Presentation on theme: "Chapter 1: The Nature of Economics"— Presentation transcript:
1 Chapter 1: The Nature of Economics INTRODUCTIONChapter 1: The Nature of Economics
2 Consumers, businesses and government all make choices These choices determine how society uses it’s resourcesFor example people may choose to purchase huge quantities of personal computers, therefore society’s resources are used to produce theseThe Government may choose to upgrade the highway system or improve educationHOW these choices are made is at the heart of economics
3 ECONOMICS is the social science that studies how people use scarce resources to satisfy their unlimited wants.
4 SCARCITY AND CHOICEThe resources for satisfying human wants are limitedCollectively we want more than we can produce with our limited resourcesEconomists help to determine the use of scarce resources to satisfy the “most important” wants.Because resources are desirable and scarce, we must make choices for the use ofthese resourcesECONOMICS is the study of “choice”.
5 THE IMPORTANCE OF ECONOMICS Enables us to improve the performance of the economy and help deal with many problems that face our countryeg. A decision to build more war planes instead of spending more money on education will have short run and long run implicationsEnhances our understanding of world affairsHelps us be informed citizensDevelops logical thinking and problem solving skills
6 ECONOMISTS work in private firms, education, government, research, non-profit organizations, for themselves, and international organizations
7 ECONOMIC METHODOLOGY (the whirlybird) The factors involved in real world economic events are often quite complexThe scientific economist creates and works with models or theories to abstract from the real worldA MODEL is a simplified version of the reality that facilitates the understanding of complex economic problem
8 ECONOMIC ASSUMPTIONSAssumptions are statements that describe the model’s operating conditionsThe ceteris paribus assumption means, all things being equal.
9 PREDICTIONSEconomists formulate models and theories so that they can make economic predictionsPredictions are statements about the general direction of events from the fulfillment of certain conditionsEconomic forecasting assigns future values to certain economic variables on the basis of known relationsGives a specific value for a particular variable
10 Prediction:If interest rates increase, the level of investment spending will fall, ceteris paribusForecast:By the end of the year, gas prices will fall by 10%
11 POSITIVE and NORMATIVE ECONOMICS Positive economic statements are statements of facts expressed in a testable, or verifiable mannerThese statements may be true or falseeg. There are 4000 students at IONA is a positive statement(albeit a false statement)A positive economic statement is: an increase in interest rates will cause a decrease in the demand for housingNormative economic statements are value judgments or statements of opinion about what “ought to be”.They cannot be verifiedInterest rates should be reduced is an example of a normative statementMore money should be spent on improving the environment
12 ECONOMIC VARIABLESA variable is anything that can assume different values under different situationsAnything that does not vary is a constantENDOGENOUS VARIABLES are variables that can be explained within a modelEXOGENOUS VARIABLES are variables that are determined by factors outside a modelA STOCK VARIABLE is a quantity existing a particular time eg. There are 7, 000 books in the library (no time dimension)A FLOW VARIABLE is the measure of a change in a variable per unit of time eg. There are 600 books taken out of the library per day
13 ECONOMIC THEORY helps us to understand how the economy functions and enables us to solve real-world problems.
14 ECONOMIC POLICY is a course of action designed to achieve some specific economic objective Every society determines the priorities of their economic objectives eg. price stability, full employment, economic growth, equitable distribution of income, economic freedom, economic security, satisfactory balance of payments etc.These goals often conflict and therefore choices must be made
15 MICROECONOMICSaka price theory deals with the behaviour of individual economic unitsMACROECONOMICSaka Income and employment theory deals with the behaviour of economic groups
16 Setting Economic Goals: A Canadian Model Political StabilityEconomic Growth (3-5% per year)Increased Productivity & EfficiencyEquitable Distribution of Income (NOT equal)Price Stability (low inflation 1-3%)Full Employment (6-7% Unemployment)Stable CurrencyBalance of TradeReduced Public DebtEconomic FreedomEnvironmental Responsibility
17 Canada’s Economic Goals Complementary Goalseg. To reach employment targets, interest rates on business loans are lowered to promote new job creation. New job creation then improves income levels and encourages consumer spending.Conflicting Goalseg. increasing interest rates can promote price stability but will have an adverse effect on employment rates and national productionPolitical Stabilitythis can help long term planning and long term investment Reduced Public Debtis it fair to spend today and leave the debt in the hands of future generations? Economic Growthan increase in the total productive output of an economy
18 Increased Productivity & Efficiency scarce productive resources are put to efficient use in order to get as much as possible from them to compete in global markets, production processes must become more efficientEquitable Distribution of Incomedividing up the total national income – many interpretations about what is a fair - redistribution of incomeregional differences also come into play Price Stabilityperiods of inflation erode the purchasing power of the dollar and raise the cost of living for Canadians living on fixed incomes
19 Viable Balance of Payments & Stable Currency Full Employmentin an attempt to reach full employment targets, governments try to promote full employment of the labour forcean unemployed labour force also represents a waste of human potential and can cause serious hardship for unemployed workers and their familiesas more and more technology is developed it becomes more and more difficult for Canada to maintain full employmentViable Balance of Payments & Stable Currencyin a global economy, an international flow of goods and currency in transactions such as importing, exporting, borrowing and lending has become increasingly importantEconomic Freedomthe freedom of choice available to workers, consumers and investors in the economyin a market economy, consumers are free to purchase goods and services of their choice, and also, through their purchasing decisions, to determine what goods and services are actually produced
20 Environmental Stewardship/Responsibility economic activity must be carried out without significantly harming the natural environmentif we wish to be more responsible stewards of our planet and protect it for future generations, we have to adjust they way we carry out our economic activitiesthis could mean potentially higher prices for consumers and lower profits for producers, but the negative effects on the environment must be reducedif Canadian environmental laws become too restrictive then Canadian goods become less competitive in world marketsthis also raises the moral issue – if Canada trades with a country that has low environmental standards, does this mean Canada’s government is condoning the other country’s policy? Clearly a normative economic issue with much to debate.