1. C H A P T E R 1 Prepared by: Fernando and Yvonn Quijano © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin Introduction: What is Economics?

2. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 2 of 16 What is Economics? Economics: studies the choices that can be made when there is scarcity. Scarcity: is a situation in which resources are limited in quantity and can be used in different ways.

3. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 3 of 16 What is Economics? Because our resources are limited, we must sacrifice one thing for another……………. Trade-Offs: the idea that because of scarcity, producing more of one good or service, means producing less of another good or service.

4. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 4 of 16 What is Economics? The Factors of Production / Resources or Production Inputs Natural Resources: land, mineral deposits, oil & gas deposits, water. Labor Physical Capital: equipment, machines, structures, infrastructure Human Capital: knowledge & skills acquired through education & experience Entrepreneurship: the effort used to coordinate the factors of production.

5. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 5 of 16 Decisions in a Modern Economy Economic decisions are made at every level in society. The choices made by individuals, firms, and governments answer three fundamental questions: 1. What goods & services will be produced? 2. How will the goods & services be produced? 3. Who will receive the goods and services produced?

6. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 6 of 16 Centrally Planned Economies vs. Market Economies Centrally planned economy: An economy in which the government decides how economic resources will be allocated. Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources. Mixed economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but where the government plays a significant role in the allocation of resources.

7. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 7 of 16 The Economic Way of Thinking Three Important Assumptions in Economics: People are Rational People Respond to Economic Incentives Optimal Decisions are made at the Margin Marginal Analysis: Analysis that involves comparing marginal benefits to marginal costs.

8. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 8 of 16 Apple Computer Makes a Decision at the Margin 1 - 1 Should Apple produce an additional 300,000 iPods? In solving the problem, consider the following: Optimal decisions are made at the margin. An activity should be continued to the point where the marginal benefit is equal to the marginal cost. In this case, the correct decision requires information about additional revenue and additional cost.

9. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 9 of 16 Preview of Coming Attractions: Microeconomics Microeconomics : the study of the choices made by households, firms, and government, and of how these choices affect the markets for goods or services.

10. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 10 of 16 Preview of Coming Attractions: Microeconomics We can use microeconomic analysis to: 1. Understand how markets work and predict changes. 2. Make personal and managerial decisions. 3. Evaluate public policies.

11. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 11 of 16 Preview of Coming Attractions: Macroeconomics Macroeconomics: the study of the nation’s economy as a whole. We can use macroeconomic analysis to: 1. Understand why economies grow. 2. Understand economic fluctuations. 3. Make informed business decisions.

12. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 12 of 16 Positive versus Normative Analysis Positive Analysis / Economics: predicts the consequences of alternative actions, answering the questions, “What is?” or “What will be?” Normative Analysis / Economics: answers the question, What ought to or should be? Normative questions lie at the heart of policy debates.

13. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 13 of 16 Positive versus Normative Analysis Positive Analysis Questions: If the government increases the minimum wage, how many workers will lose their jobs? If two cable companies merge, will the cost of monthly cable services increase? How do consumers respond to a cut in income taxes? How does a college education affect a person’s productivity & earnings? Normative Analysis Questions: Should the government increase the minimum wage? Should the government block the merger of two cable giants? Should the government cut taxes to stimulate the economy? Should the government subsidize a college education?

14. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 14 of 16 Economic Analysis and Modern Problems Economic analysis provides important insights into real-world problems. Economists attempt to diagnose and provide solutions to problems such as traffic congestion, poverty in Africa, or the problems of an entire economy.

15. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 15 of 16 Economic Analysis and Modern Problems Economic Model: A simplified version of some aspect of economic life used to analyze an economic issue.

16. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 16 of 16 Using Graphs and Formulas Graphs of Two Variables Plotting Price and Quantity Points in a Graph Inverse or Negative Relationship

17. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 17 of 16 Using Graphs and Formulas Graphs of Two Variables Positive Relationship Graphing the Direct Relationship between Income and Consumption Spending

18. C H A P T E R 1: Introduction: What is Economics? C H A P T E R 1: Introduction: What is Economics? © 2006 Prentice Hall Business Publishing Economics: Principles and Tools, 4/e O’Sullivan/ Sheffrin 18 of 16 Using Graphs and Formulas Formulas Formulas for the Areas of a Rectangle and a Triangle Showing a Firm’s Total Revenue on a Graph