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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
©©1999 South-Western College Publishing
6
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
©©1999 South-Western College Publishing
7
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
©©1999 South-Western College Publishing
8
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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
10
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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
15
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
©©1999 South-Western College Publishing
21
What is What is Macroeconomics?Macroeconomics?
What is What is Macroeconomics?Macroeconomics?
Analyzes the behavior of the economy as a whole
©©1999 South-Western College Publishing
22
What is What is Microeconomics?Microeconomics?
What is What is Microeconomics?Microeconomics?
Analyzes the behavior of firms and households
©©1999 South-Western College Publishing
23
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
©©1999 South-Western College Publishing
25
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
©©1999 South-Western College Publishing
26
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?
29
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
©©1999 South-Western College Publishing
32
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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
34
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
©©1999 South-Western College Publishing
35
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
©©1999 South-Western College Publishing
36
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?
©©1999 South-Western College Publishing
37
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
38
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.
39
Market Economy Individual people and firms
pursue their own self-interests without any central direction or regulation.
The central institution in these economies: markets!
40
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.
41
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
©©1999 South-Western College Publishing
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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
©©1999 South-Western College Publishing
43
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
44
What is Consumer What is Consumer Sovereignty?Sovereignty?
What is Consumer What is Consumer Sovereignty?Sovereignty?
Our choices as consumers guide what gets produced
©©1999 South-Western College Publishing
45
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
4646
©©1999 South-Western College Publishing
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
47
• 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?
48
• What is the Fallacy of Composition?
• What does Ceteris Paribus mean?
• What is consumer sovereignty?