Economics Textbook PDF - Arnold 13th Edition

CHAPTER 1 WHAT ECONOMICS IS...

CHAPTER 1 WHAT ECONOMICS IS ABOUT ECONOMICS Roger A. Arnold Thirteenth Edition ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©Sashkin/Shutterstock  1-1 Your Life, 2019-2029 1-2 A Definition of Economics 1-3 Key Concepts in Economics 1-4 Ceteris Paribus and Theory 1-5 Economic Categories 2 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-1 Your Life, 2019-2029 The answers to many of life’s questions have to do with economics: The salary you will earn has to do with the economic concept of opportunity cost What you will do in your first job has to do with the state of the economy when you graduate The price you pay for a house has to do with the state of the housing market How many friends you have has to do with scarcity As we proceed, ask yourself how much of what you are reading is relevant to your life, to you 3 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-2 A Definition of Economics (1 of 3) 1-2a Goods and Bads Good: Anything from which individuals receive utility or satisfaction Utility: The satisfaction one receives from a good Bad: Anything from which individuals receive disutility or dissatisfaction 4 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-2 A Definition of Economics (2 of 3) 1-2b Resources Land: All natural resources, such as minerals, forests, water, and unimproved land Labor: The work brought about by the physical and mental talents that people contribute Capital: Produced goods, such as factories, machinery, tools, computers, and buildings, that can be used as inputs for further production Entrepreneurship: The talent that some people have for organizing the resources of land, labor, and capital to produce goods, seek new business opportunities, and develop new ways of doing things 5 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-2 A Definition of Economics (3 of 3) 1-2c Scarcity and a Definition of Economics Scarcity: The condition in which our wants are greater than the limited resources available to satisfy those wants Economics: The science of scarcity; the science of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants Thinking Like an Economist: Scarcity Affects Everyone Rationing Device: A means for deciding who gets what of available resources and goods 6 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (1 of 7) 1-3a Opportunity Cost Opportunity Cost: The most highly valued opportunity or alternative forfeited when a choice is made There is no such thing as a free lunch Thinking Like an Economist: Zero Price Doesn’t Mean Zero Cost 1-3b Opportunity Cost and Behavior Economists believe that a change in opportunity cost can change a person’s behavior The higher the opportunity cost of doing something, the less likely it is that it will be done 7 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  EXHIBIT 1 Scarcity and Related Concepts 8 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (2 of 7) 1-3c Benefits and Costs Benefits rarely come without costs If we passed a law stating that anyone caught driving a car would go to prison for 40 years, few would drive, and car pollution would be gone But many would think that the cost was too high Economists think in terms of both costs and benefits 9 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (3 of 7) 1-3d Decisions Made at the Margin Marginal benefits (MB): Additional benefits; the benefits connected with consuming an additional unit of a good or undertaking one more unit of an activity Marginal costs (MC): Additional costs; the costs connected with consuming an additional unit of a good or undertaking one more unit of an activity Decisions at the Margin: Decision making characterized by weighing the additional (marginal) benefits of a change against the additional (marginal) costs of a change with respect to current conditions 10 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (4 of 7) 1-3d Decisions Made at the Margin (cont) Ex: You just finished eating a hamburger and drinking a soda; you are still a bit hungry, and considering whether to order another burger If the marginal benefits are greater than the marginal costs, you expect a net benefit, and your order another; But if the marginal benefits are less than marginal costs, you expect a net cost What you don’t consider are the total benefits and total costs; the benefits and costs associated with the first burger are no longer relevant to your decision The question is whether to eat another burger after already having eaten one 11 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (5 of 7) 1-3e Efficiency Efficiency: Exists when marginal benefits equal marginal costs Suppose you are studying for an econ test, and for the first hour of studying, the marginal benefits (MB) are greater than the marginal costs (MC): – MB studying first hour > MC studying first hour So, you will certainly study for the first hour; suppose for the 2nd hour, MB is still greater than MC – MB studying 2nd hour > MC studying 2nd hour You will continue to study as long as the MB is greater than the MC; see Exhibit 2 12 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  EXHIBIT 2 Efficiency 13 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (6 of 7) 1-3e Efficiency (cont) Maximizing Net Benefits: If you had stopped studying after the 1st hour, you would have given up the net benefits of studying longer Efficiency is consistent with MB = MC, and also consistent with maximizing net benefits Thinking Like an Economist: No $10 Bills on the Sidewalk 1-3f Economics is About Incentives Incentive: Something that encourages or motivates a person to undertake an action 14 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  EXHIBIT 3 The Efficient Amount of Time to Bowl 15 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-3 Key Concepts in Economics (7 of 7) 1-3g Unintended Effects Economists think in terms of unintended effects If a minimum wage law is passed, might some lose their jobs? Do mandatory seat belt laws cause more accidents because people feel safer? 1-3h Exchange Exchange (Trade): The giving up of one thing for something else People enter into exchanges to make themselves better off Think of the trade in terms of utility or satisfaction After a trade, you expect that your utility rate has risen 16 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-4 Ceteris Paribus and Theory (1 of 1) 1-4a Ceteris Paribus Thinking Ceteris Paribus: A Latin term meaning all other things constant or nothing else changes Economists specify ceteris paribus because they want to clearly define what they believe to be the real-world relationship between two variables 1-4b What is a Theory? Theory: An abstract representation of the real world designed with the intent to better understand it Abstract: The process (used in building a theory) of focusing on a limited number of variables to explain or predict an event 17 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock  1-5 Economic Categories (1 of 2) There are four common economic categories 1-5a Positive Economics and Normative Economics Positive Economics: The study of what is in economics Normative Economics: The study of what should be in economics 1-5b Microeconomics and Macroeconomics Microeconomics: The branch of economics that deals with human behavior and choices as they relate to relatively small units: an individual, a firm, an industry, a single market Macroeconomics: The branch of economics that deals with human behavior and choices as they relate to highly aggregate markets (e.g., the market for goods and services) or the entire economy ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 18  1-5 Economic Categories (2 of 2) Microeconomists and Macroeconomists ask different questions: A Microeconomist might ask: How does a market work? What level of output does a firm produce? What price does a firm charge for the good it produces? A Macroeconomist might ask: How does the economy work? Why is the unemployment rate sometimes high and sometimes low? What causes inflation? 19 ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock