Ch01

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  • Ch01

    1. 1. Cha pte r 1 Economics: Foundations and Models P re pa re d by: Fe rna ndo & Yvonn Quija no © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
    2. 2. What Happens When U.S. High-Technology Firms Move to China? Learning Objectives 1.1 Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. 1.2 Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services? 1.3 Understand the role of models in economic analysis. 1.4 Distinguish between microeconomics and macroeconomics. Many U.S., Japanese, and European firms have been moving the production of goods and services outside their home country … 1.5 Become familiar with important economic terms. APPENDIX Review the use of graphs and formulas. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 29
    3. 3. Economics: Foundations and Models In this book, we use economics to answer questions such as the following: • How are the prices of goods and services determined? • How does pollution affect the economy, and how should government policy deal with these effects? • Why do firms engage in international trade, and how do government policies affect international trade? e pa h C t • Why does government control the prices of some goods and services, and what are the effects of those controls? © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 34
    4. 4. Economics: Foundations and Models 4.1 Scarcity The situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics The study of the choices people make to attain their goals, given their scarce resources. e pa h C t Economic model A simplified version of reality used to analyze real-world economic situations. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 34
    5. 5. Learning Objective 1.1 Three Key Economic Ideas 4.1 Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas: 1 People are rational. 2 People respond to economic incentives. e pa h C t 3 Optimal decisions are made at the margin. Marginal analysis Analysis that involves comparing marginal benefits and marginal costs. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 34
    6. 6. Learning Objective 1.1 e pa h C t Making Will Women Have More Babies if the the Government Pays Them To? Connection © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 34
    7. 7. Learning Objective 1.1 Solved Problem 1-1 Apple Computer Makes a Decision at the Margin Should Apple produce an additional 300,000 iPods? In solving the problem, consider the following: Optimal decisions are made at the margin. • An activity should be continued to the point where the marginal benefit is equal to the marginal cost. • e pa h C t • In this case, the correct decision requires information about additional revenue and additional cost. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 34
    8. 8. Learning Objective 1.2 The Economic Problem That Every Society Must Solve Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. Opportunity cost The highest-valued alternative that must be given up to engage in an activity. Trade-offs force society to make choices, particularly when answering the following three fundamental questions: 1 What goods and services will be produced? 2 How will the goods and services be produced? e pa h C t 3 Who will receive the goods and services produced? © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 34
    9. 9. Learning Objective 1.2 The Economic Problem That Every Society Must Solve Centrally Planned Economies versus Market Economies Centrally planned economy An economy in which the government decides how economic resources will be allocated. e pa h C t Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 34
    10. 10. Learning Objective 1.2 The Economic Problem That Every Society Must Solve The Modern “Mixed” Economy e pa h C t Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 34
    11. 11. Learning Objective 1.2 The Economic Problem That Every Society Must Solve Efficiency and Equity Productive efficiency The situation in which a good or service is produced at the lowest possible cost. e pa h C t Allocative efficiency A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 34
    12. 12. Learning Objective 1.2 The Economic Problem That Every Society Must Solve Efficiency and Equity Voluntary exchange The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction. e pa h C t Equity The fair distribution of economic benefits. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 34
    13. 13. Learning Objective 1.3 Economic Models To develop a model, economists generally follow these steps: 1 Decide on the assumptions to be used in developing the model. 2 Formulate a testable hypothesis. 3 Use economic data to test the hypothesis. 4 Revise the model if it fails to explain well the economic data. e pa h C t 5 Retain the revised model to help answer similar economic questions in the future. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 34
    14. 14. Learning Objective 1.3 Economic Models The Role of Assumptions in Economic Models Economic models make behavioral assumptions about the motives of consumers and firms. Forming and Testing Hypotheses in Economic Models e pa h C t Economic variable Something measurable that can have different values, such as the wages of software programmers. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 14 of 34
    15. 15. Learning Objective 1.3 Making When Economists Disagree: the A Debate over Outsourcing Connection e pa h C t Does outsourcing by U.S. firms raise or lower incomes in the United States? © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 34
    16. 16. Learning Objective 1.3 Economic Models Normative and Positive Analysis Positive analysis Analysis concerned with what is. e pa h C t Normative analysis Analysis concerned with what ought to be. Don’t Let This Happen to YOU! Don’t Confuse Positive Analysis with Normative Analysis © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 16 of 34
    17. 17. Learning Objective 1.4 Microeconomics and Macroeconomics Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. e pa h C t Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 17 of 34
    18. 18. Learning Objective 1.5 A Preview of Important Economic Terms • Entrepreneur • Profit • Innovation • • Technology Firm, company, or business • • Household Factors of production or economic resources • Capital • Human capital Goods • Services • e pa h C t • Revenue © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 18 of 34
    19. 19. An Inside LOOK Should the United States Worry about HighTech Competition from India and China? e pa h C t Nightmare Scenarios © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 19 of 34
    20. 20. Key Terms e pa h C t Allocative efficiency Centrally planned economy Economic model Economic variable Economics Equity Macroeconomics Marginal analysis Market Market economy Microeconomics Mixed economy Normative analysis Opportunity cost Positive analysis Productive efficiency Scarcity Trade-off Voluntary exchange © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 20 of 34
    21. 21. Appendix Using Graphs and Formulas e pa h C t A graph is like a street map—it is a simplified version of reality. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 21 of 34
    22. 22. Appendix Graphs of One Variable FIGURE 1A-1 e pa h C t Bar Graphs and Pie Charts © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 22 of 34
    23. 23. Appendix Graphs of One Variable FIGURE 1A-2 e pa h C t Time-Series Graphs © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 23 of 34
    24. 24. Appendix Graphs of Two Variables FIGURE 1A-3 e pa h C t Plotting Price and Quantity Points in a Graph © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 24 of 34
    25. 25. Appendix Graphs of Two Variables Slopes of Lines Slope = Change in value on the vertical axis Change in value on the horizontal axis = Δy Δx = Rise Run FIGURE 1A-4 e pa h C t Calculating the Slope of a Line Slope = Δ Price of pizza Δ Quantity of pizza = ($12 − $14) (65 − 55) = −2 10 = − 0.2 © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 25 of 34
    26. 26. Appendix Graphs of Two Variables Taking into Account More Than Two Variables on a Graph FIGURE 1A-5 e pa h C t Showing Three Variables on a Graph © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 26 of 34
    27. 27. Appendix Graphs of Two Variables Positive and Negative Relationships FIGURE 1A-6 e pa h C t Graphing the Positive Relationship between Income and Consumption © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 27 of 34
    28. 28. Appendix Graphs of Two Variables Determining Cause and Effect FIGURE 1A-7 e pa h C t Determining Cause and Effect © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 28 of 34
    29. 29. Appendix Graphs of Two Variables Are Graphs of Economic Relationships Always Straight Lines? The graphs of relationships between two economic variables that we have drawn so far have been straight lines. The relationship between two variables is linear when it can be represented by a straight line. e pa h C t Few economic relationships are actually linear. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 29 of 34
    30. 30. Appendix Graphs of Two Variables e pa h C t Slopes of Nonlinear Curves FIGURE 1A-8 The Slope of a Nonlinear Curve © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 30 of 34
    31. 31. Appendix Formulas Formulas for a Percentage Change One important formula is the percentage change. The percentage change is the change in some economic variable, usually from one period to the next, expressed as a percentage.  GDP2004 − GDP2003    x 100   GDP2003   e pa h C t Percentage change = ( Value in the second period - Value in the first period ) x 100 Value in the first period © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 31 of 34
    32. 32. Appendix Formulas Formulas for the Areas of a Rectangle and a Triangle Area of a rectangle = base x height FIGURE 1A-9 e pa h C t Showing a Firm’s Total Revenue on a Graph © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 32 of 34
    33. 33. Appendix Formulas Formulas for the Areas of a Rectangle and a Triangle Area of a triangle = 1/2 x base x height FIGURE 1A-10 e pa h C t The Area of a Triangle © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 33 of 34
    34. 34. Appendix Formulas Summary of Using Formulas Whenever you must use a formula, you should follow these steps: 1 Make sure you understand the economic concept that the formula represents. e pa h C t 2 Make sure you are using the correct formula for the problem you are solving. 3 Make sure that the number you calculate using the formula is economically reasonable. For example, if you are using a formula to calculate a firm’s revenue and your answer is a negative number, you know you made a mistake somewhere. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 34 of 34

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