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Learning ObjectivesLearning Objectives LO1: Define economics, microeconomics, and macroeconomics. LO2: Identify John Maynard Keynes, Alfred Marshall, and Adam Smith, and their influence in economics. LO3: State and explain the problem of scarcity and its relation to opportunity cost. LO4: Explain how a rational decision maker applies the cost–benefit principle. LO5: State how three pitfalls can undermine rational economic decisions. LO6: Explain how data are used to evaluate economic theories. LO7: Distinguish positive economics from welfare economics. LO8: Define an economic naturalist. © 2012 McGraw-Hill Ryerson Limited Ch1 -1

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LO1: Define economics, microeconomics, and macroeconomics “Economics is the science which studies human behaviour as a relation- ship between given ends and scarce means which have alter- native uses.” (British economist Lionel Robbins 1932) “Economics the study of how people make choices under conditions of scarcity and the results of those choices for society.” Microeconomics the study of individual choices under scarcity and the implications of these choices for the behaviour of prices and quantities in individual markets Macroeconomics the study of the performance of national economies and the policies that governments use to try to improve that performance © 2012 McGraw-Hill Ryerson Limited Ch1 -2 LO1: Definition of Economics

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LO1: Define economics, microeconomics, and macroeconomics Microeconomics studies subjects like Choices of individuals Choices of Firms The determinants of prices and quantities in specific markets Macroeconomics studies subjects like The performance of national economies Long run growth and prosperity Short run booms and busts Government policies to change performance © 2012 McGraw-Hill Ryerson Limited Ch1 -3 LO1: Definition of Economics

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LO1: Define economics, microeconomics, and macroeconomics One distinguishing feature of economics as a social science is that economic theories are often expressed as abstract models. Economic model is a representation of economic reality that highlights particular variables and the relationships among them. Another feature of economics has been the tendency of economists to assume in their theories that human beings are rational. Rational decision maker is someone with clear objectives who behaves logically to achieve those objectives. © 2012 McGraw-Hill Ryerson Limited Ch1 -4 LO1: Definition of Economics

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Using a Verbal Description to Construct a Equation I of II Equation: Equation: a mathematical expression that describes the relationship between two or more variables Variable: Variable: a quantity that is free to take a range of different values Dependent Variable: Dependent Variable: a variable in an equation whose value is determined by the value taken by another variable in the equation Independent variable: Independent variable: a variable in an equation whose value determines the value taken by another variable in the equation Constant (or parameter): a Constant (or parameter): a quantity that is fixed in value © 2012 McGraw-Hill Ryerson Limited Ch1 -5 LO1A.1: Using a Verbal Description to Construct a Graph

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Using A Verbal Description To Construct An Equation II of II My telephone bill is $5.00 per month plus 10 cents for every minute that I talk Telephone Bill = 5.00 + 0.10 * (Minutes Talked) B = 5.00 + 0.10 T If you make 32 minutes phone call, monthly bill will be B = 5.00 + 0.1 (32) = 8.20 Or one can draw a picture of the relationship © 2012 McGraw-Hill Ryerson Limited Ch1 -6 LO1A.1: Using a Verbal Description to Construct a Graph

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Graphing the Equation of a Straight Line I of II Dependent Variable Independent Variable 6 = 5 + 0.1(10) 8 = 5 + 0.1(30) 12 = 5 + 0.1(70) © 2012 McGraw-Hill Ryerson Limited Ch1 -7 LO1A.2: Graphing the Equation of a Straight Line B = 5 + 0.1T

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Graphing the Equation of a Straight Line II of II The graph of the equation B =5 + 0.10T is the straight line shown; its vertical intercept is 5, and its slope is 0.10 The graph of the equation B =5 + 0.10T is the straight line shown; its vertical intercept is 5, and its slope is 0.10 © 2012 McGraw-Hill Ryerson Limited Ch1 -8 LO1A.2: Graphing the Equation of a Straight Line Vertical Intercept (Constant) is 5 Slope = Rise/Run Slope = 2/20 = 0.1

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Deriving the Equation of a Straight Line from its Graph Vertical Intercept (Constant) is 4 Slope = Rise/Run Slope = 4/20 = 0.2 The Equation For the Billing Plan: B = 4 + 0.20T © 2012 McGraw-Hill Ryerson Limited Ch1 - 9 LO1A.3: Deriving the Equation of a Straight Line from its Graph

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Shifting the Curve – Intercept Changes Suppose the fixed fee increases from $4 to $8 ? But the per-minute charge remains the same Old Telephone Bill was determined by the equation B = 4 + 0.20 T New Bill is determined by the equation B = 8 + 0.20 T A C D A′ C′ D′ Original monthly bill New monthly bill © 2012 McGraw-Hill Ryerson Limited Ch1 - 10 LO1A.4: Changes in the Vertical Intercept

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Shifting the Curve – Slope Changes The slope of a graph indicates how much of a “rise” one can expect, for a given “run” Old Telephone Bill was determined by the equation B = 8 + 0.20 T New Telephone Bill is determined by the equation B = 8 + 0.40 T A C A′ C′ Original monthly bill New monthly bill Run = 20 Rise = 8 © 2012 McGraw-Hill Ryerson Limited Ch1-11 LO1A.5: Changes in the Slope

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Constructing Equations and Graphs from Tables Point A Point C Vertical Intercept (Constant) is 10 Slope = Rise/Run Slope = 1/20 = 0.05 The Equation For the Billing Plan: B = 10+ 0.05T © 2012 McGraw-Hill Ryerson Limited Ch1 -12 LO1A.6: Constructing Equations and Graphs from Tables

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