Exploring Economics Chapter 1 PDF

Exploring Economics CHAPTER Copyright 2020 Macmillan Learning | Chiang | All rights reserved...

Exploring Economics CHAPTER Copyright 2020 Macmillan Learning | Chiang | All rights reserved 1  HOMEWORK OPTIONAL ACHIEVE HOMEWORK – CHAPTER 1 TAKE HOME ASSIGNMENT #1 – Questions 1 – 4 Submit In-Class Exercises in Word, PDF or jpeg Please Download Lecture Slides and View in Presentation Mode 3 | CHAPTER 1  CHAPTER OBJECTIVES  Explain how economic analysis can be used in decision making.  Differentiate between microeconomics and macroeconomics.  Describe how economists use models.  Describe the ceteris paribus assumption.  Discuss the difference between efficiency and equity.  Describe the key principles in economics.  Apply the key principles in economics to situations faced in everyday life. 4 | CHAPTER 1 ECONOMIC ISSUES ARE ALL AROUND US Think about all the things you consume: food, shelter, clothing, transportation, healthcare, entertainment ….. How do you acquire those items? Do you produce them yourselves? How do you afford the things you want?  DECISION MAKING WHAT IS ECONOMI  How do individuals, firms, CS and society make decisions ABOUT? to allocate limited resources to satisfy competing wants.  SCARCITY 6 | CHAPTER 1 RESOURCE SCARCITY REQUIRES US TO MAKE CHOICES Everyone is faced with scarcity – it’s NOT just about money. TRADE OFFS = OPPORTUNITY COSTS  Every choice requires a trade off  Opportunity Cost – the NEXT BEST ALTERNATIVE given up in order to obtain the most preferred good or service  Ask yourself “or what?” … ie. “Should I get a management degree or what?”  ECONOMIC ASSUMPTIONS  PEOPLE are rational Economic (weigh costs vs benefits of an action) Assumption s  PEOPLE are self- interested  PEOPLE respond to incentives  PEOPLE RESPOND TO INCENTIVES INCENTIVE: anything that offers rewards to people who change their behavior People respond to incentives by exploiting opportunities to make themselves better off (ie. sale prices or interests rate changes) Which policy would more effectively reduce pollution: educating manufacturers about climate change or offering them financial rewards for reducing pollution? 10 | CHAPTER 1 MICROECONOM MACROECONOMIC S ICS macroeconomics microeconomics Is the study of Is the study of broader (aggregate) decision issues in the economy, such as making by inflation, individuals, unemployment, and businesses, and national output (GDP). industries. DECIDING THE NEWEST GAMES AND TECHNOLOGY TO INTRODUCE TO THE MARKET IS A MICROECONOMIC DECISION MADE BY INDIVIDUAL FIRMS  MACROECONOMIC POLICY in Canada is made by government entities including Parliament (Fiscal Policy) and the Bank of Canada (Monetary Policy) 13 | CHAPTER 1 Model building: A model is any simplified representation of reality that is used to better understand real-life situations. This Photo by Unknown Author is licensed under CC BY-NC-ND   Models are crafted from new ideas, then tested against real world data CETERIS PARIBUS  Ceteris Paribus is a simplifying assumption used in economics: “all other relevant factors or variables are held constant” Uses a scientific approach and is Positive testable – the theory or statement Economics can be proven to be either true or false vs Based on opinion and involves a value judgment - societal Normative beliefs about what should happen Economics 16 | CHAPTER 1 POSITIVE NORMATIVE STATEMENT STATEMENT A drop in People should only interest rates purchase houses should lead to when interest an increase in rates are below house purchases 5%  EFFICIENCY VERSUS EQUITY Do people get the goods Fairness is a normative and services they want concept. We elect at the lowest possible governments to resource cost? implement policies that reflect our values about what is just and fair.  EQUITY AND EFFICIENCY EQUITY AND EFFICIENCY often work against each other markets usually lead to efficiency; but when markets don’t achieve efficiency, government can intervene to improve society’s welfare in pursuit of profit, firms may ignore the harm imposed on the environment unless government policies require them to acknowledge the social cost. Krugman, Macroeconomics: Krugman, Canadian Edition, 4e, Economics, 6e, © 2021 2020 Worth Publishers Real Flow – Goods & Services Money Flow - ($)  Real Flow is exchanged for bought Money Flow supplie d (Inputs)  Markets are where (resource s) exchanges are made – buyers and sellers interact 8 K E Y PRINCIPLE S  1 1 ECONOMICS IS CONCERNED WITH ECONOMICS IS MAKING CHOICES WITH LIMITED CONCERNED WITH MAKING CHOICES RESOURCES. WITH LIMITED RESOURCES 22 | CHAPTER 1 SCARCITY UNLIMITED WANTS CLASH WITH LIMITED RESOURCES. EVERYONE FACES SCARCITY. ECONOMICS FOCUSES ON THE ALLOCATION OF SCARCE RESOURCES. 2 WHEN MAKING DECISIONS, ONE MUST TAKE INTO ACCOUNT TRADEOFFS AND OPPORTUNITY COSTS. 24 | CHAPTER 1 OPPORTUNITY COST THE NEXT BEST ALTERNATIVE; WHAT YOU GIVE UP TO DO SOMETHING OR PURCHASE SOMETHING ELSE 3 SPECIALIZATION LEADS TO GAINS FOR ALL INVOLVED. 26 | CHAPTER 1 THE GAINS FROM SPECIALIZATION INDIVIDUALS TEND TO WORK IN CAREERS MOST SUITED TO THEM 4 PEOPLE RESPOND TO INCENTIVES, BOTH GOOD AND BAD. 28 | CHAPTER 1 EXECUTIVE BONUSES Good Incentive – Wall Street traders and bankers were paid bonuses based on their productivity. Bad Incentive – A bonus structure encouraging lenders to take extreme risks to generate high bonuses played a major role in the 2008 financial crisis in the United States, including bank failures. 5 RATIONAL BEHAVIOR REQUIRES THINKING ON THE MARGIN – AT THE COST vs THE BENEFIT OF THE NEXT UNIT 30 | CHAPTER 1 FOOD FOR THOUGHT AT AN ALL-YOU-CAN-EAT BUFFET, COMPARE THE BENEFIT OF ONE MORE PLATE OF FOOD TO THE COSTS (BLOATING, WEIGHT GAIN). ($ value is = 0) 6 MARKETS ARE GENERALLY EFFICIENT (Resources allocated well); WHEN THEY AREN’T, GOVERNMENT CAN SOMETIMES CORRECT THE FAILURE. 28 | CHAPTER 1 EFFICIENCY OF COMPETITION PRIVATE MARKETS AND COMPETITION FORCE BUSINESSES TO BE EFFICIENT OR BE DRIVEN OUT – competition leads to lower prices for consumers 33 | CHAPTER 1 MESSY OUTCOMES MARKETS SOMETIMES RESULT IN UNDESIRABLE OUTCOMES, SUCH AS POLLUTION. 7 ECONOMIC GROWTH, LOW UNEMPLOYMENT, AND LOW INFLATION ARE ECONOMIC GOALS THAT DO NOT ALWAYS COINCIDE. 35 | CHAPTER 1 UNEMPLOYMENT & INFLATION Unemployment and inflation often operate opposite to one another – low unemployment means people have money to spend but too much demand pushes up the price level. 8 INCREASES IN THE ECONOMY’S POTENTIAL LEAD TO ECONOMIC GROWTH OVER TIME 37 | CHAPTER 1 GOOD INSTITUTIONS & HUMAN CREATIVITY Legal systems and government legislation protect the rights of citizens and the ideas they create. Innovation leads to creation of new goods & services and, therefore, economic growth.