Layton3e_PP_Ch01

Chapter1Introducing the economic way of thinkingKey conceptsK t•Defining the economic problem •Defining the three types of resources •Understanding entrepreneurship •What are macro and microeconomics?•The purpose of modelling•What is ceteris paribus?•Defining positive and normative economics3The problem of scarcity •Scarcity forces us all to make choices as we never have the amount of goods and services we want:–individuals: more clothes, etc.individuals: more clothes etc–governments: more security, etc.•Economics aims to explain what occurs as a result of scarcity because wants are forever greater than the available resources.4The economic problemy•Scarcity is also called ‘the economic problem’•Economists aim to show how individuals, groups and society can achieve the most wants given the resources at their disposal.5Resources •Resources are the basic categories of inputs used to produce goods and services.•Resources are also called the factors of production and are split into three main categories:–land–labour–capital.cap ta6Resources: land•Any natural resource provided by nature used in the process of production, for example forests, minerals, wildlife, oil, rivers, lakes and oceans.y•May be renewable or non-renewable.7Resources: labourp y p y •The mental and physical capacity of workers to produce goods and services, for example:p–farmers–nurses–lawyers.8Entrepreneurship •Entrepreneurship is a special type oflabour:–the creative ability of individuals toorganise and manage the combination of resources to produce goods andservices.services9Resources: capital •Capital relates to human-made goods that produce goods and services.that produce goods and services •Capital does not directly satisfy wants but is used to produce the goods and b d d h d d services desired, such as a factory that produce televisions.d l i i•Money is not included in the economic definition of capital as it is simply a measure of value placed on goods.10Economics: the study ofyscarcity and choice•Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.11Two branches of economics •Microeconomics is the branch of economics that studies decision-making by a single individual, household, firm, y g,,, industry or level of government.•Macroeconomics is the branch of economics that studies decision-making for the economy as a whole.12The methodology of economics •Economists (like other scientists) use ()scientific method .•Scientific method is a step-by-step Scientific method is a step by step procedure for solving problems.the problem1Identify the problem.2Develop a model.3Test the model.13pThe steps in the model-building process14More about modelsp y •A model is a simplified view of reality.•It sets out the relationship between variables; causes and effects.•A model is valid when it enables economists to forecast or predict the results of various changes in variables.15Example: petrol consumption p p p •Identifying the problem–Petrol consumption has fallen. Why?•Developing a model–Select variables −price of petrol,price of cars.price of cars–Express them verbally, graphically or th ti llmathematically.•Testing the model–Gather data which tells us how wellthe model estimates or predictsprelationships.16Hazards of the economicy gway of thinkingp p•There are two potential problems to be aware of:–the ceteris paribus assumption–possible confusion of association and causation.causation17Ceteris paribus•Ceteris (pronounced‘keteris’)paribus is a Latin phrase which means ‘other things remaining unchanged’.•Economists use this method as ith h denables them to see how a change in one variable affects the overall outcome.i bl ff h ll •Imagine: if all the variables change at the same time, how would we know which one caused the change?18Association vs. causation •We cannot always assume that when one t f ll th th fi t d th event follows another, the first caused the second.•For example, assume exports from Indonesia rose last month. Two events might be associated :–The hole in the ozone layer grew last y g month.–Currency movements reduced the cost to Australians of buying Indonesian goods.19•But are they both possible causes ?Why do economists disagree?g y g •Economists agree on many things.•As in other professions, disagreements occur.•One explanation for disagreements isthe difference between positive andnormative economics.20Positive economicsy •Positive economics is an analysis limited to statements that are verifiable.•−Positive statements are testable they can be proven true or false.•Examples–‘Airbags save lives.’–‘Smoking is harmful to your health.’Smoking is harmful to your health.21Normative economics•Normative economics is an analysis based on value judgements .•Normative statements cannot be proven by facts to be true or false.They express opinions good bad •They express opinions –good, bad, ought to, should.l•Examples:–‘Every teenager who wants a job should have one.’–‘The government should allocate more 22The government should allocate more money to education.’Appendix to Chapter1 Applying graphs to economicsKey concepts•Why use graphs in economics?•What is a direct relationship?•What is an inverse relationship?p•What is an independent relationship between two variables?•How do we measure the slope of a line?•How do graphs show three-variableH d h h th i bl relationships?24Graphs in economics •Graphs are one of the simplest ways to present, aid and help us to understand t id d h l t d t d relationships and to ‘see’ economic concepts at work.t t k•Graphs help economists to understand the relationships that exist between variables.•You should learn to draw, describe and interpret them.p25A direct relationship •A direct relationship is a positive i ti b t t i bl association between two variables.•When one variable increases, the other also increases.•When one variable decreases, the other ,also decreases.•Note the line on the next slide has a positive slope .26A direct relationship27An inverse relationship •An inverse relationship is a negative i ti b t t i bl association between two variables.•When one variable increases , the other decreases .•When one variable decreases, the other ,increases .•Note the line on the next slide has a negative slope .28An inverse relationship29An independent relationship •An independent relationship is a zero association between two variables.i ti b t t i bl •When one variable changes, the other remains unchanged.30An independent relationship31The slope of a straight line •The ratio of change in the variable on the vertical axis (the rise or fall) toth ti l i(th i f ll)t change in the variable on the horizontal axis (the run).i(th)•Slope=rise/run= Δvertical axis/Δhorizontal axis= ΔY/ΔX32The slope of a curve•A ‘straight-line’ relationship is a linear l ti hirelationship.•The slope of a curve changes from one point on the curve to another.•To determine the slope of a curve at p any point, draw a tangent to the line at that point, and measure the slope of p ,p the tangent.33The slope of a curve34Introducing a third variable •How can a model drawn in two dimensions show the impact of changes in a third variable?•We must distinguish between movements and shifts.–Movements along a graph showchanges in one of the variables onthe graph s axes.the graph’s axes.–Shifts show changes in othervariables.35A three-variable relationship36。