1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of...

1©©1999 South-Western College Publishing

PowerPoint Slides prepared by Ken Long

Principles of EconomicsPrinciples of Economicsby Fred M Gottheilby Fred M Gottheil

Principles of EconomicsPrinciples of Economicsby Fred M Gottheilby Fred M Gottheil

Chap. 1, Introduction to Economics

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What is Economics??What is Economics??What is Economics??What is Economics??

A social science that deals with how people use scarce resources to produce and distribute goods and services

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Scarcity, the Central Scarcity, the Central Theme of EconomicsTheme of EconomicsScarcity, the Central Scarcity, the Central Theme of EconomicsTheme of Economics

Scarcity means that while we have

unlimited wants, our resources are limited

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Due to Scarcity, Choices Due to Scarcity, Choices must be mademust be made

Due to Scarcity, Choices Due to Scarcity, Choices must be mademust be made

Economics deals with how we make such

choices

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What are the Factors of What are the Factors of Production? (resources)Production? (resources)What are the Factors of What are the Factors of Production? (resources)Production? (resources)

• Land and natural resources

• Labor• Capital• Entrepreneurship

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What is received What is received for resources?for resources?

What is received What is received for resources?for resources?

• rent for land• wages for labor• interest for capital• profit for entrepreneurship

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What is aWhat is aNatural Resource?Natural Resource?

What is aWhat is aNatural Resource?Natural Resource?

The lands, water, metals, minerals, animals, and other gifts of nature that are available for producing goods and services

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What is a What is a Renewable Resource?Renewable Resource?

What is a What is a Renewable Resource?Renewable Resource?Resources that can be

replenished

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What is a What is a Nonrenewable Resource?Nonrenewable Resource?

What is a What is a Nonrenewable Resource?Nonrenewable Resource?

Resources that cannot be replenished

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What is Labor?What is Labor?What is Labor?What is Labor?The physical and

intellectual effort of people engaged in producing goods and services

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What is Capital?What is Capital?What is Capital?What is Capital?

Manufactured goods used to make and market other goods and services

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Note the difference Note the difference between physical capital between physical capital

and financial capital and financial capital (money)(money)

Note the difference Note the difference between physical capital between physical capital

and financial capital and financial capital (money)(money)

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What is Human Capital?What is Human Capital?What is Human Capital?What is Human Capital?The knowledge and skills

acquired by labor, principally through education and training

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Who is an Entrepreneur?Who is an Entrepreneur?Who is an Entrepreneur?Who is an Entrepreneur?A person who alone

assumes the risks and uncertainties of a business

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Assumptions about Assumptions about making choicesmaking choices

Assumptions about Assumptions about making choicesmaking choices

• Self interest motivation• Rationality, weighing the

benefits and costs of actions

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Costs include the Costs include the opportunity costsopportunity costsCosts include the Costs include the opportunity costsopportunity costs

Opportunity costs, the highest valued option given up when a choice is made

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What are the benefits What are the benefits and costs of taking and costs of taking

economics?economics?

What are the benefits What are the benefits and costs of taking and costs of taking

economics?economics?

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BenefitsBenefitsBenefitsBenefits

• The economy is a part of our lives• Better understanding of human

behavior• More informed voter• Relates to other fields of study• Its fun!!!!

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CostsCostsCostsCosts

Its Difficult!!!Less precision in the social sciencesCan be mathematical

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What are the two ways of What are the two ways of looking at Economics?looking at Economics?

What are the two ways of What are the two ways of looking at Economics?looking at Economics?

MacroeconomicsMicroeconomics

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What is What is Macroeconomics?Macroeconomics?

What is What is Macroeconomics?Macroeconomics?

Analyzes the behavior of the economy as a whole

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What is What is Microeconomics?Microeconomics?

What is What is Microeconomics?Microeconomics?

Analyzes the behavior of firms and households

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Economics as a Economics as a “Science”“Science”

Economics as a Economics as a “Science”“Science”

•Social sciences, difficult to perform lab experiments of

theories•Important to understand the difference between positive and normative economics

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What is Positive What is Positive Economics?Economics?

What is Positive What is Positive Economics?Economics?

A subset of economics that analyzes the way the economy actually operates

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What is Normative What is Normative Economics?Economics?

What is Normative What is Normative Economics?Economics?

A subset of economics founded on the value judgements and leading to assertions of what ought to be

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BEWARE of the following pitfalls BEWARE of the following pitfalls as you study economics (added as you study economics (added

material not in text)material not in text)

BEWARE of the following pitfalls BEWARE of the following pitfalls as you study economics (added as you study economics (added

material not in text)material not in text) • Correlation vs. causation• Fallacy of composition

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Correlation vs. CausationCorrelation vs. Causation

Two variables are correlated if one variable changes when the other variable changes.

This does NOT mean that changes in one variable CAUSE changes in the other.

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Examples: Correlation vs. Examples: Correlation vs. causationcausation

Examples: Correlation vs. Examples: Correlation vs. causationcausation

A war breaks out in Timbuktu today and the U.S. stock market falls—did the war cause the market to fall?

The economy began growing in 1992 about the same time Clinton was elected president. Does this mean that the Clinton election improved the economy?

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The Fallacy of Composition

The often mistaken belief that what is true for a part is necessarily true for the whole

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Examples of the Fallacy of Examples of the Fallacy of CompositionComposition

Examples of the Fallacy of Examples of the Fallacy of CompositionComposition

If one student stands up in class, they can see the board better—so if all students stand up will they all see better?

If I had a million dollars, I am rich, so if we all had a million dollars, would be all be rich?

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What is anWhat is anEconomic Model?Economic Model?

What is anWhat is anEconomic Model?Economic Model?

An abstraction of an economic reality expressed in various ways

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What is the purpose of an What is the purpose of an Economic Model?Economic Model?

What is the purpose of an What is the purpose of an Economic Model?Economic Model?

To simplify the complexity of our world

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What is Econometrics?What is Econometrics?What is Econometrics?What is Econometrics?The use of statistics to

quantify and test economic models

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What is one of the most What is one of the most important assumptions in important assumptions in

model building?model building?

What is one of the most What is one of the most important assumptions in important assumptions in

model building?model building?Ceteris paribus

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What does Ceteris What does Ceteris Paribus mean?Paribus mean?

What does Ceteris What does Ceteris Paribus mean?Paribus mean?

After a variable changes we assume that nothing else will change

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What are the central What are the central issues in economics?issues in economics?What are the central What are the central issues in economics?issues in economics?

• What gets produced?• How is it produced?• Who consumes what is

produced?

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2 major ways that 2 major ways that economies attempt to economies attempt to

answer these questionsanswer these questions

2 major ways that 2 major ways that economies attempt to economies attempt to

answer these questionsanswer these questions• Command economies• Market economies

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Command Economy

A central authority or agency draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution.

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Market Economy Individual people and firms

pursue their own self-interests without any central direction or regulation.

The central institution in these economies: markets!

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Markets The institutions through which

buyers and sellers interact and engage in exchange

Prices are determined in markets; prices reflect what society is willing to pay for something.

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What is theWhat is theResource Market?Resource Market?

What is theWhat is theResource Market?Resource Market?

A market where people supply their resources - land, labor, capital and entrepreneurship

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What is theWhat is theProduct Market?Product Market?

What is theWhat is theProduct Market?Product Market?

The market where people buy goods and services

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Important aspects of Important aspects of market economies:market economies:Important aspects of Important aspects of market economies:market economies:

• Consumer sovereignty• Free enterprise• Distribution of output

decentralized• Prices coordinate behavior

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What is Consumer What is Consumer Sovereignty?Sovereignty?

What is Consumer What is Consumer Sovereignty?Sovereignty?

Our choices as consumers guide what gets produced

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Most modern economies Most modern economies are mixed systemsare mixed systems

Most modern economies Most modern economies are mixed systemsare mixed systems

A mixture of free markets with government involvement

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http://www.yahoo.com

http://www.excite.com

http://www.lycos.com

http://www.helsinki.fi/WebEc/WebEc.html

http://www.bankamerica.com/econ_indicator/econ_indicator.html

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• What is Economics?• What is the Resource Market?• What is the Product Market?• What is Macroeconomics?• What is Microeconomics?• What is Positive Economics?• What is Normative Economics?

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• What is the Fallacy of Composition?

• What does Ceteris Paribus mean?

• What is consumer sovereignty?