1. 1 PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 2 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, WINNER OF THE 1987 NOBEL PRIZE IN ECONOMICS © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Ideas for Beyond the Final Exam 1.How much does it really cost? –Opportunity cost of a decision The value of the next best alternative that must be given up because of that decision 2.Attempts to repeal laws of supply & demand - Market strikes back –Price ceilings –Price floors 3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Ideas for Beyond the Final Exam 3.Surprising principle: comparative advantage –Law of comparative advantage 4.Trade is a win-win situation –Voluntary trade – all parties gain 5.Importance of thinking at the margin –Marginal analysis Marginal costs Marginal benefits 4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Ideas for Beyond the Final Exam 6.Externalities – a shortcoming of market cured by market methods –Externalities – social costs Affect parties external to the economic transactions that cause them 7.Trade-off between efficiency and equality 5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. Ideas for Beyond the Final Exam 8.Government policies can limit economic fluctuations - but don’t always succeed –Fiscal policy Control over taxes and government spending –Monetary policy Control over money and interest rates 6 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Ideas for Beyond the Final Exam 9.Short-run trade-off between inflation & unemployment –Low unemployment normally makes inflation rise –High unemployment normally makes inflation fall 7 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Ideas for Beyond the Final Exam 10. Productivity growth is (almost) everything in the long run –Small increase in productivity growth Can have a huge effect on a country’s standard of living over a long period of time –Slowdown in productivity growth that persists for a substantial number of years Devastating effect on living standards 8 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Inside the Economist’s Tool Kit Economics as a discipline –Mathematical reasoning –Historical study –Statistics Need for abstraction –Abstraction from unimportant details = necessary to understand the functioning of anything as complex as the economy 9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Map 1 Detailed Road Map of Los Angeles 10 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Map 2 Major Los Angeles Arteries and Freeways 11 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Inside the Economist’s Tool Kit Abstraction –Ignoring many details so as to focus on the most important elements of a problem Proper degree of abstraction –Depends on the objective of the analysis 12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Map 3 Greater Los Angeles Freeways 13 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Inside the Economist’s Tool Kit Theory –Deliberate simplification of reality –Explain how relationships work Statistical correlation –Variables - go up or down together –Need not imply causation 14 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Inside the Economist’s Tool Kit Economic model –Simplification - aspect of economy –Expressed Equations Graphs Words Disagreements –Imperfect information –Value judgments 15 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Appendix Using graphs: a review Economic graphs –Large quantity of data - quickly –Facilitate data interpretation & analysis –At a glance Important statistical relationships Variable –Measured by a number –Analyze what happens to other things when the size of that number changes 16 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Appendix Using graphs: a review Two-variable diagrams –Horizontal axis –Vertical axis –Origin : The “0” point in the lower-left corner of a graph where the axes meet Both variables are equal to zero –Abstract –Focus Two variables of primary interest 17 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Figure 1 Hypothetical demand curve for natural gas: St. Louis 18 Quantity 204060801001201400 Price 1 2 3 4 5 6 b Q P (a) Quantity 204060801001201400 Price 1 2 3 4 5 6 Q P (b) a D a b © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Table 1 Quantities of natural gas demanded at various prices 19 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Appendix Using graphs: a review Slope of straight line –Ratio: vertical change “rise” –To: horizontal change “run” Negative slope –One variable falls, other rises Positive slope –Both variables rise 20 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Figure 2 Different types of slope of a straight-line graph 21 (a) Y X 0 (b) Y X 0 (c) Y X 0 (d) Y X 0 Negative slope Positive slope Zero slope Infinite slope © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Appendix Using graphs: a review Zero slope –Y value doesn’t change Infinite slope –X value doesn’t change Slope of straight line –Same numerical value 22 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. Figure 3 How to measure slope 23 (a) Y X 0 (b) Slope = 1/10 13 3 8 9 A C B Y X 0 Slope = 3/10 13 3 8 11 A C B © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Appendix Using graphs: a review Slope of a curved line –Different numerical value –At one point Slope of tangent (straight line) 24 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Figure 4 Behavior of slopes in curved graphs 25 (a) Y X 0 (b) Y X 0 (c) Y X 0 (d) Y X 0 Negative slope Positive slope Positive slope Negative slope Negative slope Positive slope © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Figure 5 How to measure slope at a point on a curved graph 26 E X 123456708910 Y 1 2 3 4 5 6 7 8 r r T R G M t t B F A C D © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Appendix Using graphs: a review Y-intercept X-intercept Ray through origin –Y-intercept = zero 45° lines –Rays through origin –Slope = 1 –Angle = 45° with the horizontal axis –X=Y 27 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Figure 6 Rays through the origin 28 X 123045 Y 1 2 3 4 5 A B K E D C Slope = +1 Slope = +1/2 Slope = +2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Appendix Using graphs: a review Contour map (topographical map) –Three pieces of data Latitude Longitude Altitude 29 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. Figure 7 A geographic contour map 30 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Appendix Using graphs: a review Production indifference map –Axes - quantities of two inputs used to produce some output –Curve - given quantity of output Points on curve = different quantities of two inputs just enough to produce the given output 31 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Figure 8 An economic contour map 32 Labor hours per day 10203040506070080 X Y 10 20 30 40 50 60 70 80 Yards of cloth per day Z = 10 Z = 20 Z = 40 Z = 30 A B © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.