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Chapter 1
- 1. Graphing Data • Agraph reveals a relationship. • A graph represents “quantity” as a distance. • A two-variable graph uses two perpendicular scale lines. • The vertical line is the y-axis. • The horizontal line is the x- axis. • The zero point in common to both axes is the origin.
- 2. • Economists usethree types of graph to reveal relationships between variables. They are Time-series graphs Cross-section graphs Scatter diagrams Graphing Data
- 3. • Time-Series Graphs •A time-series graph measures time (for example, months or years) along the x-axis and the variable or variables in which we are interested along the y-axis. • The time-series graph on the next slide shows the price of gasoline between 1973 and 2006. • The graph shows the level of the price, how it has changed over time, when change was rapid or slow, and whether there was any trend. Graphing Data
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- 5. • Cross-Section Graphs • Across-section graph shows the values of a variable for different groups in a population at a point in time. • The cross-section graph on the next slide enables you to compare the number of people who participate in 10 popular leisure activities in the United States. Graphing Data
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- 7. • Scatter Diagrams •A scatter diagram plots the value of one variable on the x- axis and the value of another variable on the y-axis. • A scatter diagram can make clear the relationship between two variables. • The three scatter diagrams on the next slide show examples of variables that move in the same direction, in opposite directions, and in no particular relationship to each other. Graphing Data
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- 9. Graphs Used inEconomic Models • Graphs are used in economic models to show the relationship between variables. • The patterns to look for in graphs are the four cases in which Variables move in the same direction. Variables move in opposite directions. Variables have a maximum or a minimum. Variables are unrelated.
- 10. • Variables ThatMove in the Same Direction • A relationship between two variables that move in the same direction is called a positive relationship or a direct relationship. • A line that slopes upward shows a positive relationship. • A relationship shown by a straight line is called a linear relationship. • The three graphs on the next slide show positive relationships. Graphs Used in Economic Models
- 11. Graphs Used inEconomic Models
- 12. • Variables ThatMove in Opposite Directions • A relationship between two variables that move in opposite directions is called a negative relationship or an inverse relationship. • A line that slopes downward shows a negative relationship. • The three graphs on the next slide show negative relationships. Graphs Used in Economic Models
- 13. Graphs Used inEconomic Models
- 14. • Variables ThatHave a Maximum or a Minimum • The two graphs on the next slide show relationships that have a maximum and a minimum. • These relationships are positive over part of their range and negative over the other part. Graphs Used in Economic Models
- 15. Graphs Used inEconomic Models
- 16. • Variables Thatare Unrelated • Sometimes, we want to emphasize that two variables are unrelated. • The two graphs on the next slide show examples of variables that are unrelated. Graphs Used in Economic Models
- 17. Graphs Used inEconomic Models
- 18. The Slope ofa Relationship • The slope of a relationship is the change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis. • We use the Greek letter (capital delta) to represent “change in.” • So y means the change in the value of the variable measured on the y-axis and x means the change in the value of the variable measured on the x-axis. • The slope of the relationship is y/x.
- 19. • The Slopeof a Straight Line • The slope of a straight line is constant. • Graphically, the slope is calculated as the “rise” over the “run.” • The slope is positive if the line is upward sloping. The Slope of a Relationship
- 20. • The slopeis negative if the line is downward sloping. The Slope of a Relationship
- 21. • The Slopeof a Curved Line • The slope of a curved line at a point varies depending on where along the curve it is calculated. • We can calculate the slope of a curved line either at a point or across an arc. The Slope of a Relationship
- 22. • Slope ata Point • The slope of a curved line at a point is equal to the slope of a straight line that is the tangent to that point. • Here, we calculate the slope of the curve at point A. The Slope of a Relationship
- 23. • Slope Acrossan Arc • The average slope of a curved line across an arc is equal to the slope of a straight line that joins the endpoints of the arc. • Here, we calculate the average slope of the curve along the arc BC. The Slope of a Relationship
- 24. Graphing Relationships Among MoreThan Two Variables • When a relationship involves more than two variables, we can plot the relationship between two of the variables by holding other variables constant—by using ceteris paribus. • Ceteris paribus means “if all other relevant things remain the same.”
- 25. Graphing Relationships Among MoreThan Two Variables • Here we plot the relationships among three variables: • Price, consumption, and temperature
- 27. Definition of Economics •All economic questions arise because we want more than we can get. • Our inability to satisfy all our wants is called scarcity. • Because we face scarcity, we must make choices. • The choices we make depend on the incentives we face. • An incentive is a reward that encourages an action or a penalty that discourages an action.
- 28. • Economics isthe social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. • Economics divides in to main parts: Microeconomics Macroeconomics Definition of Economics
- 29. • Microeconomics • Microeconomicsis the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. • Macroeconomics • Macroeconomics is the study of the performance of the national and global economies. Definition of Economics
- 30. Two Big EconomicQuestions • Two big questions summarize the scope of economics: How do choices end up determining what, how, and for whom goods and services get produced? When do choices made in the pursuit of self-interest also promote the social interest?
- 31. • What, How,and For Whom? • Goods and services are the objects that people value and produce to satisfy human wants. • What? • Agriculture accounts for less than 1 percent of total U.S. production, manufactured goods for 20 percent, and services for 80 percent. • In China, agriculture accounts for 10 percent of total production, manufactured goods for 50 percent, and services for 40 percent. Two Big Economic Questions
- 32. • How? • Goodsand services are produced by using productive resources that economists call factors of production. • Factors of production are grouped into four categories: Land Labor Capital Entrepreneurship Two Big Economic Questions
- 33. • The “giftsof nature” that we use to produce goods and services are land. • The work time and work effort that people devote to producing goods and services is labor. • The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience. • The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital. • The human resource that organizes land, labor, and capital is entrepreneurship. Two Big Economic Questions
- 34. • For Whom? •Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit. Two Big Economic Questions
- 35. • When isthe Pursuit of Self-Interest in the Social Interest? • Every day, 304 million Americans and 6.7 billion people in other countries make economic choices that result in What, How, and For Whom goods and services are produced. • Do we produce the right things in the right quantities? • Do we use our factors of production in the best way? • Do the goods and services go to those who benefit most from them? Two Big Economic Questions
- 36. • You makechoices that are in your self-interest—choices that you think are best for you. • Choices that are best for society as a whole are said to be in the social interest. • An outcome is in the social interest if it uses resources efficiently and distributes goods and services fairly. • The Big Question • Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest? Two Big Economic Questions
- 37. • Self-Interest inthe Social Interest • Five topics that generate discussion and that illustrate tension between self-interest and social interest are Globalization The information-age economy Global warming Natural resource depletion Economic instability Two Big Economic Questions
- 38. The Economic Wayof Thinking • Choices and Tradeoffs • The economic way of thinking places scarcity and its implication, choice, at center stage. • You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else. • The classic tradeoff is “guns versus butter.” • “Guns” and “butter” stand for any two objects of value.
- 39. • What, How,and For Whom Tradeoffs • The questions what, how, and for whom become sharper when we think in terms of tradeoffs. • What Tradeoffs arise when people choose how to spend their incomes, when governments choose how to spend their tax revenues, and when businesses choose what to produce. The Economic Way of Thinking
- 40. • How Tradeoffsarise when businesses choose among alternative production technologies. • For Whom Tradeoffs arise when choices change the distribution of buying power across individuals. • Government redistribution of income from the rich to the poor creates the big tradeoff—the tradeoff between equality and efficiency. The Economic Way of Thinking
- 41. • Choices BringChange • What, how, and for whom goods and services get produced changes over time and the quality of our economic lives improve. • But the quality of our economic lives and the rate at which they improve depends on choices that involve tradeoffs. • We face three tradeoffs between enjoying current consumption and leisure time and increasing future production, consumption, and leisure time. The Economic Way of Thinking
- 42. • If wesave more, we can buy more capital and increase our production. • If we take less leisure time, we can educate and train ourselves to become more productive. • If businesses produce less and devote resources to research and developing new technologies, they can produce more in the future. • The choices we make in the face of these tradeoffs determine the pace at which our economic condition improves. The Economic Way of Thinking
- 43. • Opportunity Cost •Thinking about a choice as a tradeoff emphasizes cost as an opportunity forgone. • The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen. The Economic Way of Thinking
- 44. • Choosing atthe Margin • People make choices at the margin, which means that they evaluate the consequences of making incremental changes in the use of their resources. • The benefit from pursuing an incremental increase in an activity is its marginal benefit. • The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. The Economic Way of Thinking
- 45. • Responding toIncentives • Our choices respond to incentives. • For any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that activity. • If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity. • Incentives are also the key to reconciling self-interest and the social interest. The Economic Way of Thinking
- 46. • Human Nature,Incentives, and Institutions • Economists take human nature as given and view people as acting in their self-interest. • Self-interested actions are not necessarily selfish actions. • But if human nature is given and people pursue self- interest, how can the social interest be served? • Economists answer by emphasizing the role of institutions in creating incentives to behave in the social interest. • Paramount: the rule of law that protects private property and facilitates voluntary exchange in markets. The Economic Way of Thinking
- 47. Economics: A SocialScience and Policy Tool • Economics as Social Science • Economists distinguish between two types of statement: What is—positive statements What ought to be—normative statements • A positive statement can be tested by checking it against facts. • A normative statement cannot be tested.
- 48. • Unscrambling Causeand Effect • The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. • Economists create and test economic models. • An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. • Qd = f(p) 1.1 • Q= a+b(p) 1.2 • Q= 10 – 3p 1.3 (example) Economics: A Social Science and Policy Tool
- 49. • A modelis tested by comparing its predictions with the facts. • But testing an economic model is difficult, so economists also use Natural experiments Statistical investigations Economic experiments Economics: A Social Science and Policy Tool
- 50. • Economics asPolicy Tool • Economics is a way of approaching problems in all aspects of our lives. Three broad areas are Personal economic policy Business economic policy Government economic policy Economics: A Social Science and Policy Tool