1. Copyright 2002, Pearson Education Canada1 Principles of Macroeconomics 2nd Canadian Edition by Case, Fair, Strain, and Veall PowerPoint Presentation Slides to Accompany the Text By Mark Karscig, Central Missouri State University Peter Ibbott, Kings College - University of Western Ontario Richard E. Mueller, University of Lethbridge

2. Copyright 2002, Pearson Education Canada2 The Scope and Methods of Economics Chapter 1

3. Copyright 2002, Pearson Education Canada3 A Definition of Economics zEconomics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

4. Copyright 2002, Pearson Education Canada4 Another Definition of Economics zEconomics is the study of how scarce resources are allocated among conflicting demands.

5. Copyright 2002, Pearson Education Canada5 Four Main Reasons to Study Economics... zTo learn a way of thinking zTo understand society zTo understand global affairs zTo be an informed voter

6. Copyright 2002, Pearson Education Canada6 1. To Learn a Way of Thinking... zThree Fundamental Concepts of Economic Thinking yOpportunity Cost yMarginalism yInformation, Incentives, and Market Coordinations

7. Copyright 2002, Pearson Education Canada7 Opportunity Costs zThe opportunity cost of something is that which we give up when we make that choice or decision. zThe implication is that all decisions involve trade-offs. z“There’s no such thing as a free lunch!!”

8. Copyright 2002, Pearson Education Canada8 Question to Consider zWhat is the opportunity cost of your attending university? zInclude all forgone options in your consideration.

9. Copyright 2002, Pearson Education Canada9 Marginalism zIn weighing the costs and benefits of a decision, it is important to weigh only the costs that are contingent upon the decision. zDo not include sunk costs ySunk costs are the costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

10. Copyright 2002, Pearson Education Canada10 Information, Incentives, and Market Coordination zPrices, wages, and profits in market economies have the capacity to provide the information and incentives to coordinate the decisions of individual decision-makers. zAre these market solutions always desirable? yPerhaps not if they interfere with the public good, and lead, for example, to poverty or environmental degradation.

11. Copyright 2002, Pearson Education Canada11 2. Understanding Society zPresent and past economic decisions have an enormous influence on the character of life in a society. zThe state of our physical environment, the level of material well-being, and the nature and number of jobs are all products of the economic system.

12. Copyright 2002, Pearson Education Canada12 3. To Understand Global Affairs zImpact of globalization, trade negotiations zEnd of apartheid zGulf War zPoverty and Starvation in Africa and Asia zThe Asian Tigers zThe European Union zCollapse of the Soviet Union

13. Copyright 2002, Pearson Education Canada13 4. To be an informed voter… zCanadian politics is dominated by the debates over economic policy. zTo critically assess the platform of each political party requires a basic understanding of economics.

14. Copyright 2002, Pearson Education Canada14 The Scope of Economics zMicroeconomics yThe branch of economics that examines the functioning of individual industries and the behaviour of individual decision-making units -- business firms and households and the effects of government economic policy on these units.

15. Copyright 2002, Pearson Education Canada15 The Scope of Economics zMacroeconomics yThe branch of economics that examines the economic behaviour of aggregates -- income, employment, output and so on...

16. Copyright 2002, Pearson Education Canada16 The Scope of Economics (Table 1.1)

17. Copyright 2002, Pearson Education Canada17 The Method of Economics zPositive Economics yAn approach to economics that seeks to understand behaviour and the operation of systems without making judgements. It describes what exists and how it works. zNormative Economics yAn approach to economics that evaluates economic outcomes as good or bad, and may prescribe courses of action. Also called policy economics.

18. Copyright 2002, Pearson Education Canada18 Theories and Models zEconomic Theory yAn economic theory is a statement or set of related statements about cause and effect, action and reaction. zEconomic Model yAn economic model is a formal statement of an economic theory. Usually a mathematical representation of a presumed relationship between two or more variables.

19. Copyright 2002, Pearson Education Canada19 Theories and Models zOckham’s Razor yPrinciple that irrelevant detail should be cut away. zCeteris Paribus yLiterally, “other things being equal”. Used to analyze the relationship between two variables while the values of other variables are held constant. zInductive Reasoning yThe process of observing regular patterns from raw data and drawing generalizations from them.

20. Copyright 2002, Pearson Education Canada20 Theories and Models - Pitfalls yPost Hoc Fallacy xA common error made when thinking about causation: if A happened before B then A did not necessarily cause B. yCorrelation vs. Causation xTwo variables are correlated if one variable changes when the other changes. This does not imply that one caused the other. yFallacy of Composition xThe fallacy of composition implies that what is true for a part is necessarily true for the whole.

21. Copyright 2002, Pearson Education Canada21 Theories and Models zEmpirical Economics yThe collection and use of data to test economic theories.

22. Copyright 2002, Pearson Education Canada22 Economic Policy and Five Criteria for Judging Economic Outcomes 1. Efficiency yIn economics, allocative efficiency. An efficient economy is one that produces what people want and does so at the least possible cost. 2. Equity yEquity means fairness, but what this means is open to debate. Social programs and many policy debates are centred on the issue of fairness.

23. Copyright 2002, Pearson Education Canada23 Economic Policy and Five Criteria for Judging Economic Outcomes 3. Growth yEconomic growth is an increase in the total output of an economy. Often measured against population growth to find growth per capita. 4. Full employment yFull employment is a condition in which all resources available for use are being used. 5. Price Stability yA condition in which there is little inflation in prices.

24. Copyright 2002, Pearson Education Canada24 Review Terms and Concepts zceteris paribus zeconomic growth zdescriptive economics zeconomic theory zeconomics zefficiency zempirical economics zequity zfallacy of composition zfull employment zinductive reasoning zIndustrial Revolution zmacroeconomics zmicroeconomics zmodel znormative economics zOckham’s razor zopportunity cost zpositive economics zpost hoc fallacy zstability zsunk costs zvariable