Methods of Economics

7/26/2019 Methods of Economics

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2004 Prentice Hall Business Publishin 2004 Prentice Hall Business Publishin Princi les of Economics 7/ePrinci les of Economics 7/e Karl ase !a #airKarl ase !a #air

The Scope and

Method of Economics

Appendix: How to Read and Understand Graphs

Prepared by: Fernando QuijanoPrepared by: Fernando Quijano

and Yvonn Quijanoand Yvonn Quijano


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%he &tu'" of Economics

( Economicsis the stu'" of ho)

in'i*i'uals an' societies

choose to use the scarceresources that nature an'

pre*ious generations ha*e

pro*i'e'+


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h" &tu'" Economics-

( .n important reason for

stu'"ing economics is to learn

a way of thinking.

( %hree fun'amental concepts

( Opportunity cost

( Marginalism, an'

( Efficient markets


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pportunit" ost

( Opportunity costis the best

alternati*e that )e forgo, or

gi*e up, )hen )e mae achoice or a 'ecision+

( earl" all 'ecisions in*ol*e

tra'e3offs+


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5arginalism

( 6n )eighing the costs an'benefits of a 'ecision, it is

important to )eigh onl" thecosts an' benefits that arisefrom the 'ecision+


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5arginalism

( #or e8ample, )hen a firm 'eci'es

)hether to pro'uce a''itional output,

it consi'ers onl" the additional9or

marginal cost:, not the sun cost+

( Sunk costsare costs that cannot be

a*oi'e', regar'less of )hat is 'one in

the future, because the" ha*e alrea'"been incurre'+


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Efficient 5arets

( .n efficient marketis one in )hich

profit opportunities are eliminate'

almost instantaneousl"+

( %here is no free lunch; Profit

opportunities are rare because, at

an" one time, there are man" peoplesearching for them+


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5ore !easons to &tu'" Economics

( %he stu'" of economics is an

essential part of the stu'" of societ"+

( Economic 'ecisions often ha*eenormous conse=uences+

( >uring the Industrial Revolution, ne)

manufacturing technologies an'impro*e' transportation ga*e rise to the

mo'ern factor" s"stem+


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5ore !easons to &tu'" Economics

( .n un'erstan'ing of

economics is essential to an

un'erstan'ing of global affairs+

( @oting 'ecisions also re=uire a

basic un'erstan'ing of

economics+


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%he &cope of Economics

( Microeconomicsis the branch

of economics that e8amines

the beha*ior of in'i*i'ual'ecision3maing unitsAthat is,

business firms an'

househol's+


11/33 2004 Prentice Hall Business Publishin 2004 Prentice Hall Business Publishin Princi les of Economics 7/ePrinci les of Economics 7/e Karl ase !a #airKarl ase !a #air

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( Macroeconomicsis the

branch of economics that

e8amines the beha*ior ofeconomicaggregatesA

income, output, emplo"ment,

an' so onAon a national

scale+



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Examples of microeconomic and macroeconomic concerns

Production Prices Income Employment

Microeconomics Pro'uction/utputin 6n'i*i'ual6n'ustries an'

BusinessesHo) much steelHo) man" officesHo) man" cars

Price of 6n'i*i'ualoo's an'&er*ices

Price of me'icalcarePrice of gasoline#oo' prices.partment rents

>istribution of6ncome an' ealth

ages in the autoin'ustr"5inimum )agesE8ecuti*e salariesPo*ert"

Emplo"ment b"6n'i*i'ualBusinesses C

6n'ustriesDobs in the steelin'ustr"umber ofemplo"ees in afirm

Macroeconomics ational

Pro'uction/utput%otal 6n'ustrialutputross >omesticPro'uctro)th of utput

.ggregate Price

e*elonsumer pricesPro'ucer Prices!ate of 6nflation

ational 6ncome

%otal )ages an'salaries

%otal corporateprofits

Emplo"ment an'

Fnemplo"ment inthe Econom"%otal number ofGobsFnemplo"mentrate



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%he 5etho' of Economics

( Positive economicsstu'ies

economic beha*ior )ithout

maing Gu'gments+ 6t'escribes )hat e8ists an' ho)

it )ors+



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( Normative economics, also

calle' polic" economics,

anal"es outcomes ofeconomic beha*ior, e*aluates

them as goo' or ba', an' ma"

prescribe courses of action+

"



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( Positive economicsinclu'es

( escriptive economics, )hich in*ol*es

the compilation of 'ata that 'escribephenomena an' facts+

( Economic theory!)hich in*ol*es

buil'ing mo'els of beha*ior+

( .n economictheoryis a general statement

of cause an' effect, action an' reaction+

""



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%heories an' 5o'els

( %heories in*ol*e mo'els, an'

mo'els in*ol*e *ariables+

( . modelis a formal statement of atheor"+ 5o'els are 'escriptions of

the relationship bet)een t)o or more

*ariables+

""



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%heories an' 5o'els

( Ockhams razoris the

principle that irrele*ant 'etail

shoul' be cut a)a"+ 5o'elsare simplifications, not

complications, of realit"+

""



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%heories an' 5o'els

( . variableis a measure that can

change from obser*ation to

obser*ation+

( %he ceteris pari"us'e*ice is part of

the process of abstraction+

( Fsing the ceteris pari"us! or all elsee#ual! assumption, economists stu'"

the relationship bet)een t)o *ariables

)hile the *alues of other *ariables

remain constant+

""



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%heories an' 5o'els

( Pitfalls to a*oi' in formulating

economic theor"

( %hepost hoc! ergo propter hocfallacy refers to a common error ma'e

in thining about causation 6f e*ent .

happene' before e*ent B, it is not

necessaril" true that . cause' B+( %he fallacy of compositionis the

erroneous belief that )hat is true for a

part is also true for the )hole+

""



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( Empirical economicsrefers to the

collection an' use of 'ata to test

economic theories+

( 5an" 'ata sets are a*ailable to

facilitate economic research+ %he"

are collecte' b" both go*ernment

agencies an' pri*ate companies,

""



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Economic Polic"

riteria for Gu'ging economic outcomes

( Efficiency, or allocati*e efficienc"+

.n efficient econom" is one thatpro'uces )hat people )ant at the

least possible cost+

( E#uity, or fairness of economicoutcomes+

""



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Economic Polic"

riteria for Gu'ging economic outcomes

( Economic growth, or an increase in

the total output of an econom"+

( Economic sta"ility, or the con'ition

in )hich output is stea'" or gro)ing,

)ith lo) inflation an' full emplo"mentof resources+

""



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!e*ie) %erms an' oncepts

ceteris paribusceteris paribus

'escripti*e economics'escripti*e economics

economic gro)theconomic gro)th

economic theor"economic theor"

economicseconomics

efficienc"efficienc"

efficient maretefficient maret

empirical economicsempirical economics

e=uit"e=uit"

fallac" of compositionfallac" of composition

6n'ustrial !e*olution6n'ustrial !e*olution

macroeconomicsmacroeconomics

microeconomicsmicroeconomics

mo'elmo'el

normati*e economicsnormati*e economics

ochamIs raorochamIs raor

opportunit" costopportunit" cost

positi*e economicspositi*e economics

post hoc, ergo propter hocpost hoc, ergo propter hoc

stabilit"stabilit"

sun costssun costs

*ariable*ariable

""



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.ppen'i8

Ho) to !ea' an' Fn'erstan' raphs

( . graphis a t)o3'imensionalrepresentation of aset of numbers or

'ata+

""



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.ppen'i8


( . time series

graphsho)s

ho) a single*ariable changes

o*er time+

Total isposable Personal Income in

the !nited "tates# $%&'()**) +in

billions of dollars

1000

100

2000

200$000

$00

4000

400

000

00

000

00

7000700


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.ppen'i8


( %he point at )hich the%he point at )hich the

line intersects the J3a8isline intersects the J3a8is

9point9point aa: is calle' the: is calle' the (&(&

intercept.intercept.

( %he%heY-interceptY-intercept, is the, is the

*alue of*alue of YY)hen)henXX 0+ 0+


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.ppen'i8


( %his line slopes

up)ar', in'icating that

there seems to be a

positi*e relationship

bet)een income an'

spen'ing+

( PointsAan' B, abo*ethe 4L line, sho) that

consumption can be

greater than income+

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.. downward&slopingdownward&sloping

line 'escribes aline 'escribes a

negative relationshipnegative relationship

bet)een M an' J+bet)een M an' J+

.n.n upward&slopingupward&sloping

line 'escribes aline 'escribes a

positive relationshippositive relationship

bet)een M an'bet)een M an'J+J+

c"c"

. 'i


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b = =

1 00 ! b = =

"

1 00 "!

b = =0

1 00

b = =

1 0

0

c"c"

. 'i


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Cartesian coordinate systemCartesian coordinate system

graphgraph

negati*e relationshipnegati*e relationship

originorigin

positi*e relationshippositi*e relationship

slopeslope

time series graphtime series graph

M3a8isM3a8is

J3a8isJ3a8is

J3interceptJ3intercept

Methods of Economics

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