1 1 What Is Economics? Why does public discussion of economic policy so often show the abysmal ignorance of the participants? Whey do I so often want

1

What Is Economics?Why does public discussion of economic policy so

often show the abysmal ignorance of the participants? Whey do I so often want to cry at what public figures, the press, and television commentators say about economic affairs?

Robert M. Solow

♦ Ideas for Beyond the Final Exam

♦ Inside the Economist’s Toolkit

♦ Appendix: Using Graphs: A Review

♦ Ideas for Beyond the Final Exam

♦ Inside the Economist’s Toolkit

♦ Appendix: Using Graphs: A Review

ContentsContents

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Ideas for Beyond the Final ExamIdeas for Beyond the Final Exam

● Idea 1: How Much Does It Really Cost?♦ Opportunity cost = value of the best forgone

alternative to any decision

♦ All actions opportunity costs

♦ Opportunity costs true economic costs

● Idea 1: How Much Does It Really Cost?♦ Opportunity cost = value of the best forgone

alternative to any decision

♦ All actions opportunity costs

♦ Opportunity costs true economic costs



● Idea 2: The Market Strikes Back♦ Markets set prices.

♦ Government may intervene.

♦ Markets may “strike back.”■Example: rent control reduces the supply of

housing.

● Idea 2: The Market Strikes Back♦ Markets set prices.

♦ Government may intervene.

♦ Markets may “strike back.”■Example: rent control reduces the supply of

housing.



● Idea 3: The Surprising Principle of Comparative Advantage♦ When two nations trade, both benefit.

♦ Comparative advantage = the production of goods with the lowest opportunity cost

♦ Comparative advantage specialization

● Idea 3: The Surprising Principle of Comparative Advantage♦ When two nations trade, both benefit.

♦ Comparative advantage = the production of goods with the lowest opportunity cost

♦ Comparative advantage specialization



● Idea 4: Trade is a Win-Win Situation♦ Trade benefits for both buyers & sellers

♦ Restrictions on trade benefits

♦ Intervention into markets costs

● Idea 4: Trade is a Win-Win Situation♦ Trade benefits for both buyers & sellers

♦ Restrictions on trade benefits

♦ Intervention into markets costs



● Idea 5: The Importance of Thinking at the Margin♦ Marginal = small change

♦ Marginal costs = change in costs

♦ Rational decisions = comparison of costs to benefits at the margin

● Idea 5: The Importance of Thinking at the Margin♦ Marginal = small change

♦ Marginal costs = change in costs

♦ Rational decisions = comparison of costs to benefits at the margin



● Idea 6: Externalities: Shortcoming of the Market Cured by Market Methods♦ Externalities = effects of transactions on third

parties

♦ Externalities social costs

♦ Market failure need for government intervention

● Idea 6: Externalities: Shortcoming of the Market Cured by Market Methods♦ Externalities = effects of transactions on third

parties

♦ Externalities social costs

♦ Market failure need for government intervention



● Idea 7: The Trade-off between Efficiency and Equality♦ More efficiency more output & jobs

♦ More equality less efficiency

♦ Labor markets distribute income efficiently, not equally.

● Idea 7: The Trade-off between Efficiency and Equality♦ More efficiency more output & jobs

♦ More equality less efficiency

♦ Labor markets distribute income efficiently, not equally.



● Idea 8: The Short-Run Trade-off between Inflation and Unemployment♦ Low unemployment rising prices

♦ High unemployment falling prices

● Idea 8: The Short-Run Trade-off between Inflation and Unemployment♦ Low unemployment rising prices

♦ High unemployment falling prices



● Idea 9: Productivity Growth Is (Almost) Everything in the Long Run♦ Productivity growth more output

♦ More output higher living standards

♦ In the long run, productivity growth is (almost) everything.

● Idea 9: Productivity Growth Is (Almost) Everything in the Long Run♦ Productivity growth more output

♦ More output higher living standards

♦ In the long run, productivity growth is (almost) everything.


Inside the Economist’s ToolkitInside the Economist’s Toolkit

● Economics as a Discipline♦ Economics is the most scientific of the social

sciences.

♦ Yet, it is much more social than the natural sciences.

● Economics as a Discipline♦ Economics is the most scientific of the social

sciences.

♦ Yet, it is much more social than the natural sciences.



● The Need for Abstraction♦ Real world complexity simplification in

economic theory

♦ The “art” of economics: focus on the essential; ignore the trivial.

● The Need for Abstraction♦ Real world complexity simplification in

economic theory

♦ The “art” of economics: focus on the essential; ignore the trivial.



● The Role of Economic Theory ♦ Economic theory = explanation of why

economic events occur

♦ Correlation causality

♦ Economic theories predictions

● The Role of Economic Theory ♦ Economic theory = explanation of why

economic events occur

♦ Correlation causality

♦ Economic theories predictions



● What Is an Economic Model?♦ Economic model = formal statement of

economic theory

♦ Usually expressed in mathematics, with equations and graphs

● What Is an Economic Model?♦ Economic model = formal statement of

economic theory

♦ Usually expressed in mathematics, with equations and graphs



● Reasons for Disagreements: Imperfect Information and Value Judgments♦ Among economists,

♦ agreement > disagreement■Imperfect information disagreements■Value judgments disagreements

● Reasons for Disagreements: Imperfect Information and Value Judgments♦ Among economists,

♦ agreement > disagreement■Imperfect information disagreements■Value judgments disagreements

Appendix

Using Graphs: A Review


Graphs Used in Economic AnalysisGraphs Used in Economic Analysis

● Display large quantity of data quickly

● Facilitate data interpretation and analysis

● Important statistical relationships more apparent than from written descriptions or long lists of numbers

● Display large quantity of data quickly

● Facilitate data interpretation and analysis

● Important statistical relationships more apparent than from written descriptions or long lists of numbers


Two-Variable DiagramsTwo-Variable Diagrams

● Variable = something measured by a number

♦ Examples: price and quantity

● View two variables together to see if they exhibit a relationship.

● Variable = something measured by a number

♦ Examples: price and quantity

● View two variables together to see if they exhibit a relationship.

TABLE 1-1 Quantities of Natural Gas Demanded at Various Prices

TABLE 1-1 Quantities of Natural Gas Demanded at Various Prices


Q

b

a P Pri

ce

Quantity (a)

140 120 100 80 60 40 20 0

1

2

3

4

5

6

D

D

b

a

Q

P Pri

ce

Quantity (b)

140 120 100 80 60 40 20 0

1

2

3

4

5

6

FIGURE 1-1 Hypothetical Demand Curve for Gas

FIGURE 1-1 Hypothetical Demand Curve for Gas



The Definition and Measurement of SlopeThe Definition and Measurement of Slope

● Slope = ratio of vertical change to horizontal change♦ Rise/run

♦ Measure of steepness of the line

● Slope = ratio of vertical change to horizontal change♦ Rise/run

♦ Measure of steepness of the line



● The slope of a straight line♦ Negative slope = one variable rises while the

other variable falls■ The two variables move in opposite directions.

♦ Positive slope = two variables rise and fall together■ The two variables move in the same direction.

● The slope of a straight line♦ Negative slope = one variable rises while the

other variable falls■ The two variables move in opposite directions.

♦ Positive slope = two variables rise and fall together■ The two variables move in the same direction.

FIGURE 1-2a Negative SlopeFIGURE 1-2a Negative Slope

Negative slope

0 X

Y


FIGURE 1-2b Positive SlopeFIGURE 1-2b Positive Slope

Positive slope

0 X

Y




♦ Zero slope = the variable on the horizontal axis can be any value while the variable on the vertical axis is fixed■ Horizontal line

♦ Infinite slope = the variable on the vertical axis can be any value while the variable on the horizontal axis is fixed■ Vertical line

♦ Zero slope = the variable on the horizontal axis can be any value while the variable on the vertical axis is fixed■ Horizontal line

♦ Infinite slope = the variable on the vertical axis can be any value while the variable on the horizontal axis is fixed■ Vertical line

FIGURE 1-2c Zero SlopeFIGURE 1-2c Zero Slope

Zero slope

0 X

Y


FIGURE 1-2d Infinite SlopeFIGURE 1-2d Infinite Slope

Infinite slope

0 X

Y




● The slope of a straight line♦ Slope is constant along a straight line.

♦ Slope can be measured between any two points on one axis and the corresponding two points on the other axis.

● The slope of a straight line♦ Slope is constant along a straight line.

♦ Slope can be measured between any two points on one axis and the corresponding two points on the other axis.

FIGURE 1-3 How to Measure Slope

FIGURE 1-3 How to Measure Slope

3 — 10 Slope =

1 — 10 Slope =

(b) (a)

A

X

B

C

13 3 0

Y

8

11

X

A B

C

13 3 0

Y

8 9




● The slope of a curved line♦ Slope changes from point to point on a

curved line.■Curved line bowed toward the origin has a

negative slope.● Variables change in opposite directions.

■Curved line bowed away from the origin has a positive slope.

● Variables change in the same direction.

● The slope of a curved line♦ Slope changes from point to point on a

curved line.■Curved line bowed toward the origin has a

negative slope.● Variables change in opposite directions.

■Curved line bowed away from the origin has a positive slope.

● Variables change in the same direction.

FIGURE 1-4a Negative Slope in Curved Lines

FIGURE 1-4a Negative Slope in Curved Lines

Negative slope

0 X

Y


FIGURE 1-4b Positive Slope in Curved Lines

FIGURE 1-4b Positive Slope in Curved Lines

Positive slope

0 X

Y




● The slope of a curved line♦ A curved can have both a positive and

negative slope depending on where on the curve is measured.

♦ The slope at a point on a curved-line is measured by a line tangent to that point.

● The slope of a curved line♦ A curved can have both a positive and

negative slope depending on where on the curve is measured.

♦ The slope at a point on a curved-line is measured by a line tangent to that point.

FIGURE 1-4c,d Behavior of Slope in Curved Lines

FIGURE 1-4c,d Behavior of Slope in Curved Lines

Negative slope

Positive slope

0 X

Y

Negative slope

Positive slope

0 X

Y


FIGURE 1-5 How to Measure Slope at a Point on a Curve

FIGURE 1-5 How to Measure Slope at a Point on a Curve

r

r

t

t

A B

R

M

G T

E

F

D

C

Y

X 10 9 8 7 6 5 4 3 2 1 0

8

7

6

5

4

3

2

1



Rays Through the Origin and 45-degree LinesRays Through the Origin and 45-degree Lines

● Y-intercept = point at which a line touches the y axis

● Ray through the origin = straight line graph with a y-intercept of zero

● Y-intercept = point at which a line touches the y axis

● Ray through the origin = straight line graph with a y-intercept of zero

FIGURE 1-6 Rays through the Origin

FIGURE 1-6 Rays through the Origin

1 – 2 Slope = +

Slope = + 1

Slope = + 2

B

E

K

A C

D 0

5

4

3

2

5 4 3 2 1

1

Y

X



Squeezing 3 Dimensions into 2: Contour MapsSqueezing 3 Dimensions into 2: Contour Maps

● Some problems involve more than two variables

● Economic “contour map” called a production indifference map♦ Shows how variable Z changes as we change

either X or Y

● Some problems involve more than two variables

● Economic “contour map” called a production indifference map♦ Shows how variable Z changes as we change

either X or Y

FIGURE 1-8 An Economic Contour Map

FIGURE 1-8 An Economic Contour Map

Z = 40

Z = 30

Z = 20

Z = 10

Ya

rds

of

Clo

th p

er

Da

y

Labor Hours per Day

Y

X 80 70 60 50 40 30 20 10 0

10

20

30

40

50

60

70

80

B

A


Documents

1 1 What Is Economics? Why does public discussion of economic policy so often show the abysmal ignorance of the participants? Whey do I so often want