1. ECONOMICS Principles & Policy
William J. Baumol
& Alan S. Blinder
Economics: Principles & Policy
11e Baumol & Blinder
© 2009 Cengage
PowerPoint slides prepared by:
Andreea Chiritescu
Eastern Illinois University
Modified by Hui He, UHM

2. Chapter 1 What is Economics?
Why does public discussion of economic policy so often show the abysmal ignorance of the participants? Why do I so often want to cry at what public figures, the press, and television commentators say about economic affairs?
Robert M. Solow

3. Outline
Give you some idea of the issues that economic analysis help to clarify and the solutions that economic principles suggest
Introduce the tools that economists use

4. Ideas for Beyond the Final Exam
How much does it really cost?
Opportunity cost
Value of next best alternative forgone (first best is your choice)
Example: what is the cost to go to college? direct cost = TFRB, indirect cost=four year forgone wage

5. Ideas for Beyond the Final Exam
2. Attempts to repeal laws of supply & demand - Market strikes back
Price ceilings (NYC rent control creates shortage and lack of maintenance of apartments)
Price floors (price support of agricultural products leads to surplus)

6. Ideas for Beyond the Final Exam
3. Surprising principle: comparative advantage (Chapter 17)
Law of comparative advantage: Even China can produce everything more cheaply, two nations can still gain from trade by specializing in relatively cheaper items

7. Ideas for Beyond the Final Exam
4. Trade = win-win situation
Voluntary trade – all parties gain
5. Government policies - limit economic fluctuations - but don’t always succeed (Chapter 11-13)
Fiscal policy: tax and Gov. spending
Monetary policy: money supply and interest rates

8. Ideas for Beyond the Final Exam
6. Short-run trade-off between inflation & unemployment (Chapter 16)
Low unemployment - high inflation
High unemployment – low inflation
7. Productivity growth is (almost) everything in long run (Chapter 7)
Small increase in labor productivity – higher living standard
Slowdown in labor productivity – lower living standard

9. Inside the Economist’s Tool Kit
Economics as a discipline uses
Mathematical reasoning
Historical study
Statistics
Need for abstraction
Ignore many details
Focus: most important elements

10. Map 1
Detailed Road Map of Los Angeles

11. Map 2
Major Los Angeles Arteries and Freeways

12. Inside the Economist’s Tool Kit
Abstraction, simplification
Unimportant details
Necessary
Understand complex economy
Degree of abstraction
Objective of analysis

13. Map 3
Greater Los Angeles Freeways

14. Inside the Economist’s Tool Kit
Economic theory
Deliberate simplification of reality
Explain how relationships work (mechanism)
Answer counterfactual experiment
Statistical correlation
Variables - go up or down together
Need not imply causation

15. Inside the Economist’s Tool Kit
Economic model
Simplification - aspect of the real economy
Expressed
Equations
Graphs
Words
Disagreements
Imperfect information
Value judgments

16. Using graphs: a review Economic graphs Variable
Large quantity of data - quickly
Facilitate data interpretation & analysis
At a glance
Important statistical relationships
Variable
Measure: number
Analysis

17. Two-variable diagrams
Using graphs: a review
Two-variable diagrams
Horizontal axis
Vertical axis
Origin
Abstract
Focus
Two variables of primary interest

18. Figure 1 Hypothetical demand curve for natural gas: St. Louis Price 12 3 4 5 6
Price 1 2 3 4 5 6 D P a P a Q Q b b
Quantity 20 40 60 80
100
120
140
Quantity 20 40 60 80
100
120
140
(a)
(b)

19. Table 1 Quantities of natural gas demanded at various prices
Price (per thousand cubic feet) $2 $3 $4 $5 $6
Quantity demanded (billions
of cubic feet per year)
120 80 56 38 20

20. Using graphs: a review Slope of straight line Negative slope
Ratio: vertical change “rise”
To: horizontal change “run”
Negative slope
One variable falls, other rises
Positive slope
Both variables rise

21. Figure 2 Different types of slope of a straight-line graph Y Y
Negative slope
Positive slope X X
(a)
(b) Y Y
Zero slope
Infinite
slope X X
(c)
(d)

22. Using graphs: a review Zero slope Infinite slope
Y value doesn’t change
Infinite slope
X value doesn’t change
Slope of straight line
Same numerical value

23. Figure 3 How to measure slope Y Y C 11 13 C 9 8 13 8 3 3 A B BX X
(a)
(b)

24. Using graphs: a review Slope of curved line Different numerical value
At one point
Slope of tangent (straight line)

25. Figure 4 Behavior of slopes in curved graphs Y Y Positive slope
Negative slope X X
(a)
(b) Y Y
Negative
slope
Positive
slope
Negative
slope
Positive
slope X X
(c)
(d)

26. Figure 5 How to measure slope at a point on a curved graph Y 1 2 3 4 56 7 8 r D R t F C E T G M A B X 1 2 3 4 5 6 7 8 9 10

27. Using graphs: a review Y-intercept X-intercept Ray through origin
Y-intercept = zero
45° lines
Rays through origin
Slope = 1
Angle = 45°
X=Y

28. Figure 6 Rays through the origin Y 1 2 3 4 5 Slope = +2 B Slope = +1 CK
Slope = +1/2 E D X 1 2 3 4 5

29. Contour map (topographical map)
Using graphs: a review
Contour map (topographical map)
Three pieces of data
Latitude
Longitude
Altitude

30. Figure 7
A geographic contour map

31. Production indifference map
Using graphs: a review
Production indifference map
Axes - quantities of two inputs
Curve - given quantity of output
Points on curve
Different quantities of two inputs
Just enough – produce given output

32. Figure 8 An economic contour map Y 10 20 30 40 50 60 70 80
Yards of cloth per day
Z = 40
Z = 30
Z = 20
Z = 10 A B
Labor hours per day 10 20 30 40 50 60 70 80 X