Principles of Economics

Twelfth Edition

PART I
INTRODUCTION TO
ECONOMICS

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Principles of Economics
Twelfth Edition(2 of 2)

Chapter 1
The Scope and
Method of Economics

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Chapter 1 The Scope and Method of
Economics
• economics The study of how individuals and societies
choose to use the scarce resources that nature and
previous generations have provided.
• Economics is the study of how people make choices.

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Why Study Economics?
To Learn a Way of Thinking
• Economics has three fundamental concepts:
– Opportunity cost
– Marginalism
– Efficient markets

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To Learn a Way of Thinking (1 of 3)

Opportunity Cost
• opportunity cost The best alternative that we forgo, or
give up, when we make a choice or decision.

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To Learn a Way of Thinking (2 of 3)
Marginalism
• marginalism The process of analyzing the additional
costs or benefits arising from a choice or decision.

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To Learn a Way of Thinking (3 of 3)
Efficient Markets
• efficient market A market in which profit opportunities are
eliminated almost instantaneously.
• The study of economics teaches us a way of thinking and
helps us make decisions.

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To Understand Society

• The study of economics is an essential part of the study of

society.

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To Be an Informed Citizen
• To be an informed citizen requires a basic understanding
of economics.

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The Scope of Economics (1 of 2)
Microeconomics and Macroeconomics
• microeconomics The branch of economics that
examines the functioning of individual industries and the
behavior of individual decision-making units—that is, firms
and households.
• macroeconomics The branch of economics that
examines the economic behavior of aggregates—income,
employment, output, and so on—on a national scale.

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The Scope of Economics (2 of 2)
Microeconomics and Macroeconomics
• Microeconomics looks at the individual unit—the
household, the firm, the industry. It sees and examines the
“trees.”
• Macroeconomics looks at the whole, the aggregate. It sees
and analyzes the “forest.”

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TABLE 1.1 Examples of Microeconomic and Macroeconomic
Concerns

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

Macroeconomics National Aggregate price level National income Employment and

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

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The Method of Economics
• Economics deals with two kinds of questions: positive and
normative.
• positive economics An approach to economics that
seeks to understand behavior and the operation of
systems without making judgments. It describes what
exists and how it works.
• normative economics An approach to economics that
analyzes outcomes of economic behavior, evaluates them
as good or bad, and may prescribe courses of action. Also
called policy economics.

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Theories and Models (1 of 5)
• model A formal statement of a theory, usually a
mathematical statement of a presumed relationship
between two or more variables.
• variable A measure that can change from time to time or
from observation to observation.

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Theories and Models (3 of 5)
Expressing Models in Words, Graphs, and Equations
• Graphs and equations capture the quantitative side of
economic observations and predictions.

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Theories and Models ( 2 of 5)
All Else Equal
• ceteris paribus, or all else equal A device used to
analyze the relationship between two variables while the
values of other variables are held unchanged.
• Using the device of ceteris paribus is one part of the
process of abstraction.

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Theories and Models (5 of 5)
Testing Theories and Models: Empirical Economics
• empirical economics The collection and use of data to
test economic theories.

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Economic Policy ( 1 of 3)
• Four criteria are important in judging economic outcomes:
1. Efficiency
2. Equity
3. Growth
4. Stability

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Economic Policy (2 of 3)
Efficiency
• efficiency In economics, allocative efficiency. An efficient
economy is one that produces what people want at the
least possible cost.
Equity
• equity Fairness.

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Economic Policy ( 3 of 3)
Growth
• economic growth An increase in the total output of an
economy.
Stability
• stability A condition in which national output is growing
steadily, with low inflation and full employment of
resources.

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REVIEW TERMS AND CONCEPTS
• ceteris paribus, or all else equal • model
• economic growth • normative economics
• economics • opportunity cost
• efficiency • positive economics
• efficient market • scarce
• empirical economics • stability
• equity • variable
• macroeconomics
• Marginalism
• microeconomics

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CHAPTER 1 APPENDIX:
How to Read and Understand Graphs
• graph A two-dimensional representation of a set of
numbers or data.

Time Series Graphs

• time series graph A graph illustrating how a variable
changes over time.

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TABLE 1A.1 Total
Disposable Personal FIGURE 1A.1 Total Disposable Personal
Income in the United Income in the United States: 1975–2014 (in
States, 1975–2014 (in Billions of Dollars)
Billions of Dollars)
Total Total
Disposable Disposable
Personal Personal
Year Income Year Income
1975 1,219 1995 5,533
1976 1,326 1996 5,830
1977 1,457 1997 6,149
1978 1,630 1998 6,561
1979 1,809 1999 6,876
1980 2,018 2000 7,401
1981 2,251 2001 7,752
1982 2,425 2002 8,099
1983 2,617 2003 8,466
1984 2,904 2004 9,002
1985 3,099 2005 9,401
1986 3,288 2006 10,037
1987 3,466 2007 10,507
1988 3,770 2008 10,994
1989 4,052 2009 10,943
1990 4,312 2010 11,238
1991 4,485 2011 11,801
1992 4,800 2012 12,384
1993 5,000 2013 12,508
1994 5,244 2014 12,981

Source: U.S. Department of Commerce, Bureau of Economic Analysis . Source: See Table 1A.1.

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Graphing Two Variables
• X-axis The horizontal line against which a variable is
plotted.
• Y-axis The vertical line against which a variable is plotted.
• origin The point at which the horizontal and vertical axes
intersect.
• Y-intercept The point at which a graph intersects the
Y-axis.
• X-intercept The point at which a graph intersects the
X-axis.

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Plotting Income and Consumption Data
for Households
• positive relationship A relationship between two
variables, X and Y, in which a decrease in X is
associated with a decrease in Y and an increase
in X is associated with an increase in Y.
• negative relationship A relationship between two
variables, X and Y, in which a decrease in X is
associated with an increase in Y and an increase
in X is associated with a decrease in Y.

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FIGURE 1A.2 Household
Consumption and Income
TABLE 1A.2 Consumption
Expenditures and Income, 2012
Average Average
Income Consumption
Before Taxes Expenditures
Bottom fifth $ 9,988 $ 22,154
2nd fifth 27,585 32,632
3rd fifth 47,265 43,004
4th fifth 75,952 59,980
Top fifth 167,010 99,368

Source: Consumer Expenditures in 2012, U.S. Bureau

of Labor Statistics.

Source: See Table 1A.2.

A graph is a simple two-dimensional geometric representation of data. The graph in Figure 1A.2
displays the data from Table 1A.2.

Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we
measure household consumption.

Note: At point A, consumption equals $22,154 and income equals $9,988. At point B, consumption
equals $32,632 and income equals $27,585.

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Slope
• slope A measurement that indicates whether the
relationship between variables is positive or negative
and how much of a response there is in Y (the variable
on the vertical axis) when X (the variable on the
horizontal axis) changes.

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FIGURE 1A.3 A Curve with (a) Positive Slope and
(b) Negative Slope

A positive slope indicates that increases in X are associated with increases in Y and that
decreases in X are associated with decreases in Y.

A negative slope indicates the opposite—when X increases, Y decreases; and when X

decreases, Y increases.

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FIGURE 1A.4 Changing Slopes along Curves

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 Some Precautions
FIGURE 1A.5 National Income and Consumption TABLE 1A.3 Aggregate National Income
and Consumption for the United States,
1930–2014 (in Billions of Dollars)

Aggregate Aggregate
National Income Consumption
1930 75 70
1940 78 71
1950 215 192
1960 377 332
1970 762 648
1980 2,018 1,755
1990 4,312 3,826
2000 7,401 6,792
2010 11,238 10,202
2011 11,801 10,689
2012 12,384 11,083
2013 12,505 11,484
2014 12,981 11,928

Source: See Table 1A.3. Source: U.S. Department of Commerce, Bureau of Economic Analysis.
It is important to think carefully about what is represented by points in the space defined by the axes of a graph.
In Figure 1A.5 we have graphed income with consumption, as in Figure 1A.2, but here each observation point is
national income and aggregate consumption in different years, measured in billions of dollars.

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APPENDIX REVIEW TERMS AND
CONCEPTS
• graph
• negative relationship
• origin
• positive relationship
• Slope
• time series graph
• X-axis
• X-intercept
• Y-axis
• Y-intercept

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