Principles of Macroeconomics
The Scope and Methods of
Economics
Chapter 1
2nd Canadian Edition
by Case, Fair, Strain, Veall
PowerPoint Presentation Slides to Accompany the Text
By
Peter Ibbott , King’s College - University of Western Ontario
Richard E. Mueller, University of Lethbridge
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A Definition of Economics
Another Definition of Economics
z Economics is the study of how individuals and
societies choose to use the scarce resources
that nature and previous generations have
provided.
z Economics is the study of how scarce resources
are allocated among conflicting demands.
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Four Main Reasons to Study
Economics...
z
z
z
z
To learn a way of thinking
To understand society
To understand global affairs
To be an informed voter
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1. To Learn a Way of Thinking...
z Three Fundamental Concepts of Economic
Thinking
y Opportunity Cost
y Marginalism
y Information, Incentives, and Market Coordinations
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Opportunity Costs
Question to Consider
z The opportunity cost of something is that which
we give up when we make that choice or
decision.
z The implication is that all decisions involve
trade-offs.
z What is the opportunity cost of your attending
university?
z Include all forgone options in your
consideration.
z “There’s no such thing as a free lunch!!”
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Information, Incentives, and Market
Coordination
Marginalism
z In weighing the costs and benefits of a decision,
it is important to weigh only the costs that are
contingent upon the decision.
z Prices, wages, and profits in market economies
have the capacity to provide the information
and incentives to coordinate the decisions of
individual decision-makers.
z Do not include sunk costs
y Sunk costs are the costs that cannot be avoided,
regardless of what is done in the future, because
they have already been incurred.
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z Are these market solutions always desirable?
y Perhaps not if they interfere with the public good,
and lead, for example, to poverty or environmental
degradation.
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2. Understanding Society
3. To Understand Global Affairs
z Present and past economic decisions have an
enormous influence on the character of life in a
society.
z The state of our physical environment, the level
of material well-being, and the nature and
number of jobs are all products of the economic
system.
z
z
z
z
z
z
z
z
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Impact of globalization, trade negotiations
End of apartheid
Gulf War
Poverty and Starvation in Africa and Asia
The Asian Tigers
The European Union
Collapse of the Soviet Union
NAFTA and the WTO
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4. To be an informed voter…
The Scope of Economics
z Canadian politics is dominated by the debates
over economic policy.
z To critically assess the platform of each political
party requires a basic understanding of
economics.
z Microeconomics
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The Scope of Economics
y The branch of economics that examines the
functioning of individual industries and the behaviour
of individual decision-making units -- business firms
and households and the effects of government
economic policy on these units.
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The Scope of Economics
EXAMPLES OF MICROECONOMIC & MACROECONOMIC CONCERNS
z Macroeconomics
Microeconomics
y The branch of economics that examines the
economic behaviour of aggregates -- income,
employment, output and so on...
Production
Prices
Income
Employment
Production/Output in
Individual Industries and
Businesses
Price of Individual
Goods and Services
Distribution of Income
and Wealth
Employment by
Individual Businesses &
Industries
Price of medical care
Price of gasoline
Food prices
Apartment rents
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
How much steel
How many offices
How many cars
National
Production/Output
Macroeconomics
Total Industrial Output
Gross Domestic Product
Growth of Output
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Consumer prices
Producer Prices
Rate of Inflation
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Theories and Models
z Positive Economics
z Economic Theory
y An approach to economics that seeks to understand
behaviour and the operation of systems without
making judgements. It describes what exists and
how it works.
z Normative Economics
y An approach to economics that evaluates economic
outcomes as good or bad, and may prescribe courses
of action. Also called policy economics.
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Jobs in the steel industry
Number of employees in
a firm
Number of accountants
Aggregate Price Level National Income
The Method of Economics
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(Table 1.1)
Employment and
Unemployment in the
Total wages and salaries Economy
Total corporate profits
Total number of jobs
Unemployment rate
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y An economic theory is a statement or set of related
statements about cause and effect, action and
reaction.
z Economic Model
y An economic model is a formal statement of an
economic theory. Usually a mathematical
representation of a presumed relationship between
two or more variables.
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Theories and Models
Theories and Models - Pitfalls
y Post Hoc Fallacy
z Ockham’s Razor
x A common error made when thinking about causation: if A
happened before B then A did not necessarily cause B.
y Principle that irrelevant detail should be cut away.
z Ceteris Paribus
y Correlation vs. Causation
y Literally, “other things being equal”. Used to analyze
the relationship between two variables while the
values of other variables are held constant.
x Two variables are correlated if one variable changes when
the other changes. This does not imply that one caused the
other.
y Fallacy of Composition
z Inductive Reasoning
x The fallacy of composition implies that what is true for a
part is necessarily true for the whole.
y The process of observing regular patterns from raw
data and drawing generalizations from them.
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Economic Policy and Five Criteria for
Judging Economic Outcomes
Theories and Models
1. Efficiency
z Empirical Economics
y In economics, allocative efficiency. An efficient
economy is one that produces what people want and
does so at the least possible cost.
y The collection and use of data to test economic
theories.
2. Equity
y Equity means fairness, but what this means is open
to debate. Social programs and many policy debates
are centred on the issue of fairness.
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Economic Policy and Five Criteria for
Judging Economic Outcomes
3. Growth
y Economic growth is an increase in the total output of
an economy. Often measured against population
growth to find growth per capita.
4. Full employment
y Full employment is a condition in which all resources
available for use are being used.
5. Price Stability
y A condition in which there is little inflation in prices.
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Review Terms and Concepts
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ceteris paribus
economic growth
descriptive economics
economic theory
economics
efficiency
empirical economics
equity
fallacy of composition
full employment
inductive reasoning
Industrial Revolution
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z
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macroeconomics
microeconomics
model
normative economics
Ockham’s razor
opportunity cost
positive economics
post hoc fallacy
stability
sunk costs
variables
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