Economics Today: A Canadian Perspective PDF

Economics Today A Canadian Perspective Microeconomics, First Edition Chapter 1 The Nature of Economics Copyright © 2023 Pearson Canada Inc. 1-1 Introduction The typical age of women g...

Economics Today A Canadian Perspective Microeconomics, First Edition Chapter 1 The Nature of Economics Copyright © 2023 Pearson Canada Inc. 1-1 Introduction The typical age of women getting married rose from 20 in 1950 to 27 today. More women also choose not to marry at all. What accounts for the delayed marriages and nonmarriages today? You will explore this question in this chapter. Copyright © 2023 Pearson Canada Inc. 1-2 Learning Objectives 1.1 Define economics and discuss the difference between microeconomics and macroeconomics 1.2 Identify the three basic economic questions and the two opposing sets of answers 1.3 Evaluate the role that rational self-interest plays in economic analysis 1.4 Explain why economics is a science 1.5 Distinguish between positive and normative economics Copyright © 2023 Pearson Canada Inc. 1-3 Chapter Outline 1.1 The Power of Economic Analysis 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers 1.3 The Economic Approach: Systematic Decisions 1.4 Economics as a Science 1.5 Positive versus Normative Economics Appendix A: Reading and Working with Graphs Copyright © 2023 Pearson Canada Inc. 1-4 Did You Know That... More than one in four vehicles on Russian roads are equipped with a dashboard camera? Russians have stronger incentives to document auto accidents that may occur while they are driving. The prevalence of icy roads, police corruption, and faked accidents claims give drivers in Russia strong incentives to install dashboard cameras. In this chapter, you will learn the nature of self- interested responses to incentives. Copyright © 2023 Pearson Canada Inc. 1-5 1.1 The Power of Economic Analysis (1 of 11) Incentives – Rewards for engaging in a particular activity – The nature of self-interested responses to incentives is the starting point for economic analysis Copyright © 2023 Pearson Canada Inc. 1-6 1.1 The Power of Economic Analysis (2 of 11) The economic way of thinking is a framework to analyze solutions to economic problems: – How much time to study – Choosing which courses to take – Whether the Canadian government should provide more grants to universities or raise taxes Copyright © 2023 Pearson Canada Inc. 1-7 1.1 The Power of Economic Analysis (3 of 11) The economic way of thinking gives you the power to reach informed conclusions about what is happening in the world. Economic analysis helps you make better decisions concerning your career, your education, financing your home or other important matters. Copyright © 2023 Pearson Canada Inc. 1-8 1.1 The Power of Economic Analysis (4 of 11) Economic analysis is a way of thinking about all decisions. These decisions could be about: – Your education, career, or financing your home – Your involvement in the business world – How you cast your ballot as a voter Copyright © 2023 Pearson Canada Inc. 1-9 1.1 The Power of Economic Analysis (5 of 11) Economics – The study of how people allocate their limited resources to satisfy their unlimited wants – The study of how people make choices Copyright © 2023 Pearson Canada Inc. 1 - 10 1.1 The Power of Economic Analysis (6 of 11) Resources – Things that have value and are used to produce goods and services that satisfy people’s wants Wants – What people would buy if they had unlimited income Copyright © 2023 Pearson Canada Inc. 1 - 11 1.1 The Power of Economic Analysis (7 of 11) With limited income (resources), people must make choices to satisfy their wants. We never have enough of everything, including time, to satisfy our every desire. Copyright © 2023 Pearson Canada Inc. 1 - 12 1.1 The Power of Economic Analysis (8 of 11) Individuals, businesses, and nations face alternatives, and choices must be made. Economics studies how these choices are made. Economics examines situations in which individuals choose how to do things, when to do things, and with whom to do them. Copyright © 2023 Pearson Canada Inc. 1 - 13 1.1 The Power of Economic Analysis (9 of 11) Microeconomics – The study of decision making undertaken by individuals (or households) and by firms – Like looking through a microscope to focus on the smaller parts of the economy: ▪ The effects of changes in the price of gasoline relative to that of other energy sources ▪ The effects of new taxes on a specific product or industry ▪ If the government establishes new health regulations, how individual firms and consumers will react to those regulations Copyright © 2023 Pearson Canada Inc. 1 - 14 1.1 The Power of Economic Analysis (10 of 11) Macroeconomics – The study of the behaviour of the economy as a whole – Deals with economy-wide phenomena: ▪ Changes in unemployment ▪ The general price level ▪ The national income – Macroeconomics deals with aggregates, or totals— such as total output in an economy – Modern economic theory blends micro and macro concepts Copyright © 2023 Pearson Canada Inc. 1 - 15 1.1 The Power of Economic Analysis (11 of 11) Artificial intelligence (AI) technologies – The development and implementation of methods of utilizing automated data-analytics techniques, machine learning, or virtual- or augmented-reality techniques to examine and evaluate information in an effort to help consumers, businesses, and governments to make decisions. – Often implements data-analytics methods for working with very substantial volumes of information, commonly known as big data, to reveal previously hidden relationships. Copyright © 2023 Pearson Canada Inc. 1 - 16 AI—Decision Making Through Data: Microeconomic and Macroeconomic Applications AI technologies can be applied to both microeconomic and macroeconomic issues. At the company level, data-analytics techniques can be applied to vast amounts of information on product prices, amounts purchased, and so on. Examples of big data analytics that involve economic aggregates include central banks’ evaluation of considerable information on price levels, total outputs, and employment levels. Copyright © 2023 Pearson Canada Inc. 1 - 17 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (1 of 4) Economic system – The institutional mechanism that determines the way scarce resources are utilized to satisfy human wants Copyright © 2023 Pearson Canada Inc. 1 - 18 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (2 of 4) Three economic questions: 1. What and how much will be produced? 2. How will items be produced? 3. For whom will items be produced? Copyright © 2023 Pearson Canada Inc. 1 - 19 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (3 of 4) Two opposing answers in the form of economic systems: – Centralized command and control (central planning): Authority that makes all economic decisions – Price system (market system): Decentralized decision- making process, in which prices are terms (signals) under which people agree to make exchanges Copyright © 2023 Pearson Canada Inc. 1 - 20 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (4 of 4) Economic systems of the world’s nations (e.g., Canada) are mixed systems that incorporate aspects of both centralized command and control and a decentralized price system. Copyright © 2023 Pearson Canada Inc. 1 - 21 1.3 The Economic Approach: Systematic Decisions (1 of 7) Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain. Copyright © 2023 Pearson Canada Inc. 1 - 22 1.3 The Economic Approach: Systematic Decisions (2 of 7) “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” —Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 Copyright © 2023 Pearson Canada Inc. 1 - 23 1.3 The Economic Approach: Systematic Decisions (3 of 7) Rationality assumption – The assumption that people do not intentionally make decisions that would leave them worse off Copyright © 2023 Pearson Canada Inc. 1 - 24 1.3 The Economic Approach: Systematic Decisions (4 of 7) Questions: – Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics? – Can economic models be applied to situations in which behaviour is at odds with what we expect from rational people? Copyright © 2023 Pearson Canada Inc. 1 - 25 1.3 The Economic Approach: Systematic Decisions (5 of 7) Responding to incentives – Rationality and the use of incentives: ▪ Positive incentives ▪ Negative incentives – Making choices: ▪ Balancing costs and benefits Copyright © 2023 Pearson Canada Inc. 1 - 26 1.3 The Economic Approach: Systematic Decisions (6 of 7) Some examples of incentives – Responding to positive incentives: ▪ Schoolchildren getting gold stars, working to have a “better life” for yourself – Responding to negative incentives: ▪ Penalties, punishments, using credit cards to avoid cheque overdrafts Copyright © 2023 Pearson Canada Inc. 1 - 27 Example: The Incentives to Attend Post- Secondary Education More than half of Canadians (54 percent) have either college or university qualifications. An investment in education will provide the graduate with a lower unemployment rate, a higher income and a better quality of life. Even though tuition keeps increasing, each year of additional schooling increases a worker’s earning by an average of about 10%. Copyright © 2023 Pearson Canada Inc. 1 - 28 1.3 The Economic Approach: Systematic Decisions (7 of 7) Defining self-interest – The pursuit of one’s goals: ▪ Prestige ▪ Friendship ▪ Love – Does not always mean increasing one’s wealth Copyright © 2023 Pearson Canada Inc. 1 - 29 Behavioural Example: Assessing Whether Charitable Donations Reflect Caring for Others or for Oneself For making a charitable donation, people are motivated by a desire to help others or by the benefit that governments provide to donors, such as tax deductions. Three behavioural economists have found evidence that, during the years following a damaging earthquake in Japan, Japan’s taxpayers directed six times the amount of donations to regions whose governments offered reciprocal gifts than to areas that offered no gifts. Copyright © 2023 Pearson Canada Inc. 1 - 30 1.4 Economics as a Science (1 of 9) Economics is a social science that employs the same kinds of methods used in other sciences, such as biology, physics or chemistry. Economics uses models or theories to explain economic phenomena in the real world. Copyright © 2023 Pearson Canada Inc. 1 - 31 1.4 Economics as a Science (2 of 9) Models or theories – Simplified representations of the real world used as the basis for predictions or explanations – Should capture only the essential relationships that are sufficient to analyze a problem – Cannot be faulted as unrealistic simply because they do not capture all details of the real world ▪ A map is the quintessential model Copyright © 2023 Pearson Canada Inc. 1 - 32 1.4 Economics as a Science (3 of 9) Assumptions – The set of circumstances in which a model is applicable – Every model or theory must be based on a set of assumptions Copyright © 2023 Pearson Canada Inc. 1 - 33 Example: Getting Directions A map is a simplified model of reality. The degree of simplification varies across maps; some contain more detail than others. Economic models attempt to focus on what is relevant to the problem at hand and omit what is not. Copyright © 2023 Pearson Canada Inc. 1 - 34 1.4 Economics as a Science (4 of 9) Ceteris paribus [KAY-ter-us PEAR-uh-bus] assumption – Nothing changes except the factor or factors being studied – “Other things constant” – “Other things equal” Copyright © 2023 Pearson Canada Inc. 1 - 35 1.4 Economics as a Science (5 of 9) Economics is an empirical science – Real-world data are used to evaluate the usefulness of a model – Empirical means that evidence (data) is looked at to see whether we are right – Economists are often engaged in empirically testing their models Copyright © 2023 Pearson Canada Inc. 1 - 36 1.4 Economics as a Science (6 of 9) Models of behaviour, not thought processes – Models are useful if they predict economic phenomena – Economic models predict how people react, not how they think – People’s declared preferences are generally of little use in testing economic theories Copyright © 2023 Pearson Canada Inc. 1 - 37 What Happens When … people’s actual reactions to incentives differ from how they claim they would respond in answers to survey questions? Firms sometimes conduct surveys to try to gauge how purchases might be affected. For instance, a common response people give to a question about a new fee on baking service is that they would halt their consumption of the service. The declared preferences do not necessarily accord with their true preferences as many people in fact pay the new fee and continue to utilize the service. Copyright © 2023 Pearson Canada Inc. 1 - 38 1.4 Economics as a Science (7 of 9) Behavioural economics – An approach to the study of consumer behaviour: ▪ Emphasizes psychological limitations and complications that may interfere with rational decision making Copyright © 2023 Pearson Canada Inc. 1 - 39 1.4 Economics as a Science (8 of 9) Bounded rationality – Hypothesis that people are nearly, not fully, rational: ▪ They cannot examine every choice available to them ▪ They appear to use rules of thumb to sort alternatives – Proponents believe that it is “unrealistic” to assume: ▪ Unbounded selfishness ▪ Unbounded willpower ▪ Unbounded rationality Copyright © 2023 Pearson Canada Inc. 1 - 40 1.4 Economics as a Science (9 of 9) Rules of Thumb – A key implication of bounded rationality – Because every possible choice cannot be considered, an individual will tend to fall back on methods of making decisions that are simpler than trying to sort through every possibility Copyright © 2023 Pearson Canada Inc. 1 - 41 1.5 Positive versus Normative Economics (1 of 2) Positive economics – Purely descriptive statements or scientific predictions, such as “If A, then B” – A statement of what is Normative economics – Analysis involving value judgments; relates to whether things are good or bad – A statement of what ought to be Copyright © 2023 Pearson Canada Inc. 1 - 42 Economics as It Applies To Your Everyday Life and Your Future You will learn common skills that are practical Real Application questions: – Career choices – Managerial choices if you decide to go into business – Future behaviour in your household – Voting choices Copyright © 2023 Pearson Canada Inc. 1 - 43 Economics in Your Life: Government Provides Incentive Program for Zero- Emission Vehicles (ZEV) In 2019, the Ministry of Transport announced how government investment would make it easier for Canadians to choose a zero-emission vehicle. The government will provide between $2,500 and $5,000 to consumers who purchase a ZEV. Overall, does it appear the incentive to purchase a ZEV arises from the application of centralized command and control, the price system or a mix of the two? Copyright © 2023 Pearson Canada Inc. 1 - 44 Issues & Applications: Why Education and Financial Independence Helps to Explain Why Women are Delaying Marriage and Why Fewer Women Are Married Whether to marry is not only a personal decision but also a self-interested decision that involves assessing the economic contributions that a partner has to offer to a combined household. Women have begun placing lower valuations on the potential economic contributions of partners with lower education. The result has been a reduction in the number of women who have decided to marry these partners. Copyright © 2023 Pearson Canada Inc. 1 - 45 Summary Discussion of Learning Objectives (1 of 5) 1.1 Define economics and discuss the difference between microeconomics and macroeconomics – Economics is the study of how individuals make choices to satisfy wants. – Microeconomics is the study of decision making by individual households and individual firms. – Macroeconomics is the study of nationwide phenomena, such as inflation and unemployment levels. Copyright © 2023 Pearson Canada Inc. 1 - 46 Summary Discussion of Learning Objectives (2 of 5) 1.2 Identify the three basic economic questions and the two opposing sets of answers – The basic economic questions are what, how much, and for whom items will be produced. – The two sets of answers are provided by the type of economic system: centralized command and control or the price system. Copyright © 2023 Pearson Canada Inc. 1 - 47 Summary Discussion of Learning Objectives (3 of 5) 1.3 Evaluate the role that rational self-interest plays in economic analysis – Rational self-interest is the assumption that people never intentionally make decisions that would leave them worse off. – Instead, they are motivated mainly by self-interest. Copyright © 2023 Pearson Canada Inc. 1 - 48 Summary Discussion of Learning Objectives (4 of 5) 1.4 Explain why economics is a science – Economists use models, or theories, that are simplified representations of the real world to analyze and make predictions about the real world. Copyright © 2023 Pearson Canada Inc. 1 - 49 Summary Discussion of Learning Objectives (5 of 5) 1.5 Distinguish between positive and normative economics – Positive economics deals with what is, whereas normative economics deals with what ought to be. – Positive statements are of the “if … then” variety, while normative statements ask what “should” or “ought to” be. Copyright © 2023 Pearson Canada Inc. 1 - 50 Appendix A: Reading and Working with Graphs Independent variable – A variable whose value is determined independently of, or outside, the equation under study Dependent variable – A variable whose value changes according to changes in the value of one or more independent variables Copyright © 2023 Pearson Canada Inc. 1 - 51 Appendix A: Direct and Inverse Relationships Direct relationship – A relationship between two variables that is positive, meaning that an increase in one variable is associated with an increase in the other, and a decrease in one variable is associated with a decrease in the other Inverse relationship – A relationship between two variables that is negative, meaning that an increase in one variable is associated with a decrease in the other, and a decrease in one variable is associated with an increase in the other Copyright © 2023 Pearson Canada Inc. 1 - 52 Table A-1 Gas Mileage as a Function of Driving Speed Kilometres per Kilometres per Hour Litre 50 14 60 13 70 11 80 9 90 7 100 4 110 1 Copyright © 2023 Pearson Canada Inc. 1 - 53 Figure A-1 Direct and Inverse Relationships Copyright © 2023 Pearson Canada Inc. 1 - 54 Appendix A: Constructing a Graph Number line – A line that can be divided into segments of equal length, each associated with a number y axis – The vertical axis in a graph x axis – The horizontal axis in a graph Origin – The intersection of the y axis and the x axis in a graph Copyright © 2023 Pearson Canada Inc. 1 - 55 Figure A-2 Horizontal Number Line Copyright © 2023 Pearson Canada Inc. 1 - 56 Figure A-3 Vertical Number Line Copyright © 2023 Pearson Canada Inc. 1 - 57 Figure A-4 A Set of Coordinate Axes Copyright © 2023 Pearson Canada Inc. 1 - 58 Appendix A: Graphing Numbers in a Table Table A-2 T-Shirts Purchased (1) Price of (2) Number of T-Shirts T-Shirts Purchased per Week $10 20 9 30 8 40 7 50 6 60 5 70 Copyright © 2023 Pearson Canada Inc. 1 - 59 Figure A-5 Graphing the Relationship between T- Shirts Purchased and Price Panel (a) Price per T-Shirts Purchased T-Shirt per Week Point on Graph $10 20 I (20, 10) 9 30 J (30, 9) 8 40 K (40, 8) 7 50 L (50, 7) 6 60 M (60, 6) 5 70 N (70, 5) Copyright © 2023 Pearson Canada Inc. 1 - 60 Figure A-6 Connecting the Observation Points Copyright © 2023 Pearson Canada Inc. 1 - 61 Figure A-7 A Positively Sloped Curve Panel (a) Price per Pairs of Shoes Point on Pair Offered per Week Graph $100 400 A (400, 100) 80 320 B (320, 80) 60 240 C (240, 60) 40 160 D (160, 40) 20 80 E (80, 20) Copyright © 2023 Pearson Canada Inc. 1 - 62 Appendix A: The Slope of a Line (A Linear Curve) Slope – The change in the y value divided by the corresponding change in the x value of a curve – The “incline” of the curve – “Rise” over “run” Copyright © 2023 Pearson Canada Inc. 1 - 63 Figure A-8 Figuring Positive Slope Copyright © 2023 Pearson Canada Inc. 1 - 64 Figure A-9 Figuring Negative Slope Copyright © 2023 Pearson Canada Inc. 1 - 65 Figure A-10 The Slope of a Nonlinear Curve Copyright © 2023 Pearson Canada Inc. 1 - 66 Appendix: Summary Discussion of Learning Objectives (1 of 4) Direct and Inverse Relationships – In a direct relationship, a dependent variable changes in the same direction as the change in the independent variable. – In an inverse relationship, the dependent variable changes in the opposite direction of the change in the independent variable. Copyright © 2023 Pearson Canada Inc. 1 - 67 Appendix: Summary Discussion of Learning Objectives (2 of 4) Constructing a Graph – When we draw a graph showing the relationship between two economic variables, we are holding all other things constant (ceteris paribus). Copyright © 2023 Pearson Canada Inc. 1 - 68 Appendix: Summary Discussion of Learning Objectives (3 of 4) Graphing Numbers – We obtain a set of coordinates by putting vertical and horizontal number lines together. – The vertical line is called the y axis; the horizontal line, the x axis. Copyright © 2023 Pearson Canada Inc. 1 - 69 Appendix: Summary Discussion of Learning Objectives (4 of 4) The Slopes of Linear and Nonlinear Curves – The slope of any linear curve is the change in the y values divided by the corresponding change in the x values as we move along the line, or “rise over run.” – The slope of a nonlinear curve changes. The slope is positive when the curve is rising and negative when the curve is falling. At a maximum or minimum point, the slope is zero. Copyright © 2023 Pearson Canada Inc. 1 - 70