1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Slides prepared by Muni Perumal, University of Canberra, Australia
Direct Relationship
As Y increases, C increases
$500
$400
$300
$200
$100
C = Y
Consumption
Consumption (C) e d c b a
$ $ $ $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

25. 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
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

26. 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

27. 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

28. Slides prepared by Muni Perumal, University of Canberra, Australia
Positive Slope o
$500
$400
$300
$200
$100
C = Y
Consumption
Consumption (C) e d c b
vertical change = +50 a
horizontal change = +100
$ $ $ $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

29. 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
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

30. 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

31. Slides prepared by Muni Perumal, University of Canberra, Australia
Slope of a Curve (cont.) Y 40 30 20 10 b P b 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

32. 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