0. Chapter 1 Economics and the Economy
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
8th Edition, McGraw-Hill Education, 2005
PowerPoint presentation by Alex Tackie and Damian Ward

1. The Scope and Method of Economics
Appendix: How to Read and Understand Graphs
Prepared by: Fernando Quijano and Yvonn Quijano

2. The Study of Economics
Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

3. Why Study Economics?
An important reason for studying economics is to learn a way of thinking.
Three fundamental concepts:
Opportunity cost
Marginalism, and
Efficient markets

4. Opportunity Cost
Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision.
Nearly all decisions involve trade-offs.

5. Marginalism
In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.

6. Marginalism
For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost.
Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

7. Efficient Markets
An efficient market is one in which profit opportunities are eliminated almost instantaneously.
There is no free lunch! Profit opportunities are rare because, at any one time, there are many people searching for them.
Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs.
Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.

8. More Reasons to Study Economics
The study of economics is an essential part of the study of society.
Economic decisions often have enormous consequences.
During the Industrial Revolution, new manufacturing technologies and improved transportation gave rise to the modern factory system.

9. More Reasons to Study Economics
An understanding of economics is essential to an understanding of global affairs.
Voting decisions also require a basic understanding of economics.

10. The Scope of Economics
Microeconomics is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households.
Footballers’ wages and the price of oil, for example, are both microeconomic issues

11. The Scope of Economics
Macroeconomics is the branch of economics that examines the behavior of economic aggregates— income, output, employment, and so on—on a national scale.
Gross domestic product, the aggregate price level and unemployment, for example, are all macroeconomic issues

12. Examples of microeconomic and macroeconomic concerns
The Scope of Economics
Examples of microeconomic and macroeconomic concerns
Production
Prices
Income
Employment
Microeconomics
Production/Output in Individual Industries and Businesses
How much steel
How many offices
How many cars
Price of Individual Goods and Services
Price of medical care
Price of gasoline
Food prices
Apartment rents
Distribution of Income and Wealth
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
Employment by Individual Businesses & Industries
Jobs in the steel industry
Number of employees in a firm
Macroeconomics
National Production/Output
Total Industrial Output
Gross Domestic Product
Growth of Output
Aggregate Price Level
Consumer prices
Producer Prices
Rate of Inflation
National Income
Total wages and salaries  
Total corporate profits
Employment and Unemployment in the Economy
Total number of jobs
Unemployment rate

13. Market orientation China Sweden USA Hungary UK Cuba Command economy
Free
market
See Section 1-3 in the main text, and Figure 1-3.

14. What is Economics? ECONOMICS ... is the study of how society decides:
For whom
How
See the introduction to Chapter 1 in the main text.
to produce...

15. The price of oil Tripled in 1973-74, and doubled again in 1979-80
… and affected people all over the world.
See Section 1-1 in the main text, and Figure 1-1.

16. An increase in the price of oil affects
What to produce
less oil-intensive products
How to produce
less oil-intensive techniques
For whom to produce
oil producers have more buying power, importers have less
See Section 1-1 in the main text.

17. The distribution of world population and GNP, 2003
See Section 1-1 in the main text. Data here are taken from World Development Report These data re similar but not identical to the data appearing in Table 1-1.

18. The production possibility frontier (1)
For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced.
See Section 1-2 in the main text.

19. The production possibility frontier (2)

20.  Food output (F) Production possibility frontier Film output (G) A 14
F/G = opportunity cost (=1/2)
Film output (G)
Food output (F)
Production
possibility
frontier
G = 8
F= 4 A B 10 14 6 
See Section 1-2 in the main text, and Figure 1-2.

21. The operation of markets
a shorthand expression for the process by which …
households’ decisions about consumption of alternative goods
firms’ decisions about what and how to produce
and workers’ decisions about how much and for whom to work
… are all reconciled by adjustment of prices
See Section 1-3 in the main text.

22. Resource allocation Resource allocation is crucial for a society
and is handled in different ways in different societies, e.g.:
Command economy
Mixed economy
Free market
See Section 1-3 in the main text.

23. Normative and Positive Economics
Positive economics deals with objective explanation
e.g. if a tax is imposed on a good its price will tend to rise
Normative economics offers prescriptions based on value judgements
e.g. a tax should be imposed on tobacco to discourage smoking
See Section 1-4 in the main text.