1. AS Economics Mr. Durham durham.j@shishialevel.cn

2. Lesson Objectives Review HW Activity 1.2 from textbook
Study the meaning of Normative and Positive Statements and apply to practice questions
Learn the different stages of the business cycle.
More advanced analysis and application will follow at later time

3. 2. Marginal Analysis
Marginal Analysis: is an examination of the additional benefits of an activity compared to the additional costs of that activity.
Companies use marginal analysis as a decision making tool to help them maximize their profits.
Example: Should my company build (produce) one more good (called a unit)
Individuals use marginal analysis (without even thinking about it) to make decisions every day.
Example: Should I buy a second iPhone?

4. 3. Positive vs Normative Statements
Positive Economics: Economic analysis (or statements) that describes the way the economy actually works.
Has no value judgments
Can be verified by empirical data
Can include prediction
Examples (Positive Statements):
A fall in the supply of oil will lead to an increase in its price
An increase in tourist numbers in Chengdu will create more employment
An increase in taxation on cigarettes will result in fewer cigarettes being sold

5. 3. Positive vs Normative Statements
Normative Economics: Economic analysis (or statements) that make prescriptions about the way that the economy should work.
Based on a person’s beliefs or value system
Cannot be verified with data
Examples (Normative Statements):
A fall in the supply of oil will lead to an increase in its price
… and this should be positive for the environment
An increase in tourist numbers in Chengdu will create more employment
… and therefore the Chengdu government should try and promote tourism
An increase in taxation on cigarettes will result in fewer cigarettes being sold
… and this ought to improve the health of the country

6. 3. Positive vs Normative Statements
Mini Quiz: Identify if the following statements are positive or normative?
Mr. Durham is an Economics teacher
The Chinese economy grew by 14.2% in 2007
Mr. Durham is the best economics teacher in China
The Chinese government should spend more money on education
The inflation rate in Egypt in 2013 was 2%
The government should cut fuel tax to reduce the rate of inflation
Public sectors must reduce their demands for higher wages
Justin Beiber deserves to make millions of dollars because he makes so many people happy.
Spain had a budget deficit in 2013
The head of Global Research at Goldman Sachs predicts a fall in demand for iPhones

7. 3. Positive vs Normative Statements
Mini Quiz: Identify if the following statements are positive or normative?
Mr. Durham is an Economics teacher (P)
The Chinese economy grew by 14.2% in 2007 (P)
Mr. Durham is the best economics teacher in China (N)
The Chinese government should spend more money on education (N)
The inflation rate in Egypt in 2013 was 2% (P)
The government should cut fuel tax to reduce the rate of inflation (N)
Public sectors must reduce their demands for higher wages (N)
Justin Beiber deserves to make millions of dollars because he makes so many people happy. (N)
Spain had a budget deficit in 2013 (P)
The head of Global Research at Goldman Sachs predicts a fall in demand for iPhones (P)

8. 4. The Business Cycle
Relevance: The business cycle applies more to the study of macroeconomics, but learning the general idea and terms now is helpful because the business cycle will have an effect on firms, consumers, supply, demand, revenue, etc….
As a result, business cycle matters to microeconomics.
A change in the business cycle could appear in the wording of a multiple choice question
Business Cycle: A periodic up-and-down movement of total production and other measures of activity (such as income and employment)
Fluctuations in the pace of economic activity.

9. 4. The Business Cycle 2 Parts of Business Cycle Expansion Recession
2 Turning Points of Business Cycle
Peak
Trough

10. 4. The Business Cycle
1. Expansion: A period of during which real GDP increases.
Output / production will increase
Decrease in unemployment
Consumers will have more disposable income
Demand will increase for factors of production
May experience inflation

11. 4. The Business Cycle
2. Recession: a period during which real GDP decreases – the growth rate of the country’s GDP is negative – for at least two consecutive quarters.
3. Peak: As indicated by the term “peak”, the top of the business cycle occurs when economic growth has reached a point where it will stabilize for a short time and then reverse direction.
4. Trough: A trough is a stage of the economy’s business cycle that marks the end of declining business activity and the transition to expansion.
GDP: the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
GDP = Gross Domestic Product
Gross (Total) Domestic (within a country) Product (Goods)

12. Review MC Q: Which of the following is a positive statement?
Government economists expect that the economy will grow next year
Government economists believe that the policy makers ought to increase spending
Academics say that the finance minister should decrease taxes
The GDP of China is growing more slowly this year, which is not good for exporters

13. Review MC Q: Decision making at the margin
Is making decisions using statistics
Is making decisions with economics
Looks at the effect of a small change to two or more variables
Looks at the effect of a small change in one variable

14. Homework Complete Handouts “Homework 2” and “Homework 3”.
Bring your answers to class