“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”  Adam Smith – The Wealth of Nations. [Par. IV.2.9]

  • 1.1 Define economics and discuss the difference between microeconomics and macroeconomics
  • 1.2 Identify the three basic economic questions and the two opposing sets of answers
  • 1.3 Evaluate the role that rational self-interest plays in economic analysis
  • 1.4 Explain why economics is a science
  • 1.5 Distinguish between positive and normative economics

 

  • 1.1 The Power of Economic Analysis
    • 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers
    • 1.3 The Economic Approach: Systematic Decisions
    • 1.4 Economics as a Science
    • 1.5 Positive versus Normative Economics
  • 1.1 The Power of Economic Analysis (1 of 10)
    • Incentives
      • Rewards for engaging in a particular activity
      • The nature of self-interested responses to incentives is the starting point for economic analysis. 3 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (2 of 10) • The economic way of thinking is a framework to analyze solutions to economic problems: – How much time to study – Choosing which courses to take – Whether the U.S. government should encourage or discourage immigration Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (3 of 10) • The economic way of thinking gives you the power to reach informed conclusions about what is happening in the world. • Economic analysis helps you make better decisions and increases your understanding when watching or reading the news on the Web. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (4 of 10) • Economic analysis is a way of thinking about all decisions. • These decisions could be about: – Your education, career, or financing your home – Your involvement in the business world – How you cast your ballot as a voter 4 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (5 of 10) • Economics – The study of how people allocate their limited resources to satisfy their unlimited wants – The study of how people make choices Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (6 of 10) • Resources – Things used to produce other things to satisfy people’s wants • Wants – What people would buy if their incomes were unlimited Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (7 of 10) • With limited income (resources), people must make choices to satisfy their wants. • We never have enough of everything, including time, to satisfy our every desire. 5 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (8 of 10) • Individuals, businesses, and nations face alternatives, and choices must be made. • Economics studies how these choices are made. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (9 of 10) • Microeconomics – The study of decision making undertaken by individuals (or households) and by firms – Like looking though a microscope to focus on the smaller parts of the economy:  The effects of changes in gasoline prices  A family’s choice of having a baby  An individual firm’s decision to advertise Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Example: Microeconomic and Macroeconomic Implications of the Gig Economy • Today about one-third of the nearly 160 million people received fixed payments for performing short-term tasks, or “gigs.” • The development of this gig economy has altered the decision-making process for many individuals and firms. • The expansion of the gig economy has also contributed to a rise in the part-time share of employment from less than 17 percent a decade ago to above 20 percent today. 6 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.1 The Power of Economic Analysis (10 of 10) • Macroeconomics – The study of the behavior of the economy as a whole – Deals with economywide phenomena:  The national unemployment rate  The rate of inflation  The yearly output of goods and services in a nation – Macroeconomics deals with aggregates, or totals—such as total output in an economy. – Modern economic theory blends micro and macro concepts. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (1 of 4) • Economic system – The institutional mechanism through which resources are utilized to satisfy human wants Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (2 of 4) • Three economic questions: 1. What and how much will be produced? 2. How will items be produced? 3. For whom will items be produced? 7 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (3 of 4) • Two opposing answers in the form of economic systems: – Centralized command and control (central planning): Authority that makes all economic decisions – Price system (market system): Decentralized decisionmaking process, in which prices are terms (signals) under which people agree to make exchanges Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved What If … the government increases pharmaceutical companies’ costs but prevents them from raising their prices? • The failure of pharmaceutical prices to fully reflect the rising costs of producing the drugs has provided a signal to the owners of some manufacturers that they should reduce or even halt production. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers (4 of 4) • Economic systems of the world’s nations (e.g., U.S.) are mixed systems that incorporate aspects of both centralized command and control and a decentralized price system. 8 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (1 of 7) • Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (2 of 7) “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” —Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (3 of 7) • Rationality assumption – The assumption that people do not intentionally make decisions that would leave themselves worse off 9 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (4 of 7) • Questions: – Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics? – Can economic models be applied to situations in which behavior is at odds with what we expect from rational people? Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (5 of 7) • Responding to incentives – Rationality and the use of incentives:  Positive incentives  Negative incentives – Making choices:  Balancing costs and benefits Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (6 of 7) • Some examples of incentives – Responding to positive incentives:  Schoolchildren getting gold stars, working to have a “better life” for yourself – Responding to negative incentives:  Penalties, punishments, using credit cards to avoid check overdrafts 10 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved International Policy Example: Greece Discovers That Higher Tax Rates Encourage More Tax Evasion • During the past few years, the government of Greece implemented gradual increases in several tax rates. • However, the government’s tax revenues in fact declined slightly. • Residents of Greece responded to the higher tax rates by raising their efforts to evade paying taxes. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.3 The Economic Approach: Systematic Decisions (7 of 7) • Defining self-interest – The pursuit of one’s goals:  Prestige  Friendship  Love – Does not always mean increasing one’s wealth. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Behavioral Example: Why Doesn’t Higher Pay Persuade Some Women to Avoid Traditional Gender Roles? • The “gender gap” in earnings remains primarily because many young women continue to choose traditionally female occupations, such as receptionists and housekeepers. • Behavioral economists have found that many immigrant women opt for work in predominantly “female” occupations that reinforce their stereotypical gender roles. 11 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (1 of 7) • Economics is a social science that employs the same kinds of methods used in other sciences, such as biology. • Economics uses models to explain economic phenomena in the real world. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (2 of 7) • Models or theories – Simplified representations of the real world used as the basis for predictions or explanations – Should capture only the essential relationships that are sufficient to analyze a problem – Cannot be faulted as unrealistic simply because they do not capture all details of the real world  A map is the quintessential model. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (3 of 7) • Assumptions – The set of circumstances in which a model is applicable – Every model, or theory, must be based on a set of assumptions. 12 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Example: Getting Directions • A map is a simplifying model of reality. • The degree of simplification varies across maps; some contain more detail than others. • Economic models attempt to focus on what is relevant to the problem at hand and omit what is not. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (4 of 7) • Ceteris paribus [KAY-ter-us PEAR-uh-bus] assumption – Nothing changes except the factor or factors being studied. – “Other things constant” – “Other things equal” Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (5 of 7) • Economics is an empirical science. – Real-world data is used to evaluate the usefulness of a model. – Models are useful if they predict economic phenomena. – Economic models predict how people react, not how they think. 13 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (6 of 7) • Behavioral economics – An approach to the study of consumer behavior:  Emphasizes psychological limitations and complications that may interfere with rational decision making – Proponents believe that it is “unrealistic” to assume:  Unbounded selfishness  Unbounded willpower  Unbounded rationality Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.4 Economics as a Science (7 of 7) • Bounded rationality – Hypothesis that people are nearly, not fully, rational:  They cannot examine every choice available to them.  They appear to use rules of thumb to sort alternatives. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 1.5 Positive versus Normative Economics • Positive economics – Purely descriptive statements or scientific predictions, such as “If A, then B” – A statement of what is • Normative economics – Analysis involving value judgments; relates to whether things are good or bad – A statement of what ought to be 14 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved You Are There: The Incentive to Understand Chickens’ “Speech” • Wayne Daley, a researcher at the Georgia Institute of Technology, has developed apps to allow farmers to monitor chickens’ “speech” for signs of discomfort or distress. • It might be a humanitarian motive to discern chickens’ levels of comfort. • However, it might also be a profit motive because comfortable and healthy chickens lay more and larger eggs, which translates to higher profits for chicken farmers. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Issues & Applications: Why More Highly Educated Women Are Having More Children • Child bearing is an economic decision that involves a woman’s self-interest. • Figure 1-1 on the next slide shows that the percentages of highly educated women opting to have children are larger today than 20 years ago. • The incentives for those women to have children include more assistance with child rearing today and the enjoyment derived from being a parent. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure 1-1 Percentages of Women Aged 40 to 44 with at Least One Child by Educational Attainment, 1997 versus 2017 Source: Pew Research Center. 15 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Summary Discussion of Learning Objectives (1 of 5) • 1.1 Define economics and discuss the difference between microeconomics and macroeconomics – Economics is the study of how individuals make choices to satisfy wants. – Microeconomics is the study of decision making by individual households and individual firms. – Macroeconomics is the study of nationwide phenomena, such as inflation and unemployment levels. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Summary Discussion of Learning Objectives (2 of 5) • 1.2 Identify the three basic economic questions and the two opposing sets of answers – The basic economic questions are what, how, and for whom items will be produced. – The two sets of answers are provided by the type of economic system: centralized command and control or the price system. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Summary Discussion of Learning Objectives (3 of 5) • 1.3 Evaluate the role that rational self-interest plays in economic analysis – Rational self-interest is the assumption that individuals behave in a reasonable (rational) way in making choices to further their interests. 16 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Summary Discussion of Learning Objectives (4 of 5) • 1.4 Explain why economics is a science – Economists use models, or theories, that are simplified representations of the real world to analyze and make predictions about the real world. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Summary Discussion of Learning Objectives (5 of 5) • 1.5 Distinguish between positive and normative economics – Positive economics deals with what is, whereas normative economics deals with what ought to be. – Positive statements are of the “if…then” variety, while normative statements ask what “should” or “could” be. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Appendix A: Reading and Working with Graphs • Independent variable – A variable whose value is determined independently of, or outside, the equation under study • Dependent variable – A variable whose value changes according to changes in the value of one or more independent variables 17 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Appendix A: Direct and Inverse Relationships • Direct relationship – A relationship between two variables that is positive, meaning that an increase in one variable is associated with an increase in the other, and a decrease in one variable is associated with a decrease in the other • Inverse relationship – A relationship between two variables that is negative, meaning that an increase in one variable is associated with a decrease in the other, and a decrease in one variable is associated with an increase in the other Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Table A-1 Gas Mileage as a Function of Driving Speed Miles per Hour Miles per Gallon 45 25 50 24 55 23 60 21 65 19 70 16 75 13 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-1 Direct and Inverse Relationships 18 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Appendix A: Constructing a Graph • Number line – A line that can be divided into segments of equal length, each associated with a number • y axis – The vertical axis in a graph • x axis – The horizontal axis in a graph • Origin – The intersection of the y axis and the x axis in a graph Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-2 Horizontal Number Line Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-3 Vertical Number Line 19 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-4 A Set of Coordinate Axes Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Table A-2 T-Shirts Purchased (1) Price of T-Shirts (2) Number of T-Shirts Purchased per Week $10 20 9 30 8 40 7 50 6 60 5 70 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-5 Graphing the Relationship between TShirts Purchased and Price Panel (a) Price per T-Shirt T-Shirts Purchased per Week Point on Graph $10 20 I (20, 10) 9 30 J (30, 9) 8 40 K (40, 8) 7 50 L (50, 7) 6 60 M (60, 6) 5 70 N (70, 5) 20 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-6 Connecting the Observation Points Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-7 A Positively Sloped Curve Panel (a) Price per Pair Pairs of Shoes Offered per Week Point on Graph $100 400 A (400, 100) 80 320 B (320, 80) 60 240 C (240, 60) 40 160 D (160, 40) 20 80 E (80, 20) Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Appendix A: The Slope of a Line (A Linear Curve) • Slope – The change in the y value divided by the corresponding change in the x value of a curve – The “incline” of the curve – “Rise” over “run” 21 Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-8 Figuring Positive Slope Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved Figure A-9 Figuring Negative Slope Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved