econ2_micro_power slides lecturech01.ppt

Chapter 1 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1
ECON
Designed by
Amy McGuire, B-books, Ltd.
McEachern 2010-2011
1
CHAPTER
The Art and
Science of Economic
Analysis
Micro

LO1
The Economic Problem
 Wants, desires: unlimited
 Resources: scarce
 Economic choice
 Economics
 How people use scarce
resources to satisfy
unlimited wants

LO1
Resources
 Inputs; factors of production
 Used to produce goods and
services
 Goods and services are scarce
because resources are scarce
1. Labor
2. Capital
3. Natural Resources
4. Entrepreneurial ability

LO1
Resources
 Labor – human effort
 Physical effort
 Mental effort
 Time
 Payment: Wage
 Capital – human creations
 Physical capital
 Human capital
 Payment: Interest

LO1
Resources
 Natural resources – Gifts of
nature
 Renewable
 Exhaustible
 Payment: Rent
 Entrepreneurial ability
 Talent, idea
 Risk of operation
 Payment: Profit

LO1
Goods and Services
 Good: see, feel, touch
 Service: intangible
 Scarce good/service
 The amount people desire
exceeds the amount
available at zero price
 Choice
 Give up some goods and
services

LO1
Goods and Services
 Bads
 We want none of them;
not even at a zero price
 Free goods and services
 “There is no such thing as a
free lunch”
 Involve a cost to
someone

LO1
Economic Decision Makers
 Households
 Consumers
 Demand goods and
services
 Resource owners
 Supply resources
 Firms, Governments, Rest of
the World
 Demand resources
 Produce goods and
services

LO1
Markets
 Bring together buyers and sellers
 Determine price and quantity
 Product markets
 Goods and services
 Resource markets
 Resources

LO1
A Simple Circular-Flow Model
 Flow of
 Resources
 Products
 Income
 Revenue
 Among economic
decision makers
 Interaction
 Households
 Firms

LO1 The Simple Circular-Flow Model
for Households and Firms
Exhibit
1
Households
- Supply resources to
resource market; earn
income
- Demand goods and
services from product
market; spend income
Firms
- Demand resources to
produce goods and
services; payment for
resources
- Supply goods and
services to product market;
earn revenue

Rational Self-Interest
LO2
 Individuals are rational
 Make the best choice
 Given the available information
 Maximize expected benefit
 With a given cost
 Minimize expected cost
 For a given benefit
 The lower the personal cost of helping
others, the more help we offer

Choice Requires Time
and Information
LO2
 Time and information – scarce;
valuable
 Rational decision makers
 Willing to pay for information
 Improve choices
 Acquire information
 Additional benefit expected
exceeds the additional cost

Economic Analysis Is
Marginal Analysis
LO2
 Expected marginal benefit
 Expected marginal cost
 Marginal
 Incremental, additional, extra
 Rational decision maker:
 Change the status quo if expected
marginal benefit exceeds expected
marginal cost

Microeconomics and
Macroeconomics
LO2
 Microeconomics
 Individual economic choices
 Markets coordinate the choices of
economic decision makers
 Individual pieces of the puzzle
 Macroeconomics
 Performance of the economy as a
whole
 Big picture

The Science of
Economic Analysis
LO3
 Economic theory / model
 Simplification of economic reality
 Important elements of the problem
 Make predictions about the real
word
 Good theory
 Guide
 Sort, save, understand information

The Scientific Method
LO3
1. Identify the question and define
relevant variables
2. Specify assumptions
 Other-things-constant
 Behavioral assumptions
3. Formulate the hypothesis
 Key variables relate to each other
4. Test the hypothesis - evidence

LO3 The Scientific Method: Step by Step
1. Identify the Question and Define Relevant Variables
2. Specify Assumptions
or
3. Formulate a hypothesis
4. Test the hypothesis
Reject the
hypothesis
Use the hypothesis until a
better one comes along
Modify
Approach
Exhibit
2

Normative Versus Positive
LO3
 Positive economic statement
 Assertion about economic reality
 Supported or rejected by evidence
 True or false
 ‘What is’
 Normative economic statement
 Opinion
 ‘What should be’

LO3
Case
Study A Yen for Vending Machines
 Japan – lower unemployment
 Low birthrate
 No immigration
 Aging population
 Vending machines
 Wider variety of products
 Preferred

Predicting Average
Behavior
LO3
 Individual behavior
 Difficult to predict
 Random actions of individuals
 Offset one another
 Average behavior of groups
 Predicted more accurately

Pitfalls of Faulty
Economic Analysis
LO4
 The fallacy that association is
causation
 Event A caused event B –
associated in time
 The fallacy of composition
 What is true for the individual is
true for the group
 The mistake of ignoring the
secondary effects
 Unintended consequences

LO5
Case
Study College Major and Annual Earnings
 College degree
 Better jobs
 Higher pay
 Median annual earnings
 Men: $43,199
 Women: $32,155
 Major in economics
 Rank: #7
 No gap between men and
women

LO5
Exhibit
3 Median Annual Earnings of 35- to 44-Year-Olds
with Bachelor’s as Highest Degree, by Major

Understanding Graphs
Appendix
 Origin
 Horizontal axis
 Vertical axis
 Graph
 Functional relation
– Dependent variable
– Independent variable

Exhibit
4
15
10
5
20
y
Vertical
axis
a
b
0
Origin
20
15
10
5 x
Horizontal axis
Point a:
- 5 units X
- 15 units Y
Point b:
- 10 units X
- 5 units Y
Basics of a Graph

U.S. Unemployment Rate Since 1900
Exhibit 5

Drawing Graphs
 Dependent variable
– Depends on the independent variable
 Types of relations between variables
– Positive; direct
– Negative; inverse
– Independent; unrelated
Appendix

Exhibit 6; Exhibit 7
a
b
c
d
e
Hours
driven
per day
Distance
traveled per
day (miles)
a
b
c
d
e
1
2
3
4
5
50
100
150
200
250
0 4
3
2
1
Hours driven per day
5
150
100
50
200
Distance
traveled
per
day
(miles)
250
Points a through e depict different
combinations of hours driven per day
and the corresponding distances traveled.
Connecting these points graphs a line.
Schedule and Graph Relating Distance Traveled to
Hours Driven

Slopes of Straight Lines
 Slope
– Change in vertical variable
– For a given increase in horizontal variable
 Slope = Change in the vertical distance/
Increase in the horizontal distance
 Slope of a straight line
– The same value along the line
Appendix

Alternative Slopes for Straight
Lines
(a) Positive relation
0 x
20
10
10
15
20
y
5
10
Slope = 5/10 = 0.5
(b) Negative relation
0 x
20
10
10
3
20
y
10
Slope = - 7/10 = –0.7
-7
Exhibit 8(a), (b)

Alternative Slopes for Straight
Lines
(c) No relation: zero slope
0 x
20
10
10
20
y
Slope = 0/10 = 0
(d) No relation: infinite slope
0 x
10
10
20
y
10
Slope = 10/0 = ∞
10
Exhibit 8(c), (d)

Slope, Units of Measurement,
Marginal Analysis
 Value of slope
– Depends on units of measurement
– Measures marginal effects
Appendix

(a) Measured in feet (b) Measured in yards
0
Feet of copper tubing
6
5
5
$6
Total
cost
1
1
Slope = 1/1
= 1
0
Yards of copper tubing
2
1
3
$6
Total
cost
3
1
Slope = 3/1
= 3
Slope Depends on the Unit of
Measure
(a) Output is measured in feet of copper tubing.
(b) Output is measured in yards.
The cost: $1 per foot.
Slope is different: copper tubing is measured using different units
Exhibit 9

The Slopes of Curved Lines
 Differs along the curve
 Slope of a curved line at one point
– Slope of the tangent
Appendix

Slope at Different Points on a
Curved Line
0 40
30
20
10
x
30
20
10
40
y
a
b
B
A The slope of a curved line
varies from point to point.
At point a, the slope of the curve
is equal to the slope of the tangent A.
At point b, the slope of the curve
is equal to the slope of the tangent B.
Exhibit 10

a
Curves with Both Positive and
Negative Slopes
0 x
y
b
Some curves have both positive
and negative slopes.
The hill-shaped curve has:
positive slope to the left of a
slope of 0 at point a
negative slope to the right of a.
The U-shaped curve has:
negative slope to the left of b
slope of 0 at point b
positive slope to the right of b.
Exhibit 11

Line Shifts
 Change assumptions
– Changed relationship between variables
– Line shift
Appendix

Shift of Line Relating Distance Traveled to
Hours Driven
Exhibit 12
0 4
3
2
1
Hours driven per day
5
150
100
50
200
Distance
traveled
per
day
(miles)
250
f
T’
d
T
Line T
hours driven/day and
distance traveled/day
average speed = 50 mph
Line T’
hours driven/day and
distance traveled/day
average speed = 40 mph

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