Chapter 1 The Nature and Method of Economics Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Learning Objectives Of what importance or consequence is the study of economics? How should we study economics? What are the proper methods by which this is best achieved? In other words, what is the methodology of economics? Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Learning Objectives (cont.) What specific problems, limitations and pitfalls might we encounter in studying economics? What characterises or identifies an ‘economic perspective’? Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Economics Concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia The Roles of Economics Why study economics? John Maynard Keynes offered this response: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Keynes, 1936. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

The Age of the Economists Adam Smith David Ricardo John Stuart Mill Karl Marx Jon Maynard Keynes plus many modern contributors Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia The Roles of Economics Economics for citizenship To create well-informed members of society Economics in business To provide business with strategic information and interpretations Personal applications To assist individuals, as workers and income receivers, to gain and retain economic security Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Methodology of Economics What do economists do? What are their goals? Principles, policies and problems What procedures do economists employ? Descriptive or empirical economics Economic theory Policy formulation Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Induction and Deduction A method of reasoning that proceeds from facts to generalisations Deduction Reasoning from assumptions to conclusions by testing a hypothesis Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Descriptive Economics Complex in economics unlike physical sciences Economics is a social science involving the complexities of individuals and institutions Facts are difficult to gather and interpret Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Economic Theory Facts must be systematically arranged, interpreted and generalised to derive appropriate economic theory Theories or principles are the end result of economic analysis. These are meaningful statements drawn from facts Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Terminology of Economic Theory Economists use the terms ‘laws’, ‘theories’ and ‘models’ to represent generalisations, or statements of regularity, concerning the economic behaviour of individuals and institutions Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Generalisations in Economics Economic principles are generalisations, and subject to exceptions and to quantitatively imprecise statements Economic principles are often stated in terms of averages or statistical probabilities Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Economic Theory The ‘other things being equal’ assumption The process of analysis, that all other variables, other than the one being considered are constant Abstractions in economics Economic theories do not encompass the full complexity of reality Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Microeconomics and Macroeconomics Microeconomics is concerned with specific economic units and a detailed consideration of the behaviour of these individuals units Macroeconomics deals with the economy as a whole, or with the basic subdivisions or aggregates that make up the economy Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Positive and Normative Economics Positive economics are based upon facts without value judgements Normative economics are based upon subjective beliefs. . . “what ought to be” Normative economic statements come into play at the level of policy economics Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Economic Goals 1. Economic growth 2. Full employment 3. Economic efficiency 4. Price-level stability 5. Economic freedom 6. An equitable distribution of income 7. Economic security 8. External balance Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Pitfalls to Objective Thinking Bias Loaded terminology Definitional difficulties Fallacy of composition Cause and effect Post-hoc fallacy Correlation versus causation Economic quackery Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

The Economic Perspective Scarcity and Choice resources are limited and this necessitates choices Rational behaviour behaviour that involves decisions and actions in order to achieve the greatest satisfaction or maximum fulfilment of goals Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

The Economic Perspective (cont.) Marginalism: benefits and costs incremental benefits available from any changes are compared to the incremental costs of making the change Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Graphs and their Meaning Appendix to Chapter 1 Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Constructing a Graph Two-dimensional graph horizontal line is x-axis vertical line is y-axis intersection (0) is origin Linear relationship y = a + bx Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Graphs Used in Economic Models Graphing relationships between variables direct (positive) relationship: where the values of two related variable change in the same direction, e.g. consumption and income inverse (negative) relationship: where the values of two related variables move in opposite directions, e.g. ticket prices and attendance Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Direct Relationship As Y increases, C increases $500 $400 $300 $200 $100 C = 50 + 0.5Y Consumption Consumption (C) e d c b a $100 $200 $300 $400 Income (Y) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Inverse Relationship As P increases, Q decreases a b c $25 $20 $15 $10 $5 P = 25 – 1.25Q Ticket Price (P) d Ticket Demand e f 4 8 12 16 20 Attendance in thousands (Q) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Dependent and Independent Variables The variable which changes as a consequence of a change in some other (independent) variable Independent variable: The variable which causes a change in some other (dependent) variable Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slope of a Straight Line The ratio of the vertical change to the corresponding horizontal change involved in moving between two points Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Positive Slope o $500 $400 $300 $200 $100 C = 50 + 0.5Y Consumption Consumption (C) e d c b vertical change = +50 a horizontal change = +100 $100 $200 $300 $400 Income (Y) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Negative Slope a $25 $20 $15 $10 $5 b – 5 P = 25 – 1.25Q c Ticket Price (P) + 4 d Ticket Demand e f 4 8 12 16 20 Attendance in thousands (Q) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Slope of a Curve Y Tangent a A P a A X Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Slides prepared by Muni Perumal, University of Canberra, Australia Slope of a Curve (cont.) Y 40 30 20 10 b P b X 10 20 30 40 Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia

Next Chapter: The Economising Problem Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia