Principles of Economics PDF

Principles of Economics Thirteenth Edition Chapter 1 The Scope and Method of Economics Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Re...

Principles of Economics Thirteenth Edition Chapter 1 The Scope and Method of Economics Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter 1 The Scope and Method of Economics Economics - “oikonomia” The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. Dismal science. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Why Study Economics? 1. To Learn a Way of Thinking Economics has three fundamental concepts: – Opportunity Cost – Marginalism – Efficient Markets Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved To Learn a Way of Thinking (1 of 3) Opportunity Cost opportunity cost The best alternative that we forgo, or give up, when we make a choice or decision. scarce Limited. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved To Learn a Way of Thinking (2 of 3) Marginalism marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved To Learn a Way of Thinking (3 of 3) Efficient Markets—No Free Lunch efficient market A market in which profit opportunities are eliminated almost instantaneously. The study of economics teaches us a way of thinking and helps us make decisions. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved To Understand Society Industrial Revolution The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities. The study of economics is an essential part of the study of society. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved To Be an Informed Citizen To be an informed citizen requires a basic understanding of economics. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Scope of Economics Microeconomics and Macroeconomics Division of Production Prices Income Employment Economics Microeconomics Production/output in Prices of Distribution of Employment by individual individual income and individual industries and goods and wealth businesses and businesses services Wages in the auto industries How much steel Price of medical industry Jobs in the steel How much office care Minimum wage industry space Price of Executive salaries Number of employees How many cars gasoline Poverty in a firm Food prices Number of Apartment rents accountants Macroeconomics National Aggregate National income sEmployment and production/output price level Total wages and unemployment in the Total industrial Consumer salaries economy output prices Producer Total corporate Total number of jobs Gross domestic prices profits Unemployment rate product Rate of inflation Growth of output Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Fields of Economics Behavioral economics – Do aggregate household savings increase when we automatically enroll people in savings programs and let them opt out as opposed to requiring them to sign up? Comparative economic systems – How does the resource allocation process differ in market versus command and control systems? Econometrics – What inferences can we make based on conditional moment inequalities? Economic development – Does increasing employment opportunities for girls in developing nations increase their educational achievements? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Fields of Economics Economic history – How did the growth of railroads and improvement in transportation more generally change the U.S. banking systems in the nineteenth century? Environmental economics – What effect would a tax on carbon have on emissions? Is a tax better or worse than rules? Finance – Is high frequency trading socially beneficial? Health economics – Do co-pays by patients change the choice and use of medicines by insured patients? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Fields of Economics The history of economic thought – How did Aristotle think about just prices? Industrial organization – How do we explain price wars in the airline industry? International economics – What are the benefits and costs of free trade? Does concern about the environment change our views of free trade? Labor economics – Will increasing the minimum wage decrease employment opportunities? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Fields of Economics Law and economics – Does the current U.S. patent law increase or decrease the rate of innovation? Public economics – Why is corruption more widespread in some countries than in others? Urban and regional economics – Do enterprise zones improve employment opportunities in central cities? Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Method of Economics positive economics An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. normative economics An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Theories and Models model A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables. variable A measure that can change from time to time or from observation to observation. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Theories and Models All Else Equal ceteris paribus or all else equal A device used to analyze the relationship between two variables while the values of other variables are held unchanged. x=y+z+a-b (1) X - educational attainment y - government funding z - nutrition a - access to education B - weather Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Economic Policy (1 of 3) Four criteria are important in judging economic outcomes: 1. Efficiency 2. Equity 3. Growth 4. Stability Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Economic Policy (2 of 3) Efficiency efficiency In economics, efficiency means allocative efficiency. An efficient economy is one that produces what people want at the least possible cost. Equity equity Fairness. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Economic Policy (3 of 3) Growth economic growth An increase in the total output of an economy. Stability stability A condition in which national output is growing steadily, with low inflation and full employment of resources. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Review Terms and Concepts ceteris paribus, or all else equal microeconomics economic growth model economics normative economics efficiency opportunity cost efficient market positive economics empirical economics scarce equity stability Industrial Revolution variable macroeconomics Marginalism Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 1A.1 Total Disposable Personal Income in the United States, 1975–2017 (in billions of dollars) Total Disposable Personal Total Disposable Personal Total Disposable Personal Year Year Year Income Income Income 1975 1,219 1991 4,485 2007 10,507 1976 1,326 1992 4,800 2008 10,994 1977 1,457 1993 5,000 2009 10,943 1978 1,630 1994 5,244 2010 11,238 1979 1,809 1995 5,533 2011 11,801 1980 2,018 1996 5,830 2012 12,404 1981 2,251 1997 6,149 2013 12,396 1982 2,425 1998 6,561 2014 13,033 1983 2,617 1999 6,876 2015 13,615 1984 2,904 2000 7,401 2016 13,969 1985 3,099 2001 7,752 2017 14,379 1986 3,288 2002 8,099 1987 3,466 2003 8,466 1988 3,770 2004 9,002 1989 4,052 2005 9,401 1990 4,312 2006 10,037 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 1A.1 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Plotting Income and Consumption Data for Households positive relationship A relationship between two variables, X and Y, in which a decrease in X is associated with a decrease in Y and an increase in X is associated with an increase in Y. negative relationship A relationship between two variables, X and Y, in which a decrease in X is associated with an increase in Y and an increase in X is associated with a decrease in Y. x=y-b (2) x - income y - normal goods (e.g. food, clothing) b - inferior goods (e.g. generic items, car parts) Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Slope slope A measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in Y (the variable on the vertical axis) when X (the variable on the horizontal axis) changes. DY Y2 -Y1 = DX X 2 - X1 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 1A.3 A Curve with (a) Positive Slope and (b) Negative Slope A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y. A negative slope indicates the opposite—when X increases, Y decreases; and when X decreases, Y increases. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 1A.4 Changing Slopes along Curves Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved