© the mcgraw-hill companies, 2005 chapter 1 economics and the economy david begg, stanley fischer...
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© The McGraw-Hill Companies, 2005
Chapter 1Economics and the
Economy
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill Education, 2005
PowerPoint presentation by Alex Tackie and Damian Ward
C
H A
P T
E
R1
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Scope andMethod of Economics
Appendix: How to Read and Understand Graphs
Prepared by: Fernando Quijano and Yvonn Quijano
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The Study of Economics
• Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
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Why Study Economics?
• An important reason for studying economics is to learn a way of thinking.
• Three fundamental concepts:– Opportunity cost– Marginalism, and– Efficient markets
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Opportunity Cost
• Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision.
• Nearly all decisions involve trade-offs.
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Marginalism
• In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.
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Marginalism• For example, when a firm
decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost.– Sunk costs are costs that
cannot be avoided, regardless of what is done in the future, because they have already been incurred.
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Efficient Markets
• An efficient market is one in which profit opportunities are eliminated almost instantaneously.
• There is no free lunch! Profit opportunities are rare because, at any one time, there are many people searching for them.
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More Reasons to Study Economics
• The study of economics is an essential part of the study of society.
• Economic decisions often have enormous consequences.– During the Industrial
Revolution, new manufacturing technologies and improved transportation gave rise to the modern factory system.
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More Reasons to Study Economics
• An understanding of economics is essential to an understanding of global affairs.
• Voting decisions also require a basic understanding of economics.
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The Scope of Economics
• Microeconomics is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households.
• Footballers’ wages and the price of oil, for example, are both microeconomic issues
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The Scope of Economics
• Macroeconomics is the branch of economics that examines the behavior of economic aggregates— income, output, employment, and so on—on a national scale.
• Gross domestic product, the aggregate price level and unemployment, for example, are all macroeconomic issues
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The Scope of EconomicsExamples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microeconomics Production/Output in Individual Industries and Businesses How much steelHow many officesHow many cars
Price of Individual Goods and Services Price of medical carePrice of gasolineFood pricesApartment rents
Distribution of Income and Wealth Wages in the auto industryMinimum wagesExecutive salariesPoverty
Employment by Individual Businesses & IndustriesJobs in the steel industryNumber of employees in a firm
Macroeconomics National Production/Output Total Industrial OutputGross Domestic ProductGrowth of Output
Aggregate Price Level Consumer pricesProducer PricesRate of Inflation
National IncomeTotal wages and salaries
Total corporate profits
Employment and Unemployment in the Economy Total number of jobsUnemployment rate
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Market orientation
Commandeconomy
Freemarketeconomy
Cuba
China
Hungary
Sweden
UK
USA
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What is Economics?
• ECONOMICS ...• is the study of how society
decides:
– What– For whom– How
to produce...
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The price of oil
0
10
20
30
40
50
60
1965
1970
1975
1980
1985
1990
1995
2000
US
$ p
er b
arre
l
Tripled in 1973-74, and doubled again in 1979-80 … and affected people all over the world.
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An increase in the price of oil affects
• What to produce– less oil-intensive products
• How to produce– less oil-intensive techniques
• For whom to produce– oil producers have more buying
power, importers have less
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The distribution of world population and GNP, 2003
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Population GNP
LIC MIC HIC
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The production possibility frontier (1)
• For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced.
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The production possibility frontier (2)
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Film output (G)
Fo
od o
utp
ut (
F)
Production possibility frontier
G = 8
F= 4
A
B10
14
6 14
F/G = opportunity cost (=1/2)
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The operation of markets• Market• a shorthand expression for the
process by which … – households’ decisions about
consumption of alternative goods– firms’ decisions about what and
how to produce– and workers’ decisions about how
much and for whom to work• … are all reconciled by
adjustment of prices
© The McGraw-Hill Companies, 200523
Resource allocation
• Resource allocation is crucial for a society
• and is handled in different ways in different societies, e.g.:–Command economy–Mixed economy–Free market
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Normative and Positive Economics
• Positive economics deals with objective explanation– e.g. if a tax is imposed on a good its
price will tend to rise• Normative economics offers
prescriptions based on value judgements– e.g. a tax should be imposed on
tobacco to discourage smoking
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