Learning ObjectivesLearning Objectives  LO1: Define economics, microeconomics, and macroeconomics.  LO2: Identify John Maynard Keynes, Alfred Marshall, and Adam Smith, and their influence in economics.  LO3: State and explain the problem of scarcity and its relation to opportunity cost.  LO4: Explain how a rational decision maker applies the cost–benefit principle.  LO5: State how three pitfalls can undermine rational economic decisions.  LO6: Explain how data are used to evaluate economic theories.  LO7: Distinguish positive economics from welfare economics.  LO8: Define an economic naturalist. © 2012 McGraw-Hill Ryerson Limited Ch1 -1

LO1: Define economics, microeconomics, and macroeconomics  “Economics is the science which studies human behaviour as a relation- ship between given ends and scarce means which have alter- native uses.” (British economist Lionel Robbins 1932)  “Economics the study of how people make choices under conditions of scarcity and the results of those choices for society.”  Microeconomics the study of individual choices under scarcity and the implications of these choices for the behaviour of prices and quantities in individual markets  Macroeconomics the study of the performance of national economies and the policies that governments use to try to improve that performance © 2012 McGraw-Hill Ryerson Limited Ch1 -2 LO1: Definition of Economics

LO1: Define economics, microeconomics, and macroeconomics  Microeconomics studies subjects like  Choices of individuals  Choices of Firms  The determinants of prices and quantities in specific markets  Macroeconomics studies subjects like  The performance of national economies  Long run growth and prosperity  Short run booms and busts  Government policies to change performance © 2012 McGraw-Hill Ryerson Limited Ch1 -3 LO1: Definition of Economics

LO1: Define economics, microeconomics, and macroeconomics  One distinguishing feature of economics as a social science is that economic theories are often expressed as abstract models.  Economic model is a representation of economic reality that highlights particular variables and the relationships among them.  Another feature of economics has been the tendency of economists to assume in their theories that human beings are rational.  Rational decision maker is someone with clear objectives who behaves logically to achieve those objectives. © 2012 McGraw-Hill Ryerson Limited Ch1 -4 LO1: Definition of Economics

Using a Verbal Description to Construct a Equation I of II  Equation:  Equation: a mathematical expression that describes the relationship between two or more variables  Variable:  Variable: a quantity that is free to take a range of different values  Dependent Variable:  Dependent Variable: a variable in an equation whose value is determined by the value taken by another variable in the equation  Independent variable:  Independent variable: a variable in an equation whose value determines the value taken by another variable in the equation  Constant (or parameter): a  Constant (or parameter): a quantity that is fixed in value © 2012 McGraw-Hill Ryerson Limited Ch1 -5 LO1A.1: Using a Verbal Description to Construct a Graph

Using A Verbal Description To Construct An Equation II of II  My telephone bill is $5.00 per month plus 10 cents for every minute that I talk  Telephone Bill = * (Minutes Talked) B = T  If you make 32 minutes phone call, monthly bill will be B = (32) = 8.20  Or one can draw a picture of the relationship © 2012 McGraw-Hill Ryerson Limited Ch1 -6 LO1A.1: Using a Verbal Description to Construct a Graph

Graphing the Equation of a Straight Line I of II Dependent Variable Independent Variable 6 = (10) 8 = (30) 12 = (70) © 2012 McGraw-Hill Ryerson Limited Ch1 -7 LO1A.2: Graphing the Equation of a Straight Line B = T

Graphing the Equation of a Straight Line II of II The graph of the equation B = T is the straight line shown; its vertical intercept is 5, and its slope is 0.10 The graph of the equation B = T is the straight line shown; its vertical intercept is 5, and its slope is 0.10 © 2012 McGraw-Hill Ryerson Limited Ch1 -8 LO1A.2: Graphing the Equation of a Straight Line Vertical Intercept (Constant) is 5 Slope = Rise/Run Slope = 2/20 = 0.1

Deriving the Equation of a Straight Line from its Graph Vertical Intercept (Constant) is 4 Slope = Rise/Run Slope = 4/20 = 0.2 The Equation For the Billing Plan: B = T © 2012 McGraw-Hill Ryerson Limited Ch1 - 9 LO1A.3: Deriving the Equation of a Straight Line from its Graph

Shifting the Curve – Intercept Changes  Suppose the fixed fee increases from $4 to $8 ?  But the per-minute charge remains the same  Old Telephone Bill was determined by the equation  B = T  New Bill is determined by the equation  B = T A C D A′ C′ D′ Original monthly bill New monthly bill © 2012 McGraw-Hill Ryerson Limited Ch LO1A.4: Changes in the Vertical Intercept

Shifting the Curve – Slope Changes  The slope of a graph indicates how much of a “rise” one can expect, for a given “run”  Old Telephone Bill was determined by the equation  B = T  New Telephone Bill is determined by the equation  B = T A C A′ C′ Original monthly bill New monthly bill Run = 20 Rise = 8 © 2012 McGraw-Hill Ryerson Limited Ch1-11 LO1A.5: Changes in the Slope

Constructing Equations and Graphs from Tables Point A Point C Vertical Intercept (Constant) is 10 Slope = Rise/Run Slope = 1/20 = 0.05 The Equation For the Billing Plan: B = T © 2012 McGraw-Hill Ryerson Limited Ch1 -12 LO1A.6: Constructing Equations and Graphs from Tables