Transcript Chapter 1: The Scope and Method of Economics Key Concepts (* elaborated on in lecture) 1. 2. Cartesian coordinate system and graphs* Criteria for evaluating economic results a. b. 3. Economic growth Efficiency c. d. Equity Stability Criteria.

Chapter 1:
The Scope and
Method of
Economics
Key Concepts
(* elaborated on in lecture)
1.
2.
Cartesian coordinate system and graphs*
Criteria for evaluating economic results
a.
b.
3.
Economic growth
Efficiency
c.
d.
Equity
Stability
Criteria for evaluating economic choices (or making
decisions or solving problems)
a.
b.
c.
Opportunity cost*
‘Marginalism’ and sunk costs*
Efficient markets*
Key Concepts (cont’d)
4.
5.
Economics*
Errors or cautions in logic or reasoning*
a.
b.
c.
d.
6.
7.
8.
9.
Post hoc
Fallacy of composition
Ceteris paribus
Correlation vs. causality
Macroeconomics vs. microeconomics*
Models, theories, and variables
Normative vs. positive economics
Negative vs. positive slopes*
Economics is a social science that studies
how people, either individually or collectively,
make choices to use scarce resources.
Q.
Explain further or define each of the
underlined words above.
A.
People 
Choices 
consumers, workers, gov’t officials
consumption, production, exchange,
policies
Scarce 
limited
Resources  natural (e.g. land, water)
capital (man-made bldgs & equip)
labor
managerial skills
financial (i.e. money)
time
Opportunity Cost Examples of
1.
2.
3.
4.
A student skipping Dr. Deiter’s Econ class?
Going to college versus entering the work
place?
An investor waiting a year to sell some
property versus selling now?
A business firm buys some new machinery?
‘Efficient’ markets (or situations) implies unequal
‘costs’ or ‘profits’ associated with alternatives are
eliminated as people respond to incentives (e.g.
profit, risk, time savings, price, money, etc.)
Examples:
1.
Drive-through lanes at a bank
2.
Local gas station making ‘excessive’ profits
3.
Business firm producing a product out of two plants
Marginal Analysis Example #1
Joe lives in Houston and is traveling to
Kansas City on business. What is the
‘marginal’ cost to Joe of visiting his
grandmother who lives in Des Moines by
extending his trip one more day?
Marginal Analysis Example #2
Why does an airline sometimes set
aside a few seats to be sold at big
discounts through pricline.com or
other Web sites?
Marginal Analysis Example #3
Sue has been asked by her boss to attend a
business meeting 125 miles away by either
renting a car for $50 (fuel costs not included)
or by driving a company-owned car. Her
boss has asked her to choose the cheapest
form of transportation for the company.
Identify marginal and sunk costs of driving
the company car.
Q. What is the favorite bumper sticker of most
economists?
A. Economists Do It ‘Marginally’
“Good” Economic Decisions
 Marginal
benefits > marginal costs
Examples of marginal benefits:
 profit
 revenue
 cost
 safety
 risk
Marginal costs = opposite of above examples
Cautions in analyzing variable
relationships
Caution #1.
Ceteris paribus  hold all relevant
explanatory variables EXCEPT one constant
e.g. # miles driven depends on price of
gasoline, ceteris paribus
Cautions in analyzing variable
relationships
Caution #2.
Post hoc fallacy  falsely assuming a first
event caused second event
e.g. price of gasoline decrease caused the
stock market to decrease
Cautions in analyzing variable
relationships
Caution #3.
Correlation does not imply causality
e.g. the number of cars and number of
crimes in cities are positively correlated; thus,
cars cause crimes
Cautions in analyzing variable
relationships
Caution #4.
Fallacy of composition  what is good for
one is not necessarily good for all
e.g. one person vs. everybody standing up to
get a better view at a sporting event
Equation of a straight line where:

y
x
Y
=
=
=
vertical axis variable
horizontal axis variable
b + mx where
b = vertical-axis intercept
(value of y when x = 0)
m = slope = Δy/Δx =
y1  y2
x1  x2
The slope (m) of a line has two
components:
1.
Sign
> 0  y and x  (or ) together
 positive correlation
2.
Number (or magnitude) which shows
amount y is expected to change for each 1
unit change in x
Given any 2 points, one can calculate
the actual equation of a straight line:
Step #1)
y y1  y2 rise
m


x x1  x2 run
Step #2)
b  y1  mx1(or b  y2  mx2 )
Refer to Table 1A.2 and Fig. 1A.3
1.
What is the slope of the straight line
(number and interpretation)?
2.
What is the ‘y-axis intercept’ value?
3.
What is the significance of the dashed 45°
line in Fig. 1A.3? What does this imply
about points ‘A’ and ‘B’?
Refer to Table 1A.2 and Fig. 1A.3
4.
5.
6.
What is the equation of the line in Fig.
1A.3?
What is predicted or expected avg.
consumer expenditures if avg. consumer
income before taxes is $100,000?
How would the line in Fig. 1A.3 change if
we observed a) a steeper slope, same yaxis intercept and b) a greater y-axis
intercept, same slope?