACROECONOMIC CONCERNS

Microeconomics

Production

Production/Output inIndividual Industries andBusinesses

How much steelHow many officesHow many cars

Prices

Price of IndividualGoods and Services

Price of medical carePrice of gasolineFood pricesApartment rents

Income

Distribution of Incomeand Wealth

Wages in the auto industryMinimum wagesExecutive salariesPoverty

Employment

Employment byIndividual Businesses &Industries

Jobs in the steel industryNumber of employees in a firmNumber of accountants

Macroeconomics

NationalProduction/Output

Total Industrial OutputGross Domestic ProductGrowth of Output

Aggregate Price Level

Consumer pricesProducer PricesRate of Inflation

National Income

Total wages and salariesTotal corporate profits

Employment andUnemployment in theEconomy

Total number of jobsUnemployment rate


The Method of Economics

Positive Economics An approach to economics that seeks to

understand behaviour and the operation of systems without making judgements. It describes what exists and how it works.

Normative Economics An approach to economics that evaluates

economic outcomes as good or bad, and may prescribe courses of action. Also called policy economics.


Theories and Models

Economic Theory An economic theory is a statement or set of

related statements about cause and effect, action and reaction.

Economic Model An economic model is a formal statement of

an economic theory. Usually a mathematical representation of a presumed relationship between two or more variables.


Theories and Models

Ockham’s Razor Principle that irrelevant detail should be cut away.

Ceteris Paribus Literally, “other things being equal”. Used to

analyze the relationship between two variables while the values of other variables are held constant.

Inductive Reasoning The process of observing regular patterns from

raw data and drawing generalizations from them.


Theories and Models - Pitfalls

Post Hoc FallacyA common error made when thinking about

causation: if A happened before B then A did not necessarily cause B.

Correlation vs. CausationTwo variables are correlated if one variable changes

when the other changes. This does not imply that one caused the other.

Fallacy of CompositionThe fallacy of composition implies that what is true

for a part is necessarily true for the whole.


Theories and Models

Empirical Economics The collection and use of data to test

economic theories.


Economic Policy and Five Criteria for Judging Economic Outcomes

1. Efficiency In economics, allocative efficiency. An efficient

economy is one that produces what people want and does so at the least possible cost.

2. Equity Equity means fairness, but what this means is

open to debate. Social programs and many policy debates are centred on the issue of fairness.


Economic Policy and Five Criteria for Judging Economic Outcomes

3. Growth Economic growth is an increase in the total output

of an economy. Often measured against population growth to find growth per capita.

4. Full employment Full employment is a condition in which all

resources available for use are being used.

5. Price Stability A condition in which there is little inflation in

prices.


Review Terms and Concepts

ceteris paribus economic growth descriptive economics economic theory economics efficiency empirical economics equity fallacy of composition full employment inductive reasoning Industrial Revolution

macroeconomics microeconomics model normative economics Ockham’s razor opportunity cost positive economics post hoc fallacy stability sunk costs variable

Copyright 2002, Pearson Education Canada1 Principles of Macroeconomics 2nd Canadian Edition by Case,...

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