1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 1 Chapter 1 The Nature and Method of Economics

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 2 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?

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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’?

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 4 Economics Concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 5 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.

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 7 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

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 9 Induction and Deduction Induction – A method of reasoning that proceeds from facts to generalisations Deduction – Reasoning from assumptions to conclusions by testing a hypothesis

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 11 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

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 14 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

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 17 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

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

20. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

21. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 21 Graphs and their Meaning Appendix to Chapter 1

22. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 22 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

23. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

24. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 24 Direct Relationship 0 $500 $400 $300 $200 $100 $100 $200 $300 $400 Consumption (C) Income (Y) Consumption C = 50 + 0.5Y a b c d e As Y increases, C increases

25. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 25 Inverse Relationship 0 $25 $20 $15 $10 $5 4 8 12 16 20 Ticket Price (P) Attendance in thousands (Q) Ticket Demand a b c d f As P increases, Q decreases e P = 25 – 1.25Q

26. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 26 Dependent and Independent Variables Dependent variable: – 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

27. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 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

28. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 28 Positive Slope o $500 $400 $300 $200 $100 $100 $200 $300 $400 Consumption (C) Income (Y) Consumption C = 50 + 0.5Y a b c d e vertical change = +50 horizontal change = +100

29. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 29 Negative Slope 0 $25 $20 $15 $10 $5 4 8 12 16 20 Ticket Price (P) Attendance in thousands (Q) Ticket Demand P = 25 – 1.25Q a b c d f – 5 + 4 e

30. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 30 Slope of a Curve Tangent P A A a a X Y

31. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 31 Slope of a Curve (cont.) X Y 40 30 20 10 0 10 20 30 40 P b b

32. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 32 Next Chapter: The Economising Problem