chapter

The Role and Method

1 of Economics

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 Chapter Introduction
Many issues in our lives are at least partly
economic
in character:
• Why do 10 AM classes fill up faster than 8 AM
classes during registration?

• Why is teenage unemployment higher than adult

unemployment?

• Why is the price of your prescription drugs so

high?

• How does inflation impact you and your family?

• Why do professional athletes make so much

money?

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 • Why is it easier for college
graduates to find jobs in some
years rather than others?
• Why do US auto producers like
tariffs on imported cars?
• Will higher taxes on cigarettes
reduce the number of teenagers
smoking? If so, by how much?
• Why is it hard to find an
apartment in cities such as San
Francisco, Berkeley and New York?

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 • The study of economics
improves your understanding
of these and many other
concerns.
• The economic approach sheds
light on many social issues
such as discrimination,
education, crime and
divorce

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1.1 Economics: A Brief Introduction
• Economics is the study of the
allocation of our limited resources to
satisfy our unlimited wants.
• how people decide what to buy,
how much to work, save, and spend
• how firms decide how much to produce,

how many workers to hire

• how society decides how to divide its
resources between national defense,
consumer goods, protecting the
environment, and other needs

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 •Resources are inputs that are used to produce
goods and services.

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 Economics: A Brief Introduction
•Scarcity forces us to make choices on how to best use
our limited resources.

•The economic problem: Scarcity forces us to choose, and

choices are costly because we must give up other
opportunities that we value.
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 • All decisions involve tradeoffs
• Living in a world of scarcity means facing
tradeoffs—a trip to the grocery store versus
the mall; finishing a research paper or going
to the beach or a movie; sleep or class.
• Economics concerns everything an individual
might consider worthwhile, including things
that are generally considered “priceless”
• e.g. Love, sexual fulfillment, or spiritual
enlightenment
• Even time has an economic dimension.
Study Playing
game

or
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 • Why study economics?
• Many of the things that concern us
are at least partly economic in
character.
• Study of economics helps improve
our understanding of these
concerns.
• Economics gives us clues on how to
intelligently evaluate options.
• Helps develop a disciplined method
of thinking about problems.

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1.2 Economic Behavior
• Economists assume that individuals
act as if they are motivated by
self-interest and respond in
predictable ways to changing
circumstances.
• To a worker, self-interest means
pursuing a higher paying job
and/or better working conditions.
• To a consumer, self-interest means
gaining a greater level of
satisfaction from their limited
income and time.
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 • 1.2 Economic Behavior
• Most economists believe that
people for the most part engage
in rational behavior.
• Rational people : systematically
and purposefully do the best they
can to achieve their objectives.

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 • In mainstream economics, to say
that people are rational is not to
assume that they never make
mistakes. It is merely to say that
they do NOT make systematic
mistakes.
• When economists talk of self-
interest, they are not just
referring to satisfaction of
material wants but to a broader
idea of “preferences” that can
easily encompass the welfare of
others.
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 • ceteris paribus
• Virtually all theories in economics
are expressed using a ceteris paribus
(“holding everything else constant”)
assumption.
• An example of ceteris paribus: The
theory that if I study harder, I will
perform better on a test must
carefully hold other things constant.
• These other things might include—what
if you studied so hard you overslept
or you were too sleepy to think
clearly? Or what if you studied the
wrong stuff?

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 • Two main branches of economics:
• Macroeconomics, and
• Microeconomics.
• Macroeconomics is the study of the
aggregate, or total economy.
• It looks at economic problems as
they influence the whole of
society, including the topics of
inflation, unemployment, business
cycles, and economic growth.

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 • Microeconomics deals with the
smaller units within the economy.
• It attempts to understand the
decision making behavior of firms

and households and their

interaction in markets for
particular goods or services.
• Microeconomics looks at the
trees; Macroeconomics looks at
the forest.

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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1.5 Positive and Normative Statements
• Positive statement--an objective
testable statement. Positive statements
are attempts to describe what happens
and why it happens.
• Normative statement--a subjective non-
testable item about what should be or
what ought to happen. Normative
statements are attempts to prescribe
what should be done.
• For example, should the government give
“free” prescription drugs to seniors?
Or should the government increase
spending in the space program?

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1.5 Positive and Normative Statements

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 • Disagreement is common in
most disciplines.
• The majority of disagreements
in economics stem from
normative issues.
• However, there is some
disagreement over positive
analysis—there may be mixed
empirical evidence or
insufficient information.

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 • Most economists agree on a
wide range of issues
including the effects of
rent control, import
tariffs, export
restrictions, the use of
wage and price controls to
curb inflation, and the
minimum wage.
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 APPENDIX Working with Graphs

Graphs are an important economic tool.

They:
• Allow economists to better
understand the workings of the economy,
and
• Enhance the understanding of
Important economic relationships.

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Working with Graphs

Plotting a Graph

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Working with Graphs

Four common types of graphs

are:

• Pie charts;
• Bar graphs;
• Time series graphs; and
• Scatter diagrams.

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Working with Graphs

Pie Chart—Tax Revenues—Federal Government

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Working with Graphs

Bar Graph—U.S. Unemployment, by Sex and Age

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Working with Graphs

Time-Series Graph—Inflation Rate

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Working with Graphs

Scatter Diagram—Saving Rates and GDP Growth

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Working with Graphs

• Graphs can be used to show the

relationship
between two variables.

• A variable is something that is

measured by
a number – like your height.

• Relationships between two variables

can be
expressed in a simple
two‑dimensional graph.
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Working with Graphs

• A positive relationship means that two

variables move in the same direction.
• That is, an increase
in one variable
(practice time) is
accompanied by an
increase in another
variable (overall
score) or a decrease
in one variable is
accompanied by a
decrease in another
variable. A Positive Relationship

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Working with Graphs

• When two variables move in different directions, there

is a negative relationship between the two variables.
• When one variable rises, the other variable falls.
• A downward‑sloping line,
the demand curve, shows the
different combinations of
price and quantity
purchased.
• The higher you go up on the
vertical (price) axis, the
smaller the quantity
purchased on the horizontal
axis, and the lower you go
down along the vertical
(price) axis, the greater
the quantity purchased.
A Negative Relationship
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Working with Graphs

• Even when only two variables are

shown on the axes, graphs can be
used to show the relationship
between three variables.
• For example, a rise in income may
increase the quantity of CDs
purchased at each possible price.
• This would shift the whole demand
curve for CDs outward to a new
position.

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Working with Graphs

Shifting a Curve: Demand Curve with

Higher Income
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Working with Graphs

Shifting a Curve: Demand Curve with Lower

Income
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Working with Graphs

• It is important to remember the

difference between a movement up
and down along a curve and a shift
in the whole curve.
• A change in one of the variables
on the graph, like price or
quantity purchased, will cause a
movement along the curve.
• A change in one of the variables
not shown, like income in our
example, will cause the whole
curve to shift.
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Working with Graphs

• Going from
Point A to B
indicates
movement
along a
demand curve.
• Going from D0
to D1 is a
shift. Shifts Versus
Movements
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Working with Graphs

• The slope, or steepness, of curves

can be either positive (upward
sloping) or negative (downward
sloping).
• A curve that is downward sloping
represents an inverse, or negative,
relationship between the two
variables.
• A curve that is upward sloping
represents a direct, or positive
relationship between the two
variables.
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Working with Graphs

• A downward-sloping curve
represents a negative
relationship between two
variables.
• An upward-sloping curve
represents a positive
relationship between two
variables.
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Working with Graphs

Downward-Sloping Linear Curve

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Working with Graphs

Upward-Sloping Linear Curve

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Working with Graphs

• The slope of a linear curve

between two points measures
the relative rates of change
of two variables.
• The slope of a linear curve
can be defined as the ratio
of the change in the Y value
to the change in the X value,
or the ratio of the rise to
the run.
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Working with Graphs

Slopes of Positive and Negative Curves

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Working with Graphs

• Along a nonlinear curve, the

slope varies from point to
point.
• However, we can find the
slope of such a curve at any
point by finding the slope
of the tangent to that curve
at that point.

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Working with Graphs

Slopes of a Nonlinear
Curve
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