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					    CHAPTER 1:

What is Economics?
        CHAPTER CHECKLIST

1. Define economics, distinguish between
   microeconomics and macroeconomics, and
   explain the questions of macroeconomics.

2. Describe the work of economists as social
   scientists.

3. Explain four core ideas that define way
   economists think about macroeconomic
   questions.

4. Explain why economics is worth studying.
I. Introduction
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.
<Society’s wants exceed the resources
 available to satisfy them.

<Rich and poor alike are faced with
 scarcity.
 Texts
<This course will use this text:
<Bade & Parkin, Foundations of
 Macroeconomics, 1st edition
<This comes in a package, with a Study Guide,
 a CD of exercises etc., access to web
 resources and phone help.
<Practice with Study Guide or CD or web
 multiple choice questions/sample quizzes is
 the best way to prepare for tests
<Explore what is in the package; it’s costing
 you about $80, get your money’s worth out of
 it.
Using Bade-Parkin



<Don’t bring the text to class

<Do read it -- preferably before and after the class
 that the chapter is assigned for

<Do use the CD/web and the Study Guide -- it is
 best to do it with some friends, rather than alone.
Email and the Web


<If you don’t have an FSU email address,
 get one as soon as possible. You will get
 lots of important information about this
 class by email. It is easy to get email
 forwarded from your FSU garnet account
 to your preferred email account.
<By the end of the semester, there will be
 lots of material for the class on the web.
 See
 http://mailer.fsu.edu/~jcobbe/eco2013.htm
 JARGON


<Economics uses jargon a lot
<Jargon means a special vocabulary
<Economics jargon can be confusing because
 it often gives special meaning to ordinary,
 every day words, that have a different
 meaning in normal usage
 Why jargon?


<Jargon allows precision
<Jargon allows shorter statements
<Jargon permits more efficient
 communication
<It’s standard in economics, so we have to
 know it to understand economics
Quote: Joan Robinson
[Professor of Economics at U. of Cambridge]




<“You study economics in
order to avoid being fooled
      by economists”
 Bad aspects of Jargon


<Jargon can be used to obfuscate or exclude
<Jargon can be confusing to those who are
 unsure of it
<Unnecessary jargon hinders efficient
 communication rather than helping it
 Economics as a Foreign Language


<ALL economics and economists use jargon
 to some extent
<MOST of economics is common sense
<Except for a very few non-intuitive ideas,
 learning economics amounts to learning how
 to express what you know in the right jargon,
 i.e. it is like learning a new language
     LECTURE TOPICS

n   Definitions and Questions

n   Economics: A Social Science

n   Macroeconomic Ideas

n   Why Economics Is Worth Studying
           1.1 DEFINITIONS AND QUESTIONS
All economic questions and problems arise because human wants
exceed the resources available to satisfy them.


Scarcity
   The condition that arises because the available resources are
   insufficient to satisfy wants.


Economics
   Studies the choices that individuals, businesses, government, and
   entire societies make as they cope with scarcity.
       1.1 DEFINITIONS AND QUESTIONS

<Microeconomics
  Microeconomics: The study of the choices that
  individuals and businesses make, the way these
  choices interact, and the influence that governments
  exert on these choices. Micro = ‘small’
<Macroeconomics
  Macroeconomics: The study of the aggregate (or
  total) effects on the national economy and the global
  economy of the choices that individuals, businesses,
  and governments make. Macro = ‘big’
      1.1 DEFINITIONS AND QUESTIONS

<Macroeconomic Questions
  The three big issues that macroeconomics tries to
  understand are:
     • The standard of living
     • The cost of living
     • Economic fluctuations—recessions and
     expansions
       1.1 DEFINITIONS AND QUESTIONS

The Standard of Living
   Standard of living
   The level of consumption of goods and services that
   people enjoy, on the average; it is measured [not
   perfectly] by average income per person.
   Goods and services
   The objects that people value and produce to satisfy
   human wants. Goods are physical objects, and services
   are things done for people.
     1.1 DEFINITIONS AND QUESTIONS



For most people achieving a high standard of living
means finding a good job.
Unemployment
The state of being available and willing to work but
unable to find suitable work.
     1.1 DEFINITIONS AND QUESTIONS

The Cost of Living
Cost of living
The number of dollars it takes to buy the goods and
services that achieve a given standard of living.
Inflation
A situation in which the cost of living is rising and the
value of money is shrinking.
    1.1 DEFINITIONS AND QUESTIONS

Economic Fluctuations: Recessions and
Expansions
Business cycle
A periodic but irregular up-and-down movement in
production and jobs.
The worst recession ever was the Great Depression.
Great Depression
A period during the 1930s in which the economy
experienced its worst-ever recession.
        1.1 DEFINITIONS AND QUESTIONS

Figure 1.1
shows a
business
cycle.

An expansion
ends at a
peak and a
recession
ends at a
trough.
     1.2 ECONOMICS: A SOCIAL SCIENCE

The goal of economists is to discover how the
economic world works. Economists distinguish
between:
   • Positive statements: What is
   • Normative statements: What [someone thinks]
   ought to be
The task of economic science:
To discover and catalog positive statements that are
consistent with what we observe in the world and that
help us to understand how the economic world works.
      1.2 ECONOMICS: A SOCIAL SCIENCE

  The task can be broken into three steps:
     • Observing and measuring
     • Model building
     • Testing
<Observing and Measuring
 Items such as:
     • Quantities of resources
     • Wages and work hours
     • Prices and quantities of goods and services
     • Taxes and government spending
     • Volume of international trade
      1.2 ECONOMICS: A SOCIAL SCIENCE

<Model Building
  Economic model
  A description of some aspect of the economic world that
  includes only those features of the world that are
  needed for the purpose at hand.
 ‘Models’
<Economics uses models a lot

<A model is an abstraction, a simplification,
 that concentrates on a few things, excluding
 detail that is not essential to the task at hand.

<“Horses for courses” -- if the model serves
 its purpose, then lack of detail and realism
 doesn’t matter. Example:
       1.2 ECONOMICS: A SOCIAL SCIENCE

<Testing
  A model’s predictions might correspond to or conflict
  with the data.
  Economic theory
  A generalization that summarizes what we understand
  about the economic choices that people make and the
  economic performance of industries and nations.
        1.2 ECONOMICS: A SOCIAL SCIENCE

<Unscrambling Cause and Effect
 The central idea that economists use to unscramble
 cause and effect is ceteris paribus.
 Ceteris Paribus
 Ceteris paribus means “other things being equal.”
 But ceteris paribus can be a problem in economics when
 trying to test a model: in the real world, usually ‘ceteris’ is
 not ‘paribus’.
    1.2 ECONOMICS: A SOCIAL SCIENCE

Economist take three complimentary approaches:
   • Natural experiments
   • Econometric investigations
   • Economic experiments

Natural Experiments
  A situation that arises in the ordinary course of
  economic life in which the one factor of interest
  changes and other things don’t.
     1.2 ECONOMICS: A SOCIAL SCIENCE

Econometric Investigations
Economic investigations use statistical tools.
      Correlation
      The tendency for the values of two variables to
      move in a predictable and related way.

      Post hoc fallacy
      The error of reasoning that a first event causes a
      second event because the first occurred before
      the second.
Two Fallacies

<Post hoc ergo propter hoc* -- correlation
 is not causation.
<[*’After this, therefore because of this’ --
  obviously a fallacy: does the sun rise because
  the cock crows?]


<The Fallacy of Composition -- what is true
 for one may not be true for all.
    1.2 ECONOMICS: A SOCIAL SCIENCE



Economic Experiments
  Economic experiments put real subjects in a
  decision making situation and vary the influence of
  interest to discover how the subjects respond to one
  factor at a time. A relatively new approach.
    1.3 MACROECONOMIC IDEAS



Four core ideas:
   • Rational choice
   • Standard of living
   • Cost of living
   • Economic fluctuations
       1.3 MACROECONOMIC IDEAS

<Rational Choice
  Using the available resources to most effectively satisfy
  the wants of the person making the choice. Also called
  ‘optimization.’


Cost: What You Must Give Up


     Opportunity cost
     The highest-valued alternative forgone.
       1.3 MACROECONOMIC IDEAS

Benefit: Gain Measured by What You Are Willing to
  Give Up to get it.
    Benefit
    The gain or pleasure that something brings.

On the Margin
    Margin
   A choice that is made by comparing all the relevant
   alternatives systematically and incrementally.
     1.3 MACROECONOMIC IDEAS

    Marginal cost
    The cost of a one-unit increase in an activity

    Marginal benefit
    What you gain when you get one more unit of
    something.
We make a rational choice when we take those actions for
which marginal benefit exceeds or equals marginal cost.
IDEA 2

  We usually 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
  By looking for changes in marginal cost and
  marginal benefits, we can predict the way choices
  will change in response to changes in incentives.
 Implication …….

<Economics is good at assessing small
 changes from existing situations

<Economics is NOT good at dealing with the
 consequences of big changes -- it is hard to
 do a cost-benefit study of a revolution

<“Natura non facit saltum” -- Marshall,
 Economics as ‘natural history’ of people’s
 behavior.
       1.3 MACROECONOMIC IDEAS

<The Standard of Living and Productivity
  The dollar value of production can increase for three
  reasons:
     • Prices and wages rise
     • People employed increases
     • Productivity increases
  Productivity, measured nationally, is:
  total production per person employed.
       1.3 MACROECONOMIC IDEAS

<The Cost of Living and the Quantity of Money
  A rising cost of living, inflation, means that more dollars
  are needed to buy the same fixed quantity of goods and
  services.
  Inflation is caused by an increase in the quantity of money
  that is not matched by an increase in the quantity of goods
  and services, ceteris paribus. [Would this still be correct if
  we had a shift from paying workers weekly to paying them
  monthly?]
       1.3 MACROECONOMIC IDEAS

<Expenditure and Productivity Fluctuations
  Sources of economic fluctuations can be grouped as:
     • Expenditure fluctuations
     • Productivity fluctuations
  Smoothing the Business Cycle
  Economic fluctuations are undesirable: recession brings
  unemployment and overly strong expansion brings
  inflation.
  Macroeconomics tries to smooth the business cycle.
 Two ways of analyzing economic issues


<Efficiency -- how do we maximize the total
 value of all production, ignoring who gets it
 and who bears the costs?
<Equity -- what are the distributional
 implications, i.e. who benefits and who
 loses?
 Need both to be complete


<The U.S. tradition is to emphasize the
 efficiency aspect of economic questions
<However, all economic decisions normally
 have equity implications as well as efficiency
 ones, and an economic analysis is
 incomplete without discussion of the equity
 aspects.
<How Economists Study Issues
  Economists attempt to discover an explanation for
  how economic systems work -- to predict.
  Economists distinguish between Positive Statements
  and Normative Statements
     • Positive statements are about how things
       actually are -- facts could show a positive
       statement was false if it was false..
     • Normative statements are about what ought to
       be, involve opinion or value judgements -- they
       cannot be shown to be false.
 Economics and Politics


<Efficiency statements will usually be positive,
 so although we may disagree about the facts
 we can use them, try to find ‘truth.’
<Equity statements can be positive, but often
 quickly become normative, reflecting
 opinions about who should benefit or bear
 the cost -- and often these views feed into
 political disagreements.
       1.4 WHY ECONOMICS IS WORTH STUDYING

  Two main benefits from studying economics are:
    • Understanding
    • Expanded career opportunities

<Understanding
  Economic ideas are all around you. You cannot ignore
  them.
  As you progress with you study of economics, you’ll gain a
  deeper understanding of what is going on around you.
      1.4 WHY ECONOMICS IS WORTH STUDYING

<Expanded Career Opportunities
  Most students of economics don’t become economists.
   But knowledge of economics is useful in many fields such
  as banking, finance, business, management, insurance,
  real estate, law, government, journalism, health care and
  the arts.
  Economics graduates are not the highest-paid
  professional, but they are close to the top.
         1.4 WHY ECONOMICS IS WORTH STUDYING

Figure 1.2
Graduates in disciplines
that teach problem
identifying and solving
and strategic brokering
are top of the earnings
distribution:
    • engineering
    • computer science
    • economics
      4.1 WHY ECONOMICS IS WORTH STUDYING
      1.4

<The Costs of Studying Economics
  The main cost of studying economics is forgone leisure
  time.
  Most students find that economics is difficult and that it
  takes time and effort to master.
  The trick is practice, or learning by doing.
<Benefits Versus Costs
  Weigh up your benefits and costs!
        APPENDIX CHECKLIST

1. Interpret a scatter diagram, a time-series graph,
   and a cross-section graph.

2. Interpret the graphs used in economic models.

3. Define and calculate slope.

4. Graph relationships among more than two
   variables.
       APPENDIX: MAKING AND USING GRAPHS

<Basic Idea
  A graph enables us to visualize the relationship
  between two variables.
  To make a graph set two lines perpendicular to each
  other:
     • The horizontal line is called the x-axis.
     • The vertical line is called the y-axis.
     • The common zero point is called the origin.
        APPENDIX: MAKING AND USING GRAPHS


Figure A1.1 How
to make a graph
The horizontal axis (x
-axis) measures
income.

The vertical axis (y-
axis) measures
expenditure.
       APPENDIX: MAKING AND USING GRAPHS

<Interpreting Data Graphs

  Scatter diagram
  A graph of the value of one variable against the value of
  another variable.

  Time-series graph
  A graph that measures time on the x-axis and the
  variable or variables in which we are interested on the y
  -axis.
     APPENDIX: MAKING AND USING GRAPHS

Trend
A general tendency for the value of a variable to rise or
fall.

Cross-section graph
A graph that shows the values of a variable for different
groups at the same point in time.
       APPENDIX: MAKING AND USING GRAPHS



Figure A1.2(b)
shows a scatter
diagram.

As the price per
minute falls, the
number of minutes
called increases.
        APPENDIX: MAKING AND USING GRAPHS



Figure A1.2(b) shows a
scatter diagram.

As the price falls, the
number of calls
increases.
         APPENDIX: MAKING AND USING GRAPHS

Figure A1.2(c) shows a
times-series graph.

The graph shows when
unemployment was:
   • high and low.
  • Increased and
    decreased.

   • Changed quickly and
     slowly.
       APPENDIX: MAKING AND USING GRAPHS



Figure A1.2(d) shows a
cross-section graph.

The graph shows the
unemployment rate in
seven countries in
1999.
      APPENDIX: MAKING AND USING GRAPHS

<Interpreting Graphs Used in Economic

   Positive relationship or direct relationship
   A relationship between two variables that move in the
   same direction.

   Linear relationship
   A relationship that graphs as a straight line.
         APPENDIX: MAKING AND USING GRAPHS


Figure A1.3(a) shows a
positive (direct) relationship.


As the speed increases, the
distance traveled increases.
       APPENDIX: MAKING AND USING GRAPHS


Figure A1.3(b) shows a
positive (direct)
relationship.
As the speed increases,
the distance traveled
increases.
          APPENDIX: MAKING AND USING GRAPHS


Figure A1.3(b) shows a
positive (direct) relationship.


As the distance sprinted
increases, recovery time
increases.
       APPENDIX: MAKING AND USING GRAPHS


Figure A1.3(c) shows a
positive (direct)
relationship.

As study time increases,
the number of problems
worked increases.
     APPENDIX: MAKING AND USING GRAPHS

Negative relationship or inverse relationship
A relationship between two variables that move in
opposite directions.
       APPENDIX: MAKING AND USING GRAPHS

Figure A1.4(a) shows a
negative (inverse)
relationship.

As the time playing tennis
increases, the time playing
squash decreases along a
straight line.
        APPENDIX: MAKING AND USING GRAPHS


Figure A1.4(b) shows a
negative (inverse)
relationship.


As the journey length
increases, the cost per mile
of the trip falls along a curve
that becomes less steep.
       APPENDIX: MAKING AND USING GRAPHS


Figure A1.4(c) shows a
negative (inverse)
relationship.

As leisure time increases,
the number of problems
worked decreases along a
curve that becomes steeper.
          APPENDIX: MAKING AND USING GRAPHS

 Figure A1.5(a) shows a
 maximum point.
 As the rainfall increases:

1. The curve slopes upward as
   the yield per acre rises.

2. The curve is flat at point
   A, the maximum yield.

3. Then slopes downward as
   the yield per acre falls.
          APPENDIX: MAKING AND USING GRAPHS

  Figure A1.5(a) shows a
  minimum point.

 As the speed increases:
1. The curve slopes
   downward as the cost per
   mile falls.
2. The curve is flat at point
   B, the minimum cost per
   mile.
3. The curve slopes upward
   as the cost per mile rises.
         APPENDIX: MAKING AND USING GRAPHS


Figure A1.6(a) shows
variables that are unrelated.

As the price of bananas
increases, the student’s
grade in economics
remains at 75 percent.

The curve is horizontal.
        APPENDIX: MAKING AND USING GRAPHS


Figure A1.6(b) shows
variables that are unrelated.


As rainfall in California
increases, the output of
French vineyards remains
at 3 billion gallons.

The curve is vertical.
      APPENDIX: MAKING AND USING GRAPHS

<The Slope of a Relationship
  Slope
  The change in the value of the variable measured on
  the y-axis divided by the change the value of the
  variable measured on the x-axis.
  Slope = Dy ÷ Dx.
        APPENDIX: MAKING AND USING GRAPHS



Figure A1.7(a) shows a
positive slope.

1. When ∆x is 4,

2. ∆y is 3.

3. Slope (∆y/∆x) is 3/4.
        APPENDIX: MAKING AND USING GRAPHS



Figure A1.7(b) shows a
negative slope.

1. When ∆x is 4,

2. ∆y is –3.

3. Slope (∆y/∆x) is –3/4.
        APPENDIX: MAKING AND USING GRAPHS

Figure A1.7(c) shows the
slope of a curve at a point.
Slope of the curve at A
equals the slope of the red
line tangent to the curve at A.

1. When ∆x is 4,

2. ∆y is –3.

3. Slope (∆y/∆x) is –3/4.
       APPENDIX: MAKING AND USING GRAPHS

<Relationships Among More Than Two
 Variables
  To graph a relationship that involves more than two
  variables, we use the ceteris paribus assumption.
  Ceteris Paribus
  “other things remaining the same.”
  Figure A1.8 shows the relationships between ice cream
  consumed, the temperature, and the price of ice cream.
        APPENDIX: MAKING AND USING GRAPHS
Figure A1.8(a) shows the relationship between price and
consumption, temperature remaining the same.
        APPENDIX: MAKING AND USING GRAPHS
Figure A1.8(b) shows the relationship between temperature
and consumption, price remaining the same.
         APPENDIX: MAKING AND USING GRAPHS
Figure A1.8(c) shows the relationship between price and
temperature, consumption remaining the same.

				
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