Macro Ch01 PPT

8/2/2019 Macro Ch01 PPT

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Copyright 2010 Nelson Education Limited

.

A Lecture Presentation in PowerPointto accompany

Prepared by

Alanna Holowinsky, Red River College


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A Lecture Presentation

in PowerPointto accompany

Exploring Economics

by Robert L. Sexton, Peter Fortura,

and Colin C. Kovacs


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Chapter 1The 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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Why Study Economics?

develops a disciplined method of thinking

provides problem-solving tools for bothpersonal and professional life

sheds light on many social issues such as

education, discrimination,crime, and unemployment


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What is Economics?

economics is the study of the allocation of our

limited resources to satisfy our unlimitedwants.

Resources:

- inputs used to produce goods and services.


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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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Macroeconomics:

the study of the aggregate, or total economy.

looks at economic problems as they influencethe whole of society

includes topics such as inflation, business

cycles, unemployment, and economic growth.


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Microeconomics:

deals with the smaller units within the

economy.

attempts to understand the decision makingbehaviour of firms and households and their

interaction in markets for particular goods orservices.


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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 mostimportant parts of a problem.

like maps: show most importantinformation, exclude minor details


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1.2 Economic Theory

What Is a Hypothesis?

Hypothesis: a testable proposition.

in economics: a testable proposition abouthow people will behave or react to a change ineconomic 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-worldobservations, it is accepted as theory

difficult because controlled experimentation isseldom 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 occurtogether- icy roads, reduced speeds, more accidents

Causation:one event causes another eventto occur- reduced speeds do not cause moreaccidents; icy roads do


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1.2 Economic Theory

Fallacy of Composition:- incorrect view that what is true for theindividual is also true for the group- for example, standing up at a concert to seebetter 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 whatshould 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 economicsstem 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 andservices.

Land

all natural resources used in the production ofgoods and services


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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 productiveknowledge and skill people receive fromeducation 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 productiontechniques, create new products.

take risks, driven by the chance to makeprofits.


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1.3 Scarcity

Goods

items that we value or desire.

Services

intangible acts for which people are willing topay.


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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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Marginal Thinking:

focuses on marginal, or additional, choices.

marginal choices involve the effects of addingto or subtracting from the current situation.

not whetherto eat, sleep, or study, but

how muchof each


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How Much Pollution?

must weigh expected marginal benefits of acleaner environment against the expectedmarginalcosts 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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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 costsof any choice are changed


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People Respond to Incentives:

if the benefits of an activity, like crime, rise

and/or the costs fall, economists expect theamount of that activity to rise.

if the benefits of an activity fall and/or if thecosts rise, economists expect the amount of

that activity to fall.


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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 andconsumption of these vehicles.


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Specialization

concentrating on the production of one, or a

few, goods.

Comparative Advantage

producing a good or service at a loweropportunity cost than other producers.


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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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Advantages of Specialization:

acquire greater skill through repetition.

avoid wasted time in shifting from one task toanother.

do the types of work for which each person isbest suited.

promote the use of specialized equipment.


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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 forproducts that others produce better.

for example, Canada produces wheat, Brazilproduces 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 therelative value of resources.

results in shift of resources from less valuedto more valued uses


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Price Controls:

government-mandated minimum or maximum

prices. strip the market price of its meaning for both

consumers and suppliers.


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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-beingby intervening.


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Market Failure:

market economy does not always

communicate accurately. market power, lack of competition can distort

market prices.

these situations can also lead to governmentintervention.


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Inequitable Distribution:

no guarantee that a market economy will

provide everyone with adequate food, shelterand health care.

inequities can cause strong disagreements:what is fair for one person may seem highly

unfair to someone else.

Macro Ch01 PPT

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