2. Chapter 1 – Introduction to Economics ECONOMICS THEORY AND PRACTICE Seventh Edition Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Patrick J. Welch St. Louis University Gerry F. Welch St. Louis Community College at Meramec & PowerPoint Presentation by: Dr. Ray Everett Pima Community College

3. Introduction to Economics Contents Economics & Scarcity Efficiency & Equity Factors of Production Economic Theory & Policy Tools of the Economist Scarcity, Model Building, & Graphs Macroeconomics & Microeconomics Graphing (Chapter 1 Appendix)

4. Introduction to Economics Chapter Objectives To define economics and introduce the scarcity problem, which underlies economics. To understand the relationship between scarcity and choice. To define opportunity cost. To explore how efficiency and equity are related to the problem of scarcity. To identify four factors of production and the income return to each type of factor. To differentiate between economic theory and economy policy. To introduce the tools economists use to express theories and policies. To use the production possibilities model to illustrate and explain the basic problem of scarcity. To differentiate between macroeconomics and microeconomics. To explain how to construct a graph and interpret the illustrated relationship.

5. Economics  Study of how scarce, or limited, resources are used to satisfy people’s unlimited material wants and needs. Scarcity  Inability to provide enough goods and/or services to satisfy the wants and needs of all people. Opportunity Cost  Cost of a purchase or a decision measured in terms of a foregone alternative. Economics & Scarcity FIGURE 1-1 Scarcity, Choice, and Influences on Decision Makers 1-1

6. Efficiency & Equity Efficiency  Producing the largest attainable output of a desired quality from a given set of resources; occurs when goods and services are produced at the lowest possible cost. If all goods and services were produced efficiently, society would experience the greatest possible lessening of the scarcity problem. Equity  Just and equitable distribution of goods and services. The concept of what constitutes an equitable distribution of goods and services is controversial because it is based on people’s value judgments. 1-2

7. Factors of Production  Resources used to produce goods and services, and which are classified into one of four categories: Labor – includes all effort, both physical and mental; receives wages Capital – includes warehouses, machinery, and equipment; receives interest Land – includes all nature-originating production inputs; receives rent Entrepreneurship – performance of a number of critical tasks that are carried out in all productive processes; receives profit FIGURE 1-2 Relationship between Resources and Wants and Needs Factors of Production 1-3

8. Economic Theory & Policy Economic Theory  Formal explanation of the relationship between economic variables; provides a reason why something happens, offers a cause-and-effect interpretation for a set of events, or shows the effect on one variable when another changes. Theories are often explored within the framework of a model, which is composed of several elements: FIGURE 1-3 Economic Theory and Models Economic Policy  Action taken to change or remedy an economic condition, which is often a result of a decision made by a policymaker. 1-4

9.  Mathematical equation – written mathematical equation used to prove the relationship between economic variables Tools of the Economist To express economic theories and policies, economists often use one of three methods:  Verbal presentation – descriptive statement used to state the relationship between economic variables The quantity of coffee demanded will fall as its price increases.  Graph – picture used to illustrate the relationship between economic variables 1-5

10. In the following model all of a hypothetical economy’s resources will be diverted to the production of only two goods: VCRs and SUVs. Scarcity, Model Building, & Graphs Production Possibilities Table  Lists the possible levels of production in an economy. 1-6a

11. Scarcity, Model Building, & Graphs Production Possibilities Curve  Formed when data points from the production possibilities table are plotted on a graph and connected. With the introduction of unemployment into the model, the economy is unable to produce at its full potential. With the introduction of economic growth into the model, the economy is able to produce above its previous full potential. 1-6b

12. Microeconomics & Macroeconomics Macroeconomics  Focuses on the operation of the economy as a whole and the interactions of the household, business, government, and foreign sectors in the economy. It includes such topics as inflation, unemployment, taxes and government spending, and money. Microeconomics  Focuses on the behavior of individual businesses and households and on specific product and resource markets. It includes such topics as consumer behavior, cost-benefit analysis, the determination of business profits, and the determination of prices in specific markets. 1-7

13. Graph  Picture of a relationship between two variables; variables are given on the vertical and horizontal axes of the graph, and the line in the graph provides a visual image of how those variables are related. Graphs can be constructed in three steps: Graphing (Appendix Slide 1) Step 1  Identify the variables to be placed on the axes. Money data is often placed on the vertical axis. 1-8

14. Step 2  Assign numbers along the axes. Always use zero at the origin. Work up the number scale as you go out on each axis. Use equal spaces for equal amounts along the axes. Graphing (Appendix Slide 2) Step 3  Plot the data points and link the data points with a line. 1-9

15. Direct Relationship  Both variables move in the same direction; that is, as one gets larger or smaller, so does the other. Graphing (Appendix Slide 3) 1-10 Indirect Relationship  Both variables move in opposite directions; that is, as one becomes larger, the other becomes smaller, and vice versa.

16. What type of relationship (direct or inverse) is illustrated in each of these graphs? Graphing (Appendix Slide 4) Electric Usage from Air Conditioning  Direct Hours of Study  Direct Price per Bottle of Wine  Inverse 1-11

17. The appearance of data in a graph can be affected by how the axes of the graph are numbered. FIGURE 1-7 Economic Growth in a Production Possibilities Model Graphing (Appendix Slide 5)  In the graph on the left, the interval of five pounds results in a more jagged line and better represents the yearly fluctuations.  In the graph on the right, the interval of twenty-five pounds results in a smoother line. 1-12

18. ECONOMICS THEORY AND PRACTICE Seventh Edition Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the expressed written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 1 - Introduction to Economics This is the end of Chapter 1. To return to the contents menu of this chapter, click on the menu graphic to the right of this text. To begin Chapter 2, click on the next chapter icon to the right of this text. Menu Next Chapter