Basic Microeconomics - (B-BABD001)

PRINCIPLES OF

ECONOMICS
TENTH EDITION
PART I Introduction to Economics

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

CASE FAIR OSTER Prepared by: Fernando Quijano & Shelly Tefft
PART I INTRODUCTION TO ECONOMICS

The Scope and

Method of Economics
CHAPTER
1
OUTLINE
Why Study Economics?
To Learn a Way of Thinking
To Understand Society
To Understand Global Affairs
To Be an Informed Citizen
The Scope of Economics
Microeconomics and
Macroeconomics

The Method of Economics

Descriptive Economics and
Economic Theory
Theories and Models
Economic Policy
Scope and method of Economics
 Why study Economics
• To Learn a Way of Thinking
• To Understand Society
• To Understand Global Affairs
• To Be an Informed Citizen
Why Study Economics

•To Learn a Way of Thinking – Can help us look at things differently:

oOpportunity cost - The best alternative that we forgo, or give up, when we make a
choice or a decision. Every time we make a decision, it involves giving up something. This
situation arises because resources are scarce.
oMarginalism - The process of analyzing the additional or incremental costs or benefits
arising from a choice or decision.
oEfficient market - A market in which profit opportunities are eliminated almost
instantaneously. This means that profit opportunities are usually rare because whenever it
exists, it will be promptly eliminated.
Why Study Economics

• To Understand Society - Studying economics helps to understand society better.

Especially how past and present economic decisions have shaped how we interact with
our physical environment, the level of material well-being, and the nature and number of
jobs are all products of the economic system. A good example is how Industrial
Revolution transformed Britain in terms of productivity of agriculture, new manufacturing
technologies, and development of more efficient forms of transportation.
• To Understand Global Affairs – Including political and environmental affairs.
• To Be an Informed Citizen - A knowledge of economics is essential to being an
informed citizen. Political decisions have implications on key issues such as recession,
and high unemployment.
The Scope of Economics
 Two major divisions
o Macroeconomics o Microeconomics

Microeconomic theory
 Microeconomics and Macroeconomics

Microeconomics Examines the functioning of individual industries and

the behavior of individual decision-making units—firms and households.

Macroeconomics Deals with the economy as a whole. Macroeconomics focuses on the

determinants of total national income, deals with aggregates such as aggregate consumption
and investment, and looks at the overall level of prices instead of individual prices.

Aggregate behavior The behavior of all households and firms together.

Microeconomics
 Branch of economics that studies how individuals and firms
make decisions to allocate limited resources………..in
markets where goods or services are being bought and sold
(Chen, 2007).
o Markets – Defined by arrangement NOT “Place”
- Product (Buyers – individuals; Sellers – firms)
- Factor ( Buyers – firms; Sellers – individuals)
Method of Economics
 Positive economics - An approach to economics based on objective analysis of data;
it tries to understand behavior and the operation of systems without making judgments.
It describes how things (economic situation or condition) works (are) or exists. It can
be supported or disproved using facts. Why price react the way the way it does on e-
bay?

 Normative economics - An approach to economics that analyzes outcomes of

economic behavior (or public policy), evaluates them as good or bad, and tend to be
judgmental as to what ought to be. Also called policy economics.
The Method of Economics
 Descriptive Economics and Economic Theory

Descriptive economics The compilation of data that describe

phenomena and facts.

Economic theory A statement or set of related

statements about cause and effect, action and reaction.
The Method of Economics
 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.
The Method of Economics
Theories and Models
All Else Equal: Ceteris Paribus

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.

Using the device of ceteris paribus is one part of the process of

abstraction. In formulating economic theory, the concept helps us
simplify reality to focus on the relationships that interest us.
 The Method of Economics
Theories and Models
Expressing Models in Words, Graphs, and Equations

Methods of expressing the quantitative relationship between two variables:

 Graphing (as presented in appendix)

 Equations, for example:

If over time U.S. households collectively spend, or consume, 90 percent of

their income and save 10 percent of their income, we could then write:

C = .90 Y and S = .10Y

where C is consumption spending, Y is income, and S is saving.

The Method of Economics
Theories and Models
Testing Theories and Models: Empirical
Economics

Theoretical Economics – Building models.

Empirical Economics - The collection and use of data

to test economic theories.
The Method of Economics
Economic Policy
Criteria for judging economic outcomes:
1. Efficiency: Producing what people want at the least possible cost.
2. Equity – Implies fairness (more equal distribution of income and alleviating poverty).
3. Growth
4. Stability
The Method of Economics
Economic Policy
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.
 FIGURE 2.1 The Three Basic Questions

Every society has some system or process that transforms its scarce
resources into useful goods and services. In doing so, it must decide
what gets produced, how it is produced, and to whom it is distributed.

The primary resources that must be allocated are

land, labor, and capital.
Basic Economic Problems
 Because of scarcity, an allocation decision must be
made. The allocation decision is comprised of three
separate choices:
 What and how many goods and services should be
produced?
 How should these goods and services be produced?
 For whom should these goods and services be produced?
What ought to happen

What does happens