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CHAPT
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CHAPT
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2004 Prentice Hall Business Publishin 2004 Prentice Hall Business Publishin Princi les of Economics 7/ePrinci les of Economics 7/e Karl ase !a #airKarl ase !a #air
The Scope and
Method of Economics
Appendix: How to Read and Understand Graphs
Prepared by: Fernando QuijanoPrepared by: Fernando Quijano
and Yvonn Quijanoand Yvonn Quijano
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%he &tu'" of Economics
( Economicsis the stu'" of ho)
in'i*i'uals an' societies
choose to use the scarceresources that nature an'
pre*ious generations ha*e
pro*i'e'+
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h" &tu'" Economics-
( .n important reason for
stu'"ing economics is to learn
a way of thinking.
( %hree fun'amental concepts
( Opportunity cost
( Marginalism, an'
( Efficient markets
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pportunit" ost
( Opportunity costis the best
alternati*e that )e forgo, or
gi*e up, )hen )e mae achoice or a 'ecision+
( earl" all 'ecisions in*ol*e
tra'e3offs+
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5arginalism
( 6n )eighing the costs an'benefits of a 'ecision, it is
important to )eigh onl" thecosts an' benefits that arisefrom the 'ecision+
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5arginalism
( #or e8ample, )hen a firm 'eci'es
)hether to pro'uce a''itional output,
it consi'ers onl" the additional9or
marginal cost:, not the sun cost+
( Sunk costsare costs that cannot be
a*oi'e', regar'less of )hat is 'one in
the future, because the" ha*e alrea'"been incurre'+
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Efficient 5arets
( .n efficient marketis one in )hich
profit opportunities are eliminate'
almost instantaneousl"+
( %here is no free lunch; Profit
opportunities are rare because, at
an" one time, there are man" peoplesearching for them+
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5ore !easons to &tu'" Economics
( %he stu'" of economics is an
essential part of the stu'" of societ"+
( Economic 'ecisions often ha*eenormous conse=uences+
( >uring the Industrial Revolution, ne)
manufacturing technologies an'impro*e' transportation ga*e rise to the
mo'ern factor" s"stem+
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5ore !easons to &tu'" Economics
( .n un'erstan'ing of
economics is essential to an
un'erstan'ing of global affairs+
( @oting 'ecisions also re=uire a
basic un'erstan'ing of
economics+
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%he &cope of Economics
( Microeconomicsis the branch
of economics that e8amines
the beha*ior of in'i*i'ual'ecision3maing unitsAthat is,
business firms an'
househol's+
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%he &cope of Economics
( Macroeconomicsis the
branch of economics that
e8amines the beha*ior ofeconomicaggregatesA
income, output, emplo"ment,
an' so onAon a national
scale+
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%he &cope of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microeconomics Pro'uction/utputin 6n'i*i'ual6n'ustries an'
BusinessesHo) much steelHo) man" officesHo) man" cars
Price of 6n'i*i'ualoo's an'&er*ices
Price of me'icalcarePrice of gasoline#oo' prices.partment rents
>istribution of6ncome an' ealth
ages in the autoin'ustr"5inimum )agesE8ecuti*e salariesPo*ert"
Emplo"ment b"6n'i*i'ualBusinesses C
6n'ustriesDobs in the steelin'ustr"umber ofemplo"ees in afirm
Macroeconomics ational
Pro'uction/utput%otal 6n'ustrialutputross >omesticPro'uctro)th of utput
.ggregate Price
e*elonsumer pricesPro'ucer Prices!ate of 6nflation
ational 6ncome
%otal )ages an'salaries
%otal corporateprofits
Emplo"ment an'
Fnemplo"ment inthe Econom"%otal number ofGobsFnemplo"mentrate
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%he 5etho' of Economics
( Positive economicsstu'ies
economic beha*ior )ithout
maing Gu'gments+ 6t'escribes )hat e8ists an' ho)
it )ors+
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%he 5etho' of Economics
( Normative economics, also
calle' polic" economics,
anal"es outcomes ofeconomic beha*ior, e*aluates
them as goo' or ba', an' ma"
prescribe courses of action+
"
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%he 5etho' of Economics
( Positive economicsinclu'es
( escriptive economics, )hich in*ol*es
the compilation of 'ata that 'escribephenomena an' facts+
( Economic theory!)hich in*ol*es
buil'ing mo'els of beha*ior+
( .n economictheoryis a general statement
of cause an' effect, action an' reaction+
""
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%heories an' 5o'els
( %heories in*ol*e mo'els, an'
mo'els in*ol*e *ariables+
( . modelis a formal statement of atheor"+ 5o'els are 'escriptions of
the relationship bet)een t)o or more
*ariables+
""
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%heories an' 5o'els
( Ockhams razoris the
principle that irrele*ant 'etail
shoul' be cut a)a"+ 5o'elsare simplifications, not
complications, of realit"+
""
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%heories an' 5o'els
( . variableis a measure that can
change from obser*ation to
obser*ation+
( %he ceteris pari"us'e*ice is part of
the process of abstraction+
( Fsing the ceteris pari"us! or all elsee#ual! assumption, economists stu'"
the relationship bet)een t)o *ariables
)hile the *alues of other *ariables
remain constant+
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%heories an' 5o'els
( Pitfalls to a*oi' in formulating
economic theor"
( %hepost hoc! ergo propter hocfallacy refers to a common error ma'e
in thining about causation 6f e*ent .
happene' before e*ent B, it is not
necessaril" true that . cause' B+( %he fallacy of compositionis the
erroneous belief that )hat is true for a
part is also true for the )hole+
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%he 5etho' of Economics
( Empirical economicsrefers to the
collection an' use of 'ata to test
economic theories+
( 5an" 'ata sets are a*ailable to
facilitate economic research+ %he"
are collecte' b" both go*ernment
agencies an' pri*ate companies,
""
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Economic Polic"
riteria for Gu'ging economic outcomes
( Efficiency, or allocati*e efficienc"+
.n efficient econom" is one thatpro'uces )hat people )ant at the
least possible cost+
( E#uity, or fairness of economicoutcomes+
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Economic Polic"
riteria for Gu'ging economic outcomes
( Economic growth, or an increase in
the total output of an econom"+
( Economic sta"ility, or the con'ition
in )hich output is stea'" or gro)ing,
)ith lo) inflation an' full emplo"mentof resources+
""
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!e*ie) %erms an' oncepts
ceteris paribusceteris paribus
'escripti*e economics'escripti*e economics
economic gro)theconomic gro)th
economic theor"economic theor"
economicseconomics
efficienc"efficienc"
efficient maretefficient maret
empirical economicsempirical economics
e=uit"e=uit"
fallac" of compositionfallac" of composition
6n'ustrial !e*olution6n'ustrial !e*olution
macroeconomicsmacroeconomics
microeconomicsmicroeconomics
mo'elmo'el
normati*e economicsnormati*e economics
ochamIs raorochamIs raor
opportunit" costopportunit" cost
positi*e economicspositi*e economics
post hoc, ergo propter hocpost hoc, ergo propter hoc
stabilit"stabilit"
sun costssun costs
*ariable*ariable
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.ppen'i8
Ho) to !ea' an' Fn'erstan' raphs
( . graphis a t)o3'imensionalrepresentation of aset of numbers or
'ata+
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.ppen'i8
Ho) to !ea' an' Fn'erstan' raphs
( . time series
graphsho)s
ho) a single*ariable changes
o*er time+
Total isposable Personal Income in
the !nited "tates# $%&'()**) +in
billions of dollars
1000
100
2000
200$000
$00
4000
400
000
00
000
00
7000700
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.ppen'i8
Ho) to !ea' an' Fn'erstan' raphs
( %he point at )hich the%he point at )hich the
line intersects the J3a8isline intersects the J3a8is
9point9point aa: is calle' the: is calle' the (&(&
intercept.intercept.
( %he%heY-interceptY-intercept, is the, is the
*alue of*alue of YY)hen)henXX 0+ 0+
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.ppen'i8
Ho) to !ea' an' Fn'erstan' raphs
( %his line slopes
up)ar', in'icating that
there seems to be a
positi*e relationship
bet)een income an'
spen'ing+
( PointsAan' B, abo*ethe 4L line, sho) that
consumption can be
greater than income+
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.. downward&slopingdownward&sloping
line 'escribes aline 'escribes a
negative relationshipnegative relationship
bet)een M an' J+bet)een M an' J+
.n.n upward&slopingupward&sloping
line 'escribes aline 'escribes a
positive relationshippositive relationship
bet)een M an'bet)een M an'J+J+
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b = =
1 00 ! b = =
"
1 00 "!
b = =0
1 00
b = =
1 0
0
c"c"
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Cartesian coordinate systemCartesian coordinate system
graphgraph
negati*e relationshipnegati*e relationship
originorigin
positi*e relationshippositi*e relationship
slopeslope
time series graphtime series graph
M3a8isM3a8is
J3a8isJ3a8is
J3interceptJ3intercept