The Scope and Methods of

Principles of Macroeconomics Economics

Chapter 1
2nd Canadian Edition
by Case, Fair, Strain, Veall

PowerPoint Presentation Slides to Accompany the Text

By Peter Ibbott , King’s College - University of Western Ontario

Richard E. Mueller, University of Lethbridge

1 Copyright 2002, Pearson Education Canada 2 Copyright 2002, Pearson Education Canada

A Definition of Economics Another Definition of Economics

z Economics is the study of how individuals and z Economics is the study of how scarce resources
societies choose to use the scarce resources are allocated among conflicting demands.
that nature and previous generations have
provided.

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Four Main Reasons to Study

Economics... 1. To Learn a Way of Thinking...

z To learn a way of thinking z Three Fundamental Concepts of Economic

z To understand society Thinking
z To understand global affairs
y Opportunity Cost
z To be an informed voter
y Marginalism
y Information, Incentives, and Market Coordinations

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Opportunity Costs Question to Consider

z The opportunity cost of something is that which

we give up when we make that choice or z What is the opportunity cost of your attending
decision. university?
z The implication is that all decisions involve
trade-offs. z Include all forgone options in your
consideration.
z “There’s no such thing as a free lunch!!”

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Information, Incentives, and Market

Marginalism Coordination

z In weighing the costs and benefits of a decision,
it is important to weigh only the costs that are
contingent upon the decision.
z Do not include sunk costs
y Sunk costs are the costs that cannot be avoided,
regardless of what is done in the future, because
they have already been incurred.
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z Prices, wages, and profits in market economies
have the capacity to provide the information
and incentives to coordinate the decisions of
individual decision-makers.
z Are these market solutions always desirable?
y Perhaps not if they interfere with the public good,
and lead, for example, to poverty or environmental
degradation.
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2. Understanding Society 3. To Understand Global Affairs

z Present and past economic decisions have an z Impact of globalization, trade negotiations
enormous influence on the character of life in a z End of apartheid
society. z Gulf War
z The state of our physical environment, the level z Poverty and Starvation in Africa and Asia
of material well-being, and the nature and z The Asian Tigers
number of jobs are all products of the economic z The European Union
system. z Collapse of the Soviet Union
z NAFTA and the WTO

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4. To be an informed voter… The Scope of Economics

z Canadian politics is dominated by the debates z Microeconomics

over economic policy.
z To critically assess the platform of each political y The branch of economics that examines the
party requires a basic understanding of functioning of individual industries and the behaviour
economics. of individual decision-making units -- business firms
and households and the effects of government
economic policy on these units.

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The Scope of Economics The Scope of Economics (Table 1.1)

EXAMPLES OF MICROECONOMIC & MACROECONOMIC CONCERNS

z Macroeconomics Production Prices Income Employment

Microeconomics Production/Output in Price of Individual Distribution of Income Employment by

Individual Industries and Goods and Services and Wealth Individual Businesses &
y The branch of economics that examines the Businesses
Price of medical care Wages in the auto
Industries

economic behaviour of aggregates -- income, How much steel Price of gasoline industry Jobs in the steel industry

employment, output and so on... How many offices Food prices Minimum wages Number of employees in
How many cars Apartment rents Executive salaries a firm
Poverty Number of accountants
National Aggregate Price Level National Income Employment and
Production/Output Unemployment in the
Macroeconomics Consumer prices Total wages and salaries Economy
Total Industrial Output Producer Prices Total corporate profits
Gross Domestic Product Rate of Inflation Total number of jobs
Growth of Output Unemployment rate

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The Method of Economics Theories and Models

z Positive Economics z Economic Theory

y An approach to economics that seeks to understand
behaviour and the operation of systems without
making judgements. It describes what exists and
how it works.
z Normative Economics
y An approach to economics that evaluates economic
outcomes as good or bad, and may prescribe courses
of action. Also called policy economics.
y An economic theory is a statement or set of related
statements about cause and effect, action and
reaction.
z Economic Model
y An economic model is a formal statement of an
economic theory. Usually a mathematical
representation of a presumed relationship between
two or more variables.

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Theories and Models Theories and Models - Pitfalls

y Post Hoc Fallacy

z Ockham’s Razor
y Principle that irrelevant detail should be cut away.
z Ceteris Paribus
y Literally, “other things being equal”. Used to analyze
the relationship between two variables while the
values of other variables are held constant.
z Inductive Reasoning
y The process of observing regular patterns from raw
data and drawing generalizations from them.
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x A common error made when thinking about causation: if A
happened before B then A did not necessarily cause B.
y Correlation vs. Causation
x Two variables are correlated if one variable changes when
the other changes. This does not imply that one caused the
other.
y Fallacy of Composition
x The fallacy of composition implies that what is true for a
part is necessarily true for the whole.
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Economic Policy and Five Criteria for

Theories and Models Judging Economic Outcomes

1. Efficiency
z Empirical Economics y In economics, allocative efficiency. An efficient
y The collection and use of data to test economic economy is one that produces what people want and
theories. does so at the least possible cost.
2. Equity
y Equity means fairness, but what this means is open
to debate. Social programs and many policy debates
are centred on the issue of fairness.

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Economic Policy and Five Criteria for

Judging Economic Outcomes Review Terms and Concepts

z ceteris paribus z macroeconomics

3. Growth z economic growth z microeconomics
z descriptive economics z model
y Economic growth is an increase in the total output of
z economic theory z normative economics
an economy. Often measured against population z Ockham’s razor
z economics
growth to find growth per capita. z opportunity cost
z efficiency
4. Full employment z empirical economics
z positive economics
z post hoc fallacy
y Full employment is a condition in which all resources z equity z stability
available for use are being used. z fallacy of composition z sunk costs
full employment
5. Price Stability z z variables
z inductive reasoning
y A condition in which there is little inflation in prices. z Industrial Revolution
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