1. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 1 Chapter 1 The general principles of economics

2. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 2 Learning objectives 1.Describe the nature and methodology of economics, including the two fundamental facts that comprise the economising problem. 2.Explain specific problems, limitations and pitfalls encountered in studying economics. 3.Discuss the meaning of economic efficiency. 4.Introduce the concept of opportunity cost and the law of increasing opportunity cost.

3. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 3 Learning objectives (cont.) 5.Illustrate, extend and modify the definition of economics through the use of production possibilities tables and curves. 6.Use the production possibilities curve model to examine the trade-off between current and future consumption.

4. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 4 The economic perspective Economics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants.

5. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 5 The economic perspective (cont.) Reasons for studying economics: –provides valuable knowledge concerning our social environment and economic behaviour –provides the knowledge needed to make fundamental decisions in a democracy –provides businesses and consumers with valuable information and a set of methods for analysing information –outlines the special perspective held by economists about scarcity, rational behaviour and the use of marginal concepts in decision making.

6. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 6 The economic perspective (cont.) The economic perspective includes: Scarcity and choice –Resources are limited and this necessitates choices. Behaviour based on ‘rational self-interest’ –Behaviour involves decisions and actions aimed at achieving the greatest satisfaction or maximum fulfilment of goals. –Choices differ between people because their circumstances, preferences and available information differ. Marginalism: benefits and costs –Marginal means ‘additional’ or ‘extra’. –Economic decisions compare marginal benefits and marginal costs. –Additional benefits available from any changes are compared to the additional costs of making the change.

7. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 7 The foundation of economics Two fundamental facts that constitute the economising problem: Unlimited wants –Material wants: the desires of consumers to obtain and use various goods and services that give utility or satisfaction Scarce resources –Economic resources includes all the natural, human and manufactured resources that go into the production of goods and services. These include:  property resources —land, raw material and capital  human resources—labour and enterprise.

8. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 8 Scarce resources Two broad categories: Property resources –Land and raw materials: all ‘gifts of nature’ usable in production –Capital: aids to production e.g. factories, machinery Human resources –Labour –Entrepreneurial ability: initiation and organisation of factors of production, promotes innovation, takes risks

9. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 9 Resource payments Land—rent Capital—interest Labour—wages Enterprise—profit

10. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 10 Five fundamental questions How much total output is to be produced? What combination of outputs is to be produced? How are these outputs to be produced? Who is to receive/consume these outputs? How can change be accommodated?

11. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 11 The methodology of economics 2. Principles or theories Theoretical economics involves generalising about economic behaviour. induction deduction 1. Facts Descriptive, or empirical, economics is concerned with gathering facts relevant to an economic problem and testing hypotheses against those facts. 3. Policies Policy economics is concerned with controlling or influencing economic behaviour or its consequences.

12. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 12 Induction and deduction Induction –A method of reasoning that proceeds from facts to generalisations. Deduction –Reasoning from assumptions to conclusions by testing a hypothesis.

13. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 13 Economic theory Facts must be systematically arranged, interpreted and generalised to derive appropriate economic theory. Theories or principles are the end result of economic analysis. These are meaningful statements drawn from facts.

14. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 14 Terminology of economic theory Economists use the terms ‘laws’, ‘theories’ and ‘models’ to represent generalisations, or statements of regularity, about the economic behaviour of individuals and institutions. Abstractions in economics –Economic theories do not encompass the full complexity of reality.

15. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 15 The ‘other things being equal’ assumption –Sometimes referred to as ‘ceteris paribus’ –Used in the process of analysis to signify that all variables, other than the one being considered, are held constant –Used to focus attention on relationship between chosen variables to minimise distracting influence of other variables

16. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 16 Microeconomics and macroeconomics Microeconomics is concerned with specific economic units and a detailed consideration of the behaviour of these individual units. Macroeconomics deals with the economy as a whole, or with the basic subdivisions or aggregates that make up the economy.

17. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 17 Policy economics: positive and normative Positive economics is based upon facts without value judgements. Normative economics is based upon subjective beliefs...‘what ought to be’ –Normative economic statements come into play at the level of policy economics.

18. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 18 Pitfalls of objective thinking Bias Fallacy of composition Cause and effect –Post-hoc fallacy –Correlation versus causation

19. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 19 Economics and efficiency Efficiency results from using or administering scarce resources to produce the maximum amount of the goods and services desired by society thereby achieving the greatest possible fulfilment of society’s wants. Full employment –When all available resources are employed Full production –When the maximum amount of goods and services are produced from the fully employed resources of an economy –Underemployment results if full production not achieved

20. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 20 Economics and efficiency (cont.) Types of efficiency Allocative efficiency –Occurs when all available resources are devoted to the combination of goods most wanted by society Productive efficiency –Occurs when goods or services are produced using the lowest cost production methods

21. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 21 Specialisation and efficiency Two major forms of specialisation enhance efficiency: –The division of labour builds on existing differences in abilities and skills. –Geographic specialisation builds on locational resource advantages.

22. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 22 Production possibilities table Used to illustrate the economising problem and the concepts of scarcity and opportunity cost Assumptions –Efficiency  Full employment and productive efficiency. –Fixed resources –Fixed technology –Two products only  Capital good and consumer good. In short run resources are scarce so output is limited –Implies that increase in production of one good means shift of resources from production of the other good

23. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 23 Production possibilities of chocolate and tractors with full employment ___________________________________________________________ Type of product Production alternatives A BCDE Chocolates (100 000s bars) 0 1234 Tractors (1000s)10 9740 ___________________________________________________________

24. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 24 Production possibilities curve The production possibilities curve (PPC) can be used to illustrate the concept of choice and opportunity cost. Demonstrates that society must make choices about which goods and services to produce and which to go without Data from the PP table can be used to plot PPC

25. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 25 Production possibilities curve (cont.) Points on the PPC represent a maximum output of the two products. Points inside the PPC are attainable, but are inefficient and undesirable. Points outside the curve are superior, but unobtainable given the assumptions of fixed technology and resources.

26. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 26 Q Q Tractors (thousands) Chocolate bars (hundred thousands) 12 11 10 9 8 7 6 5 4 3 2 1 A B C D E W Unattainable Attainable and efficient Attainable but inefficient U Production possibilities curve (cont.) 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

27. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 27 Opportunity cost: –The amount of other products that must be sacrificed to obtain an additional unit of a good The PPC is concave to the origin because of the law of increasing opportunity costs: –more and more of a good must be given up to obtain additional units of the other good. Production possibilities curve (cont.)

28. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 28 Law of increasing opportunity costs Concavity: the slope of the concave PPC becomes steeper as we move from A to E –To gain progressively more chocolate production society has to give up increasing levels of tractor production and vice versa. Rationale: –Economic resources are not completely adaptable to alternative uses; they are imperfect substitutes. –Resources lack perfect flexibility or interchangeability.

29. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 29 Allocative efficiency revisited Resources are efficiently allocated to any product when the output is such that its marginal benefit equals its marginal cost (MB = MC).

30. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 30 Unemployment and growth Points inside the production possibility curve illustrate unemployment or productive inefficiency. A movement towards full employment and productive efficiency from a point such as U will entail a greater output of at least one, if not both, products.

31. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 31 Unemployment and underemployment Q Q Tractors (thousands) Chocolate bars (hundred thousands) 10 9 8 7 6 5 4 3 2 1 A B C D E More of either or both is possible U 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

32. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 32 Economic growth and the PPC Economic growth can be represented as an outward shift (to the right) of the PPC. Economic growth results from: –expanding resource supplies –technological advances.

33. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 33 Q Q Tractors (thousands) Chocolate bars (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 A′A′A′A′ B′B′B′B′ C′C′C′C′ D′D′D′D′ E′E′E′E′ Economic growth and the PPC (cont.) 1 2 3 4 5 6 7 8

34. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 34 The role of markets and prices Market or price system is the basic coordinating mechanism of a capitalist economy. Markets bring buyers (‘demanders’) and sellers (‘suppliers’) of a good or service into contact with each other. Product and resource prices are set as a result of the choices made by demanders and suppliers in product and resource markets. Markets help society make some or all of its decisions about the five fundamental questions raised earlier.

35. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 35 Present choices and future possibilities The PPC can be used to: illustrate the importance of society’s choice between current and future consumption demonstrate the economic basis for trade between nations.

36. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 36 Goods for the present Goods for the future 2012 Curve 2023 curve 2012 Curve Alphania Betania Economic growth in two countries

37. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 37 Graphs and their meaning Appendix to Chapter 1

38. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 38 Constructing a graph Graphs are a visual representation of the relationship between two variables. Possible graphing relationships between variables –Direct (positive) relationship: where the values of two related variables change in the same direction, e.g. consumption and income –Inverse (negative) relationship: where the values of two related variables move in opposite directions, e.g. ticket prices and attendance

39. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 39 Direct relationship 0 $500 $400 $300 $200 $100 Consumption (C) Income (Y) Consumption schedule C = 50 + 0.5Y a b c d e As Income (Y) increases, consumption (C) increases $100 $200 $300 $400

40. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 40 Inverse relationship 0 $25 $20 $15 $10 $5 Ticket price (P) Attendance in thousands (Q) a b c d f As price (P) decreases, so attendance (Q) increases e P = 25 – 1.25Q Ticket demand curve 4 8 12 16 20

41. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 41 Slope of a straight line The slope is the ratio of the vertical change to the corresponding horizontal change involved in moving between two points. Ratio stays constant for a straight line

42. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 42 Positive slope o $500 $400 $300 $200 $100 Consumption (C) Income (Y) Consumption C = 50 + 0.5Y a b c d e vertical change = +50 horizontal change = +100 $100 $200 $300 $400

43. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 43 Negative slope 0 $25 $20 $15 $10 $5 Ticket Price (P) Attendance in thousands (Q) Ticket demand P = 25 – 1.25Q a b c d f – 5 + 4 e 4 8 12 16 20

44. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 44 Three addenda The discussion of the slope of a line needs the following three additional comments: –measurement units –marginal analysis –infinite and zero slopes.

45. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 45 Equation form Linear relationship y = a + bx Where y = the dependent variable a = the vertical intercept b = the slope of the line x = the independent variable

46. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 46 Slope of non-linear curves Tangent A A a a X Y P

47. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 47 Slope of non-linear curves (cont.) X Y 40 30 20 10 0 P b b 10 20 30 40

48. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 1- 48 Next chapter Demand and supply