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Copyright 2010 Nelson Education Limited
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A Lecture Presentation in PowerPointto accompany
Prepared by
Alanna Holowinsky, Red River College
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Copyright 2010 Nelson Education Limited
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A Lecture Presentation
in PowerPointto accompany
Exploring Economics
by Robert L. Sexton, Peter Fortura,
and Colin C. Kovacs
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Copyright 2010 Nelson Education Limited
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Chapter 1The Role and Method
of Economics
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Chapter 1
1.1 Economics: A Brief Introduction
1.2 Economic Theory
1.3 Scarcity
1.4 Opportunity Cost
1.5 Marginal Thinking
1.6 Incentives Matter
1.7 Specialization and Trade
1.8 Market Prices Coordinate Economic Activity
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1.1 Economics: A Brief Introduction
Why Study Economics?
develops a disciplined method of thinking
provides problem-solving tools for bothpersonal and professional life
sheds light on many social issues such as
education, discrimination,crime, and unemployment
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1.1 Economics: A Brief Introduction
What is Economics?
economics is the study of the allocation of our
limited resources to satisfy our unlimitedwants.
Resources:
- inputs used to produce goods and services.
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1.1 Economics: A Brief Introduction
What is Scarcity?
scarcity means that our wants exceed our
limited resources.
The Economic Problem:
- scarcity forces us to make choices- choices are costly because we must give
up other opportunities that we value
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1.1 Economics: A Brief Introduction
Macroeconomics:
the study of the aggregate, or total economy.
looks at economic problems as they influencethe whole of society
includes topics such as inflation, business
cycles, unemployment, and economic growth.
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1.1 Economics: A Brief Introduction
Microeconomics:
deals with the smaller units within the
economy.
attempts to understand the decision makingbehaviour of firms and households and their
interaction in markets for particular goods orservices.
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Microeconomics looks at the trees;
Macroeconomics looks at the forest.
1.1 Economics: A Brief Introduction
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1.2 Economic Theory
Economic Theories:
statements used to explain and predict
behaviour in the real world.
economists focus on the mostimportant parts of a problem.
like maps: show most importantinformation, exclude minor details
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1.2 Economic Theory
What Is a Hypothesis?
Hypothesis: a testable proposition.
in economics: a testable proposition abouthow people will behave or react to a change ineconomic circumstances
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1.2 Economic Theory
What Is a Hypothesis?
Empirical analysis uses data to test whether
a hypothesis is valid.
if hypothesis is consistent with real-worldobservations, it is accepted as theory
difficult because controlled experimentation isseldom possible in economics
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1.2 Economic Theory
What Is Ceteris Paribus?
Latin for holding everything else constant.
means isolating a variable to assess its effect
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1.2 Economic Theory
Example of Ceteris Paribus:
Hypothesis: if I study harder, I will perform
better on a test
Other variables can affect outcome:- slept in on day of exam
- studied the wrong material Hypothesis true if hold these other variables
constant
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1.2 Economic Theory
Correlation vs Causation:
Correlation:events that usually occurtogether- icy roads, reduced speeds, more accidents
Causation:one event causes another eventto occur- reduced speeds do not cause moreaccidents; icy roads do
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1.2 Economic Theory
Fallacy of Composition:- incorrect view that what is true for theindividual is also true for the group- for example, standing up at a concert to seebetter only works if others do not do the same
thing.
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1.2 Economic Theory
Positive Analysis:
- an objective, testable statement
- average income is $30,000
Normative Analysis:
- a subjective, non-testable item about whatshould be
- incomes should be more equally distributed
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1.2 Economic Theory
Why Do Economists Disagree?
disagreement is common in most disciplines.
the majority of disagreements in economicsstem from normative issues.
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1.3 Scarcity
Scarcity:
exists when human wants exceed available
resources the scarce resources used in the production
of goods and services are:- labour
- land- capital- entrepreneurship
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1.3 Scarcity
Labour
physical and mental effort expended by
people in the production of goods andservices.
Land
all natural resources used in the production ofgoods and services
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1.3 Scarcity
Capital
the equipment and structures used to
produce goods and services. buildings, tools, machines and factories.
includes human capital: the productiveknowledge and skill people receive fromeducation and training.
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1.3 Scarcity
Entrepreneurs
combine labour, land and capital to produce
goods and services. decide what and how to produce.
look for ways to improve productiontechniques, create new products.
take risks, driven by the chance to makeprofits.
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1.3 Scarcity
Goods
items that we value or desire.
Services
intangible acts for which people are willing topay.
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1.4 Opportunity Cost
Opportunity Cost:
the value of the best forgone alternative that
was not chosen. scarcity forces us to make choices
to get more of anything that is desirable, you
must accept less of something else.
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1.5 Marginal Thinking
Marginal Thinking:
focuses on marginal, or additional, choices.
marginal choices involve the effects of addingto or subtracting from the current situation.
not whetherto eat, sleep, or study, but
how muchof each
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1.5 Marginal Thinking
How Much Pollution?
must weigh expected marginal benefits of acleaner environment against the expectedmarginalcosts of a cleaner environment
zero pollution levels would be too costly in
terms of what we would have to give up- all forms of travel- grow your own food, etc.
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1.6 Incentives Matter
People Respond to Incentives:
people often respond to incentives in
predictable ways. they react to changes in expected marginal
benefits and expected marginal costs
economists use this information to predict
what will happen when the benefits and costsof any choice are changed
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1.6 Incentives Matter
People Respond to Incentives:
if the benefits of an activity, like crime, rise
and/or the costs fall, economists expect theamount of that activity to rise.
if the benefits of an activity fall and/or if thecosts rise, economists expect the amount of
that activity to fall.
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1.6 Incentives Matter
Positive Incentives
encourage consumption or production, for
example a subsidy.
Negative Incentives
discourage consumption or production, for
example a tax.
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A subsidy on hybrid electric vehicles (HEVs)would be a positive incentive that would
encourage greater production andconsumption of these vehicles.
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1.7 Specialization and Trade
Specialization
concentrating on the production of one, or a
few, goods.
Comparative Advantage
producing a good or service at a loweropportunity cost than other producers.
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1.7 Specialization and Trade
Specialization:
we all specialize to some extent:
fix computers, sell cars, cut hair rely on others to produce most of the goods
and services we want.
the income earned is used to buy goods and
services from others (trade).
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1.7 Specialization and Trade
Advantages of Specialization:
acquire greater skill through repetition.
avoid wasted time in shifting from one task toanother.
do the types of work for which each person isbest suited.
promote the use of specialized equipment.
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1.7 Specialization and Trade
Advantages of Trade:
increases wealth by making both parties
better off (or they wouldn't trade). allows a person or nation to specialize in
products that it produces better and trade forproducts that others produce better.
for example, Canada produces wheat, Brazilproduces coffee, then they trade
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1.8 Market Prices Coordinate Activity
Market System:
one method of allocating resources among
competing uses buyers and sellers indicate their wants
through action and inaction.
prices communicate information about therelative value of resources.
results in shift of resources from less valuedto more valued uses
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1.8 Market Prices Coordinate Activity
Price Controls:
government-mandated minimum or maximum
prices. strip the market price of its meaning for both
consumers and suppliers.
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1.8 Market Prices Coordinate Activity
Market Failure:
when the economy fails to allocate resources
efficiently on its own. the economy produces too little (scientific
research) or too much (pollution).
government can improve society's well-beingby intervening.
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1.8 Market Prices Coordinate Activity
Market Failure:
market economy does not always
communicate accurately. market power, lack of competition can distort
market prices.
these situations can also lead to governmentintervention.
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1.8 Market Prices Coordinate Activity
Inequitable Distribution:
no guarantee that a market economy will
provide everyone with adequate food, shelterand health care.
inequities can cause strong disagreements:what is fair for one person may seem highly
unfair to someone else.