1. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. A Lecture Presentation in PowerPoint to accompany Essentials of Economics by Robert L. Sexton Copyright © 2003 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

2. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Chapter 1 The Role and Method of Economics

3. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.1 Economics: A Brief Introduction Many issues in our lives are at least partly economic in character. Why do 10 AM classes fill up faster than 8 AM classes during registration? Why is it difficult to find a cab on a rainy and cold night after a play in New York City? Why is it hard to find an apartment in cities like New York, San Francisco and Berkeley? Why is teenage unemployment higher than adult unemployment? Will higher taxes on cigarettes reduce the amount people smoke? Why do professional athletes make so much money? Why do US auto producers like tariffs (taxes) on imported cars?

4. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.1 Economics: A Brief Introduction Another reason to study economics is that it may teach you how to think better. The economic way of thinking is a set of problem–solving tools that may prove to be valuable in your professional and personal life. Much of economic life involves making choices between conflicting wants in a world of limited resources Economics gives us clues on how to intelligently evaluate out options.

5. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.1 Economics: A Brief Introduction The economic approach sheds light on many social issues such as discrimination, education, crime and divorce. Many front page stories are filled with articles relating to economics.

6. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.1 Economics: A Brief Introduction Economics is the study of the allocation of our limited resources to satisfy our unlimited wants. Resources are inputs that are used to produce goods and services. Scarcity forces us to make choices on how to best use our limited resources. The economic problem: Scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value.

7. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Living in a world of scarcity means facing tradeoffs—a trip to the grocery store versus the mall; finishing a research paper or going to the beach or a movie; sleep or class. 1.1 Economics: A Brief Introduction

8. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.2 Economics as a Science Economics, like the other social sciences, is concerned with reaching generalizations about human behavior. Conventionally, we distinguish between two main branches of economics: macroeconomics, and microeconomics.

9. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Macroeconomics is the study of the aggregate, or total economy. It looks at economic problems as they influence the whole of society, including the topics of inflation, unemployment, business cycles, and economic growth. 1.2 Economics as a Science

10. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Microeconomics deals with the smaller units within the economy. It attempts to understand the decision making behavior of firms and households and their interaction in markets for particular goods or services. Microeconomics looks at the trees; Macroeconomics looks at the forest. 1.2 Economics as a Science

11. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.3 Economic Behavior Economists assume that individuals act as if they are motivated by self-interest and respond in predictable ways to changing circumstances. That is, self-interest is a good predictor of human behavior. To a worker, self-interest means pursuing a higher paying job and/or better working conditions. To a consumer, self-interest means gaining a greater level of satisfaction from their limited income and time.

12. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Most economists believe that it is rational for people to try to anticipate the likely future consequences of one's behavior before choosing it—like driving with a suspended driver’s license or choosing to take up smoking. Actions have consequences--even inactions, which are choices not to do something or not to make changes, have consequences— failing to study for an exam. 1.3 Economic Behavior

13. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.4 Economic Theory Theories are statements or propositions used to explain and predict behavior in the real world. Because of the complexity of human behavior, economists must abstract to focus on the most important components of a particular problem. This is similar to maps that highlight the important information (and assume away many of the minor details ) to help people get from here to there.

14. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. A hypothesis in economic theory is a testable prediction about how people will behave or react to a change in economic circumstances. For example, if the price of CDs increase, we can hypothesize that fewer CDs would be sold. Empirical analysis, the use of data to test hypotheses, is applied to determine whether or not a hypothesis fits well with the facts. If an economic hypothesis is supported by the data, it can then be tentatively accepted as an economic theory 1.4 Economic Theory

15. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. 1.5 Problems to Avoid in Scientific Thinking Virtually all theories in economics are expressed using a ceteris paribus ( “holding everything else constant”) assumption. An example of ceteris paribus:The theory that if I study harder, I will perform better on a test must carefully hold other things constant. These other things might include—what if you studied so hard you overslept or you were too sleepy to think clearly? Or what if you studied the wrong stuff?

16. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. One must always be careful not to confuse correlation with causation. The fact that two events usually occur together (correlation) does not necessarily mean that one caused the other to occur (causation). Does a roosters crowing cause the sun to rise? Why are ice cream sales and crime positively correlated? People drive slowly when roads are icy—are lower speeds the cause of increased accidents? Or do icy roads lead to lower speeds and more accidents. 1.5 Problems to Avoid in Scientific Thinking

17. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. The fallacy of composition. The incorrect view that what is true for the individual is always true for the group. For example, standing up at a football game or a concert to see better only works if others do not do the same thing. How about getting to school early to get a better parking place? What if everybody gets up early to get a better parking spot? 1.5 Problems to Avoid in Scientific Thinking

18. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Positive analysis--an objective testable statement Normative analysis is a subjective non-testable item about what should be or what ought to happen. For example, incomes should be more equally distributed. 1.6 Positive and Normative Analysis

19. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Disagreement is common in most disciplines. The majority of disagreements in economics stem from normative issues. 1.6 Positive and Normative Analysis

20. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Appendix: Working with Graphs Graphs are important tools. They: allow economists to better understand the workings of the economy, and enhance the understanding of important economic relationships.

21. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. The most useful graph for our purposes is one that merely connects a vertical line (the Y-axis) with a horizontal line (the X-axis). Appendix: Working with Graphs

22. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 1: Plotting a Graph Y X -50-40-30-20-101020305040 -10 -20 -30 -40 -50 50 40 30 20 10

23. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Three common types of graphs are: pie charts, bar graphs, and time series graphs. Appendix: Working with Graphs

24. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 2: Pie Chart 14% 25% 28% 33%

25. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 2: Bar Graph Visitors (in millions) 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 16 17 Most Popular Amusement/Theme Parks, by number of visitors, 1997 The Magic Kingdom at Walt Disney World DisneylandEpcot at Walt Disney World Disney-MGM Studios at Walt Disney World Universal Studios Florida Universal Studios Hollywood Sea World of Florida Busch Gardens Tampa Sea World of California Six Flags Great Adventure

26. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 2: Time Series Graph Inflation Rate (annual percent change) 15 12.5 10 7.5 5 2.5 0 196019651970197519801985199019952000

27. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Graphs can be used to show the relationship between two variables. A variable is something that is measured by a number–like your height. Relationships between two variables can be expressed in a simple two ‑ dimensional graph. Appendix: Working with Graphs

28. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. A direct, or positive, relationship means that two variables move in the same direction. That is, an increase in one variable (practice time) is accompanied by an increase in another variable (overall score) or a decrease in one variable is accompanied by a decrease in another variable. Appendix: Working with Graphs

29. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 3: A Positive Relationship Scores at Z Games 10 9 8 7 6 5 4 3 2 1 0 203040 Practice Time per Week (10, 4) (20, 6) (30, 8) (40, 10) A B C D The graph shows an example of a positive relationship. The skaters who practiced the most scored the highest.

30. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. When two variables move in different directions, there is an inverse, or negative, relationship between the two variables. When one variable rises, the other variable falls. Appendix: Working with Graphs

31. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. A downward ‑ sloping line, the demand curve, shows the different combinations of price and quantity purchased. The higher you go up on the vertical (price) axis, the smaller the quantity purchased on the horizontal axis, and the lower you go down along the vertical (price) axis, the greater the quantity purchased. Appendix: Working with Graphs

32. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. (1, $25) (2, $20) (3, $15) (4, $10) (5, $5) Exhibit 4: Emily’s Demand Curve A Negative Relationship Price of CDs $25 20 15 10 5 0 213456 Quantity of CDs Purchased Demand Curve A B C D E The downward slope of the curve means that price and quantity are inversely, or negatively related. As price falls, quantity purchased increases and vice versa.

33. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Even when only two variables are shown on the axes, graphs can be used to show the relationship between three variables. For example, a rise in income may increase the quantity of CDs purchased at each possible price. This would shift the whole demand curve for CDs outward to a new position. Appendix: Working with Graphs

34. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 5: Shifting a Curve Price of CDs (with higher income) D Quantity of CDs Purchased D 0 (with lower income) D Quantity of CDs Purchased D 0

35. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. It is important to remember the difference between a movement up and down along a curve and a shift in the whole curve. A change in one of the variables on the graph, like price or quantity purchased, will cause a movement along the curve. A change in one of the variables not shown, like income in our example, will cause the whole curve to shift. Appendix: Working with Graphs

36. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 6: Shifts Versus Movements Price of CDs D0D0 Quantity of CDs Purchased D1D1 0 Going from Point A to B indicates movement along a demand curve. Going from D 0 to D 1 is a shift. A B

37. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. The slope, or steepness, of curves can be either positive (upward sloping) or negative (downward sloping). A curve that is downward sloping represents an inverse, or negative, relationship between the two variables. A curve that is upward sloping represents a direct, or positive relationship between the two variables. Appendix: Working with Graphs

38. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 7: Downward-Sloping Linear Curves A downward- sloping curve represents an inverse, or negative, relationship between two variables. 25 20 15 10 5 5 152025 Downward sloping 0

39. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 7: Upward-Sloping Linear Curves An upward- sloping curve represents a direct, or positive relationship between two variables. 25 20 15 10 5 5 152025 0 Upward sloping

40. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. The slope of a linear curve between two points measures the relative rates of change of two variables. The slope of a linear curve can be defined as the ratio of the change in the Y value to the change in the X value, or the ratio of the rise to the run. Appendix: Working with Graphs

41. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 8: Slopes of Positive and Negative Linear Curves Y-axis X-axis 10 9 8 7 6 5 4 3 2 1 1234560 A B 2 Run 1 Rise Positive slope +1/2 Y-axis X-axis 10 9 8 7 6 5 4 3 2 1 1234560 A B +2 Run Negative slope -4 -8 Rise

42. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Along a nonlinear curve, the slope varies from point to point. However, we can find the slope of such a curve at any point by finding the slope of the tangent to that curve at that point. Appendix: Working with Graphs

43. Harcourt, Inc. items and derived items copyright © 2003 by Harcourt, Inc. Exhibit 9: The Slope of a Nonlinear Curve Y-axis X-axis 5 4 3 2 1 12345760 A C Slope=0 B