what is economics ? “economics is the study of mankind in the everyday business of life.” alfred...

What is Economics ?What is Economics ?

“Economics is the study of mankind in the everyday business of life.”

Alfred Marshall (1842 -1924)

Economics is the study of Economics is the study of choices made by peoplechoices made by peoplewho are faced with scarcity.who are faced with scarcity.*Scarcity is a situation in *Scarcity is a situation in which resources are limited which resources are limited and have alternative uses.and have alternative uses.

What Is Economics ?

GOODSGOODS

WORKWORK

CHOICES

ECONOMIC QUESTIONS

• What goods and services do we produce ?• How do we produce these goods and

services ?• Who consumes the goods and services

produced ?

SCARCITY AND PRODUCTION POSSIBILITY CURVES

• Production Possibility Curve A visual representation of tradeoffs that

arise in an economy that produces two goods.

A picture of the choices which can be made when considering the production of two goods.

PRODUCTION POSSIBILITY CURVE

(FRONTIER) A production possibility curve shows

how all of an economies available RESOURCES can be used to produce various combinations of goods and services.

WHAT ARE RESOURCES?WHAT ARE RESOURCES?• Labor -- human effort used to produce• Physical capital

-- machines, buildings equipment• Human Capital -- knowledge and skills acquired by workers• Natural Resources (LAND) -- things created by acts of nature and used

to produce

YY

XX

ThousandsThousandsofofcomputers computers per yearper year

Number of Space Missions Per YearNumber of Space Missions Per Year

380380

44

ee

300300

55

ff

PRODUCTION POSSIBILITYPRODUCTION POSSIBILITYCURVECURVE

200200

22

i (inferior)i (inferior)(idle resources)(idle resources)

ATTAINABLEATTAINABLEUNATTAINABLEUNATTAINABLE

GRAPHING POSSIBILITIES

SCARCITY• The limit to available resources;Illustrated by the envelope of the

production possibility curve. To obtain more of one of the two choices,

one must give up more of the other choice.

MACROECONOMICS vs

MICROECONOMICS

THE STUDY OF:(MICROECONOMICS)• choices made by

individual consumers and firms & how these decisions affect the market for a particular good or service.

(MACROECONOMICS)• The nations

economy as a whole. Issues include:– unemployment– inflation– budget deficit– trade deficit

MICROECONOMIC ANALYSIS

We use microeconomic analysis • To understand how markets work• To make personal or managerial

decisions• To evaluate merits of public choices

MARKETMARKET

• An arrangement which allows An arrangement which allows buyers and sellers to buyers and sellers to exchange money and goods.exchange money and goods.

THE ECONOMIC WAY OF THE ECONOMIC WAY OF THINKINGTHINKING

John Maynard KeynesJohn Maynard Keynes““The theory of economics does not The theory of economics does not

furnish a body of settled conclusions furnish a body of settled conclusions immediately applicable to policy. It is a immediately applicable to policy. It is a method rather than a doctrine, an method rather than a doctrine, an apparatus of mind, a technique of apparatus of mind, a technique of thinking which helps its processor to thinking which helps its processor to draw correct conclusions.”draw correct conclusions.”

SIMPLIFYING SIMPLIFYING ASSUMPTIONSASSUMPTIONS

(Eliminate Irrelevant Detail)(Eliminate Irrelevant Detail)1. People act on the basis of self 1. People act on the basis of self

interest.interest.2.People make informed decisions 2.People make informed decisions

based on information from:based on information from:a) Producer;a) Producer;b) Government.b) Government.

GIVEN :GIVEN :• My income doesn’t change;• No other major expense occurs;• I don’t suffer a major illness or injury;• etc.....I should be able to buy the new stereo I

would like to own.

EXPLORING THE RELATIONSHIP EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLESBETWEEN TWO VARIABLES

Variable -- A measure of something that can take on different values.

EXPLORING THE RELATIONSHIP EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLESBETWEEN TWO VARIABLES

CETERIS PARABUS CETERIS PARABUS Other things being equal to what they Other things being equal to what they

were before:were before:Other variables remain fixed.Other variables remain fixed.

GRAPHINGGRAPHINGEconomists use this in a Economists use this in a

two dimensional form as a two dimensional form as a way of showing the way of showing the relationship between two relationship between two variables.variables.

YY

XX

variable 2variable 2

variable 1variable 15 10 15 20 25 30 35

1020304050607080

90100110120130140150160170

QUANTITY(HOURS WORKED)

QUANTITY

WEEKLYINCOME

$20 Weekly Allowance(No hours worked)

b

a

c

d

changein weeklyallowance

$15

BASIC GRAPHING

YY

XX

variable 2variable 2

variable 1variable 15 10 15 20 25 30 35

1020304050607080

90100110120130140150160170

QUANTITY(HOURS WORKED)

QUANTITY

WEEKLYINCOME

$20 Weekly Allowance(No hours worked)

b

a

c

d

changein weeklyallowance

$15

z

y

x

BASIC GRAPHING

Graphing allows us to think Graphing allows us to think in a marginal wayin a marginal way

Marginal - How much of a change Marginal - How much of a change occurs in one variable for a specific occurs in one variable for a specific incremental change in the other incremental change in the other variable.variable.

How much of a change occurs in How much of a change occurs in income for an additional hour income for an additional hour worked.worked.

Y

X

INCOME

HOURS WORKED

108

60

10 22

SHOWING THE SLOPE

SLOPESLOPE

Change in the vertical-axis variable for Change in the vertical-axis variable for a given change in the horizontal-axis a given change in the horizontal-axis variable.variable.

Change in income for a given change Change in income for a given change in hours worked.in hours worked.

Rise ÷RunRise ÷Run

Y

X

INCOME

HOURS WORKED

108

60

10 22

RUN

RISE

SHOWING THE SLOPE