1 WHAT IS ECONOMICS?

After studying this chapter, you will be able to:

◆ Define economics and distinguish between

microeconomics and macroeconomics

◆ Explain the two big questions of economics

◆ Explain the key ideas that define the economic way

of thinking

◆ Explain how economists go about their work as social

scientists and policy advisers

◆ Describe the jobs available for an economics major

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All economic questions arise
because we want more than we can
get

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 Scarcity Of Resources
Resources
Wants Time,money and
energy

Unlimited Limited
Laptop, new mobile
Save money for a tour to Europe,
Scarce
new furniture etc etc……………….

Trade-off
Choices

Principles of Microeconomics 4
 Definition of Economics

All economic questions arise because we want more than we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face.
An incentive is a reward that encourages an action or a penalty that
discourages an action.

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 Definition of Economics

Economics is the social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with scarcity
and the incentives that influence and reconcile those choices.
Economics divides in two main parts:
■ Microeconomics
■ Macroeconomics

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 Definition of Economics

Microeconomics is the study of choices that individuals and businesses make,

the way those choices interact in markets, and the influence of governments.
An example of a microeconomic question is: Why are people downloading
more movies? Would a tax on downloads change the number of movies
downloaded? How much steel? How many cars?

Macroeconomics is the study of the performance of the national and global

economies.
An example of a macroeconomic question is: Why does the unemployment rate
fluctuate?

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 Table 1.1 Examples of Microeconomic
and Macroeconomic Concerns
Division of Production Prices Income Employment
Economics
Microeconomics Production/output in Prices of Distribution of income Employment by individual
individual industries individual goods and wealth businesses and industries
and businesses and services Wages in the auto Jobs in the steel industry
How much steel How Price of medical industry Number of employees in
much office space care ,Price of Minimum wage a firm
How many cars gasoline Executive salaries Number of accountants
Food prices
Apartment rents

Macroeconomics National Consumer prices National income Employment and

production/output Producer prices Total wages and unemployment in the
Total industrial output Rate of inflation salaries economy
Gross domestic Total corporate profits Total number of jobs
product Unemployment rate
Growth of output

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Two Big Economic Questions

Two big questions summarize the scope of economics:

■ How do choices end up determining what, how, and
for whom goods and services get produced?
■ Could it be possible that when each of us makes
choices in our self-interest, these choices are in the
social interest?’

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▪ Goods and services are the objects that people value and
produce to satisfy human wants.

Goods Services
Physical objects Task performed for
people

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 Three Basic
Questions

How to For whom to

Produce? produce?
What to
Produce?
▪ Which technology?
▪ Which resources are used? ▪ How are outputs distributed?

▪ Which goods will be

produced?
▪ How much of each?

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 Two Big Economic Questions

What, How, and For Whom?

What?
In the United States, agriculture accounts for less than
1 percent of total production, manufactured goods for
19 percent, and services for 80 percent.
In low-income Ethiopia, agriculture accounts for
36 percent of total production, manufactured goods for
17 percent, and services for 47 percent.

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Two Big Economic Questions

Figure 1.1 shows these

numbers for the United
States, China, and
Ethiopia.
What determines these
patterns of production?
How do choices end up
determining the quantity
of each item produced in
the United States and
around the world?

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 Three Basic
Questions
How to Produce?

Resources scarce

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Two Big Economic Questions

The “gifts of nature” that we use to produce goods and

services are land.
The work time and work effort that people devote to
producing goods and services is labor.
The quality of labor depends on human capital, which is
the knowledge and skill that people obtain from education,
on-the-job training, and work experience.
The tools, instruments, machines, buildings, and other
constructions that businesses use to produce goods and
services are capital.
The human resource that organizes land, labor, and capital
is entrepreneurship.
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 Two Big Economic Questions

For Whom?
Who gets the goods and services depends on the incomes that people earn.
■ Land earns rent.
■ Labor earns wages.
■ Capital earns interest.
■ Entrepreneurship earns profit.

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 Lecture 2

Previous Lecture Today’s lecture Lecture

• Definition of economics • Learn the way to think like an

economist
• Scarcity of resources
• Self interest and social interest
• Three basic question
• Positive and normative
economics

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 Economic Way of Thinking

Six key ideas define the economic way of thinking:

■ A choice is a tradeoff.
■ People make rational choices by comparing benefits and costs.
■ Benefit is what you gain from something.
■ Cost is what you must give up to get something.
■ Most choices are “how-much” choices made at the margin.
■ Choices respond to incentives.

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 Economic Way of Thinking

A Choice Is a Tradeoff
The economic way of thinking places scarcity and its implication, choice, at
center stage.
You can think about every choice as a tradeoff—an exchange—giving up one
thing to get something else.
On Saturday night, will you study or have fun?
You can’t study and have fun at the same time, so you must make a choice.
Whatever you choose, you could have chosen something else. Your choice is a
tradeoff.

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 Join: vevox.app ID: 181-964-360 POLL
OPEN
What is the opportunity cost of your presence in
the class
1. Sleeping at home

2. watching a movie

3. enjoy with friends

4. going to gym

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 Economic Way of Thinking

Making a Rational Choice

A rational choice is one that compares costs and benefits and achieves
the greatest benefit over cost for the person making the choice.
The idea of rational choice provides an answer to the first question: What
goods and services will be produced and in what quantities?
The answer is: Those that people rationally choose to buy!

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 The Economic Way of Thinking

How do people choose rationally?

The answers turn on benefits and costs.
Benefit: What you Gain
The benefit of something is the gain or pleasure that it brings and is
determined by preferences
Preferences are what a person likes and dislikes and the intensity of those
feelings.

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Opportunity of an activity (or a choice)

➢The value of what must be forgone in order to

undertake that activity or choice
➢It is the value of the next best alternative to the
choice taken
➢It is the cost of your choice
➢It Considers both explicit(direct) and implicit costs
(indirect
 Opportunity Cost (Book Example)

• Going for a medical checkup

• Choice taken: medical checkup (2 hours) valued at $50
• Potential alternatives: work / watch a movie / go to the
gym
• Next best alternative: work (2 hours / each hour valued
at $10)
• Opportunity cost for the medical checkup = explicit
Hidden or
cost + implicitindirect
cost = $50 + $20 = $70
cost
 The Economic Way of Thinking

How Much? Choosing at the Margin

You can allocate the next hour between studying and instant messaging your
friends.
The choice is not all or nothing, but you must decide how many minutes to
allocate to each activity.
To make this decision, you compare the benefit of a little bit more study time
with its cost—you make your choice at the margin.

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 The Economic Way of Thinking

To make a choice at the margin, you evaluate the consequences of making

incremental changes in the use of your time.
The benefit from pursuing an incremental increase in an activity is its marginal
benefit.
The opportunity cost of pursuing an incremental increase in an activity is its
marginal cost.
If the marginal benefit from an incremental increase in an activity exceeds its
marginal cost, your rational choice is to do more of that activity.

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 The Economic Way of Thinking

Choices Respond to Incentives

A change in marginal cost or a change in marginal benefit changes the
incentives that we face and leads us to change our choice.
The central idea of economics is that
we can predict how choices will change by looking at changes in incentives.
Incentives are also the key to reconciling self-interest and the social interest.

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Two Big Economic Questions

Do Choices Made in the Pursuit of Self-

Interest also Promote the Social Interest?

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 Two Big Economic Questions

Self-Interest
You make choices that are in your self-interest—choices that you think are
best for you.
Social Interest
Choices that are best for society as a whole are said to be in the social
interest.
Social interest has two dimensions: efficiency and fair shares.

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 Two Big Economic Questions

Social interest has two dimensions: efficiency and fair shares.

Efficiency and Social Interest
Resource use is efficient if it is not possible to make someone better off
without making someone else worse off.
Fair Shares(Equity) and Social Interest
The idea that the social interest requires “fair shares” is a deeply held one.
But what is a fair share?

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 Two Big Economic Questions

Questions about the social interest are hard ones to answer and they generate
discussion, debate, and disagreement.
Four topics that generate discussion and that illustrate tension between self-
interest and social interest are:
■ Globalization
■ Information-age monopolies
■ Climate change
■ Financial instability

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 Two Big Economic Questions

Globalization
Globalization means the expansion of international trade, borrowing and
lending, and investment.
Globalization is in the self-interest of consumers who buy low-cost imported
goods and services.
Globalization is also in the self-interest of the multinational firms that produce in
low-cost regions and sell in high-price regions.
But is globalization in the self-interest of low-wage workers in other countries
and U.S. firms that can’t compete with low-cost imports?
Is globalization in the social interest?

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 Two Big Economic Questions

Information-Age Monopolies
The technological change of the past forty years has been called the
Information Revolution.
The information revolution has clearly served your self-interest: It has provided
your cell-phone, laptop, loads of handy applications, and the Internet.
It has also served the self-interest of Bill Gates of Microsoft and Gordon Moore
of Intel, both of whom have seen their wealth soar.
But did the information revolution serve the social interest?

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 Two Big Economic Questions

Climate Change
Climate change is a huge political issue today.
Every serious political leader is acutely aware of the problem and of the
popularity of having proposals that might lower carbon emissions.
Burning fossil fuels to generate electricity and to power airplanes, automobiles,
and trucks pours a staggering
28 billion tons—4 tons per person—of carbon dioxide into the atmosphere each
year.

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 Two Big Economic Questions

Two thirds of the world’s carbon emissions comes from the United States,
China, the European Union, Russia, and India.
The fastest growing emissions are coming from India and China.
The amount of global warming caused by economic activity and its effects are
uncertain, but the emissions continue to grow and pose huge risks.

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 Two Big Economic Questions

Every day, when you make self-interested choices to use electricity and
gasoline, you contribute to carbon emissions.
You leave your carbon footprint.
You can lessen your carbon footprint by walking, riding a bike, taking a cold
shower, or planting a tree.
But can each one of us be relied upon to make decisions that affect the Earth’s
carbon-dioxide concentration in the social interest?
Can governments change the incentives we face so that our self-interested
choices are also in the social interest?

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 Two Big Economic Questions

Economic Instability
In 2008, banks were in trouble. They had made loans that borrowers couldn’t
repay and they were holding securities the values of which had crashed.
Banks’ choices to take deposits and make loans are made in self-interest, but
does this lending and borrowing serve the social interest?
Do banks lend too much in the pursuit of profit?

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 Economics: A Social Science and Policy Tool

Economist as Social Scientist

Economists distinguish between two types of statement:
■ Positive statements
• Positive statement is about what is it is based on facts
• A positive statement can be tested by checking it against facts.

■ Normative statements
▪ A normative statement is what ought to be or
• It is an opinion and cannot be tested.

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© 2019 Pearson Education Ltd.
Normative and Positive Economics

• Higher interest rates cause • People should save more.

people to save more. • Government should tax the
• High income tax rate rich to help the poor.
discourage work. • Smoking should be
• High taxes on cigarettes discouraged.
discourage smoking. • Pollution is the most
• Carbon emission causing serious economic problem.
the global warming • We ought to cut our use of
coal by 50%.
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1 WHAT IS ECONOMICS?

© 2019 Pearson Education Ltd.

After studying this chapter, you will be able to:
◆Defineeconomics and distinguish between
microeconomics and macroeconomics

◆Explain the two big questions of economics

◆Explain the key ideas that define the economic way

of thinking

◆Explain how economists go about their work as

social scientists and policy advisers

◆Describe the jobs available for an economics

major

© 2019 Pearson Education Ltd.

 Lecture 3

Previous Lecture Today’s lecture Lecture

• Learn the way to think like an Positive and normative economics

economist Economic models
• Self interest and social interest
• Positive and normative
economics

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 Some Revision

The choice to skip breakfast to go to class what is the cost

and benefit?

The choice to do laundry today rather

than watch television.

When a student faces a chemistry and an economics final exam in

one day, the student must determine whether spending the last
hour studying a little more chemistry or a little more economics
will yield a better contribution (marginal benefit) to his or her
overall GPA.
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 Economics: A Social Science and Policy Tool

Economist as Social Scientist

Economists distinguish between two types of statement:
■ Positive statements
• Positive statement is about what is it is based on facts
• A positive statement can be tested by checking it against facts.

■ Normative statements
▪ A normative statement is what ought to be or
• It is an opinion and cannot be tested.

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© 2019 Pearson Education Ltd.
 Normative and Positive Economics

• Higher interest rates cause • High taxes on cigarettes

people to save more. discourage smoking.
• People should save more. • Smoking should be
• High income tax rate discouraged.
discourage work. • . Carbon emission causing
• Government should tax the the global warming
rich to help the poor. • We ought to cut our use of
coal by 50%.
• Pollution is the most
serious economic problem
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 Challenge

▪ Fewer deep water oil wells should be drilled in the

Gulf of Mexico.
▪ If less oil is produced, the price of oil will rise.

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 Economics: A Social Science and Policy Tool
Unscrambling Cause and Effect
Economist are particularly interested in Positive statements about cause and
Effects.
Economist discovers how the economic world works.
Economists create and test economic models.
Which is simplified description that captures the essential elements of a
situation
Models are based on assumptions
The essential elements will allow us to better analyze these situations.
• Which aspects of the decision are absolutely essential?
• Which aspects are irrelevant?
• Ceteris Paribus (Latin meaning “all other things being equal or held constant”)
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 Economics: A Social Science and Policy Tool

Economist as Policy Adviser

Economics is a toolkit for advising governments and businesses and for
making personal decisions.
All the policy questions on which economists provide advice involve a blend of
the positive and the normative.
Economics can’t help with the normative part—the goal.
But for a given goal, economics provides a method of evaluating alternative
solutions—comparing marginal benefits and marginal costs.

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 Economists in the Economy

What are the jobs available to an economics major?

Is the number of economics jobs expected to grow or shrink?
How much do economics graduates earn?
What are the skills needed for an economics job?

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 Economists in the Economy

Jobs for an Economics Major

A major in economics opens the door to the pursuit of a masters or PhD and a
career as an economist.
The work of economists varies enormously but it includes
• collecting and analysing data on the production and use of resources,
goods, and services;
• predicting future trends; and
• studying ways of using resources more efficiently.
• Economists work in private firms, government, and international
organizations.

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 Economists in the Economy

Economics majors also work as

market research analysts,
financial analysts, and budget
analysts.
Figure 1.3 shows the the
relative number of jobs for
economists and analysts that
use economic ideas and tools.

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 Economists in the Economy

Will Jobs for Economists Grow?

The BLS forecasts that jobs for:
1. Economists with a PhD will grow by 6 percent.
2. Budget analysts will grow by 2 percent.
3. Financial analysts will grow by 12 percent.
4. Market research analysts will grow by 19 percent.

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Economists in the Economy

Earnings of
Economics Majors
Earnings of economics
majors vary a lot
depending on the job
and their qualifications.
Economists with a PhD
would expect to earn
about $100,000 a year

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Economists in the Economy

Economists working as
analysts earn more than
the national average.

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 Economists in the Economy

Skills Needed for Economics Jobs

Employers look for five skills:
1. Critical-thinking skills.
2. Analytical skills
3. Math skills
4. Writing skills
5. Oral communication skills

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 APPENDIX
Graphs in Economics

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 Graphing Data

Scatter Diagrams
A scatter diagram plots the value of one variable against the value of another
variable for a number of different values of each variable.

A scatter diagram reveals whether a relationship exists between the two

variables.

Figure A1.3 shows the production budget for ten popular movies and their
worldwide box office revenues.

The table gives the data and the graph describes the relationship between
each movie’s production budget and its box office revenue.

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 Graphs used in Economic Models
– Graphs are used in economic models to show the relationship
between variables.
– The patterns to look for in graphs are the four cases in which
▪ Variables move in the same direction.
▪ Variables move in opposite directions.
▪ Variables have a maximum or a minimum.
▪ Variables are unrelated.

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 Graphs Used in Economic Models
• Variables That Move in the Same Direction
– A relationship between two variables that move in the same
direction is called a positive relationship or a direct
relationship.
– A line that slopes upward shows a positive relationship.
– A relationship shown by a straight line is called a linear
relationship.
– The three graphs on the next slide show positive relationships.

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Graphs used in Economic Models

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 Graphs used in Economic Models
• Variables That Move in Opposite Directions
– A relationship between two variables that move in opposite
directions is called a negative relationship or an inverse
relationship.
– A line that slopes downward shows a negative relationship.
– The three graphs on the next slide show negative relationships.

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Graphs used in Economic Models

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Graphs used in Economic Models

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 The Slope of a Relationship
•The Slope of a Straight Line
– The slope of a straight line is
constant.
– Graphically, the slope is
calculated as the “rise” over
the “run.”
– The slope is positive if the
line is upward sloping.

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 The Slope of a Relationship
•Slope at a Point
– The slope of a curved line at
a point is equal to the slope
of a straight line that is the
tangent to that point.
– Here, we calculate the slope
of the curve at point A.

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 The Slope of a Relationship
•Slope Across an Arc
– The average slope of a
curved line across an arc is
equal to the slope of a
straight line that joins the
endpoints of the arc.
– Here, we calculate the
average slope of the curve
along the arc BC.

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 Graphing Relationships Among More
Than Two Variables
– When a relationship involves more than two variables, we can
plot the relationship between two of the variables by holding
other variables constant—by using ceteris paribus.
– Ceteris paribus
– Ceteris paribus means “if all other relevant things remain the
same.”
– Figure A1.12 shows a relationship among three variables.

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 Graphing Relationships Among More
Than Two Variables
– To plot this relationship we hold the temperature at 70°F.
– At $2.75 a scoop, 10 gallons are consumed.

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 Graphing Relationships Among More Than Two
Variables
When temperature is constant at 90°F and the price of ice cream changes,
there is a movement along the red curve.

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 Graphing Relationships Among More Than Two
Variables
When Other Things Change
The temperature is held constant along each curve, but in reality the
temperature can change.

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 Graphing Relationships Among More Than Two
Variables
When the temperature rises from 70°F to 90°F, the curve showing the
relationship shifts rightward from the blue curve to the red curve.

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1 WHAT IS ECONOMICS?

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 APPENDIX
Graphs in Economics

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 Working with Equations, Graphs and Tables

Equation
Variable
Dependent variable
Independent variable
Parameter (constant)
Slope
Intercept

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 From Words to an Equation

Identify the variables

Calculate the parameters
Slope
Intercept
Write the equation
Example: Phone bill is $5 per month plus 10 cents per minute
B = 5 + 0.10 T

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 From Equation to Graph

B = 5 + 0.10 T
Draw and label axes
• Horizontal is independent variable
• Vertical is dependent variable
To graph, B D
12
• Plot the intercept
• Plot one other C
8
point 6
A
• Connect the 5
points
T
10 30 70

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From Graph to Equation

Identify variables
• Independent
• Dependent
Identify parameters
• Intercept
• Slope
Write the equation

B = 4 + 0.2 T

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Changes in the Intercept

An increase in the intercept shifts the curve up

Slope is unchanged
Caused by an increase in the monthly fee
A decrease in
the intercept
shifts the curve
down
Slope is
unchanged

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 Changes in the Slope

An increase in the slope makes the curve steeper

Intercept is unchanged
Caused by an increase in the per minute fee
A decrease in the
slope makes the
curve flatter
• Intercept is
unchanged

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From Table to Graph

Time (minutes/month) 10 20 30 40

Bill
$10.50 $11.00 $11.50 $12.00
($/month)

Identify variables
• Independent
• Dependent
Label axes
Plot points
• Connect points
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From Table to Equation

Time (minutes/month) 10 20 30 40

Bill
$10.50 $11.00 $11.50 $12.00
($/month)

Identify independent and dependent variables

Calculate slope
• Slope = (11.5 – 10.5) / (30 – 10) = 1/20 = 0.05
Solve for intercept, f, using any point
B = f + 0.05 T
12 = f + 0.05 (40) = f + 2
f = 12 – 2 = 10
B = 10 + 0.05 T © 2019 Pearson Education Ltd.
 Simultaneous Equations

Two equations, two unknowns

Solving the equations gives the values of the variables where the two
equations intersect
Value of the independent and dependent variables are the same in each
equation
Example
Two billing plans for phone service
• How many minutes make the two plans cost the same?

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 Simultaneous Equations

Plan 1 B = 10 + 0.04 T
Plan 2 B = 20 + 0.02 T
Plan 1 has higher per minute price while Plan 2 has a higher monthly fee
Find B and T
for point A

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 Simultaneous Equations
Find B when T = 500
B = 10 + 0.04 T
Plan 1 B = 10 + 0.04 T
B = 10 + 0.04 (500)
Plan 2 B = 20 + 0.02 T
Subtract Plan 2 equation from Plan 1 and
B = 30
solve for T

B = 10 + 0.04 T
– B = – 20 – 0.02 T B = 20 + 0.02 T
0 = – 10 + 0.02 T B = 20 + 0.02(500)
T = 500 B = 30
T=500

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