1 What is Economic L1.ppt

Slide: 2
Lesson Objectives
 Explain the five broad questions economists try
to answer
 Explain the eight big ideas in economics
 Describe what economists do

Slide: 3
A Definition of Economics
 Society’s wants exceed the resources available to
satisfy them.
 Rich and poor alike are faced with scarcity.

Slide: 4
A Definition of Economics
 Economics is the science of choice — the science
that explains the choices that we make and how
those choices change as we cope with scarcity.

Slide: 5
Five Big Economic Questions
 What?
 How?
 When?
 Where?
 Who?

Slide: 6
What?
 What goods and services are produced and in
what quantities?
 Do we produce more VCR or do we built more movie
theatres?

Slide: 7
How?
 How will the various goods and services be
produced?
 Do we use humans or machines to produce the goods
we want?

Slide: 8
When?
 When will the various goods and services be
produced?
 Will a supermarket operate 24 hours a day for 7 days
a week, or just 8 hours a day for 6 days a week?

Slide: 9
Where?
 Where will the various goods and services be
produced?
 Do we produce the goods in Australia or in Japan?

Slide: 10
Who?
 Who will consume the various goods and services
that are produced?
 Do we sell our goods to the wealthy, or people with
low income?

Slide: 11
Big Ideas of Economics
 The questions give you a sense of what
economics is about.
 The Big Ideas of Economics describe how
economists think about these questions and seek
answers to them.

Slide: 12
 IDEA 1 - Choice, tradeoff, and opportunity cost
 A choice is a tradeoff — we give up something to get
something else—and the highest valued alternative we
give up is the opportunity cost of the activity chosen.

Slide: 13
 IDEA 2 - Margins and incentives
 We make choices in small steps, or at the margin, and
choices are influenced by incentives.
 Marginal Benefit vs. Marginal Cost
 Incentives are inducements to take particular actions

Slide: 14
 IDEA 3 - Voluntary exchange and efficient
markets.
 Voluntary exchange makes both buyers and sellers
better off, and markets are an efficient way to
organise exchange.
 Buyers receive goods or services
 Sellers receive money.

Slide: 15
 IDEA 3 (cont.)
 Markets are efficient because they ensure that
resources will be used where they are valued most
highly.
 Alternative to Market Economy
 Command Economy

Slide: 16
 IDEA 4 - Market failure
 The market does not always work efficiently and
sometimes, government action is necessary to
overcome market failure and lead to a more efficient
use of resources.
 Market failure is a state in which the market does not
use resources efficiently.

Slide: 17
 IDEA 5 - Expenditure, income and the value of
production
 For the economy as a whole, expenditure equals
income equals the value of production.

Slide: 18
 IDEA 6 - Living standards and productivity
growth
 Living standards improve when production per
person increases.
 This increase in output per person will enable more people
to own goods and services.

Slide: 19
 IDEA 7 - Inflation: A monetary problem
 Prices rise when the quantity of money increases
faster than production.
 Inflation results from “too much money chasing too few
goods”.

Slide: 20
 IDEA 8 - Unemployment: Wasteful and
productive
 Unemployment can result from market failure but
some unemployment is productive.
 Unemployment rates vary
 Some unemployment results from employees searching for
a suitable job and employers searching for suitable workers.
 This unemployment improves productivity.

Slide: 21
What Economists Do
 The economy can be looked at with either a
micro or a macro view.
Microeconomics vs. Macroeconomics

Slide: 22
What Economists Do
 Microeconomics and Macroeconomics
 Microeconomics is the study of individual people and
businesses and the interaction of those decisions in the
market.
 Studies:
 Prices and Quantities
 Effects of government regulation and taxes

Slide: 23
What Economists Do
 Microeconomics and Macroeconomics
 Macroeconomics is the study of the national
economy and the global economy as a whole.
 Studies
 Average prices and total employment, income, and
production
 Effects of taxes, government spending , a budget deficits on
total jobs and incomes
 Effects of money and interest rates

Slide: 24
Economic Science
 Economists attempt to discover an explanation
for how economic systems work.
 Economists distinguish between Positive
Statements and Normative Statements

Slide: 25
Economic Science
 Positive statements are about what is.
 can be proven right or wrong
 can be tested by comparing it to facts
 Normative statements are about what ought to be.
 depend upon personal values and cannot be tested

Slide: 26
Economic Science
 Objective
 discover and catalogue positive statements that are
consistent with what we observe in the world and that
enable us to understand how the economic world
works

Slide: 27
Economic Science
 Steps
 Observation and Measurement
 Model Building
 Economic model is a description of some aspects of the
economic world
 Model Testing
 Economic theory - a generalisation that summarises what
we think we understand about the real world, and is a
bridge between economic model and the real economy

Slide: 28
Obstacles and Pitfalls
in Economics
 Unscrambling Cause and Effect
 Ceteris Paribus
 Fallacy of Composition
 The statement that what is true of the parts is true of
the whole or what is true of the whole is true of the
parts

Slide: 29
Obstacles and Pitfalls
in Economics
 Post Hoc Fallacy
 The error or reasoning that a first event causes a
second event because the first occurred before the
second

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