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©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MVCC COURSE - BM 101 1 1 The Role and Method of Economics ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Economics: A Brief Introduction • Economics • ‘Okionomia’ (Greek): management of household affairs • ECONOMICS • The study of ________ we make among our many ______ & ________, given our limited resources • It is a _______-_______ science that concerns itself with the choices we make in the face of ________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Economics: A Brief Introduction • Resources • Inputs used to produce ______ & __________ • Land, human effort, skills, machines, factories • Scarcity • Scarcity exists when human _________ exceed available resources • The economic problem • ___________ forces us to choose • Choices are _________ • We must give up other opportunities that we value ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Economics: A Brief Introduction • Unlimited human wants • Not the same as needs • People are not able to fulfill all their wants and ______________ • Limited resources • • • • Labor _________ Capital Entrepreneurship ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Scarcity and Limited Resources • Labor • Physical and ________ effort used in the production of _______ & services • Land • “Gifts of ________” • Natural __________ used in the production of goods and services • Capital • Equipment and ____________ used to produce goods and services • Human capital • Productive ____________ & skill people receive from education and on-the-job training ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Scarcity and Limited Resources • Entrepreneurship • Process of ______________ labor, land, and capital to produce goods and services • Entrepreneurs • • • • Tough and risky decisions New ways to improve __________ techniques or to create new products Lured by the chance of making a profit Take risks ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 What are Goods and Services? • Goods • _______ we value or desire • _________ goods: we can reach out and touch • _________ goods: we cannot reach out and touch • Services • Intangible _____ for which people are willing to pay ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 What are Goods and Services? • Goods and services • Produced from _________ resources • Economic goods • Scarce goods created from scarce resources • ___________ but in limited in supply • We compete for them • Bads • Items that we do not desire or want • ______ is preferred to more ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Scarcity • We all face scarcity • We cannot have ______ the goods & services we desire • Will scarcity ever be eradicated? • Scarcity ________ has & _______ will be eradicated • New wants ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Economic Behavior • Self-interest • Individuals act as if they are motivated by self-interest • Respond in __________ ways to changing circumstances • Economists’ assumption • Good predictor of ________ behavior in most situations • Can include benevolence • Not necessarily _________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Economic Behavior • Rational behavior • People do the best they can • Based on their values & __________ • Under current and anticipated future circumstances • Economists’ assumption • Most people act _____________ • Make decisions with some expected outcome in mind • Their actions are rational and purposeful, not random and chaotic ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Economic Behavior Enormous amounts of resources (_____ & ______) were donated to the Hurricane Katrina victims. If individuals are acting to promote the things that interest them, are these self-interested acts necessarily selfish? Acting in one’s own self-interest is only selfish if one’s interests are selfish. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Economic Behavior • People respond to changes in incentives • Reacting to changes in _________ and costs • Human behavior • Influenced in predictable ways by changes in economic _____________ • Can be explained and predicted as a __________ to incentives ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Markets • Market • Process of buyers and sellers ___________ goods and services • Market economy • Provides a way for millions of producers & ____________ to allocate scarce resources • Efficiency • Achieved when the economy gets the most out of its scarce resources • Makes the economic pie as large as possible ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Markets • Competitive markets • Make existing products ___________ &/or less ____________ • Improve production processes • Create new products • Markets • Provide what buyers are ________ & _______ to pay for • And what sellers are willing and able to produce ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Market Prices provide Important Information • Market price • Serve as the ___________ of the market system • Communicate important information to both buyers and sellers • Buyers: relative availability of products • Sellers: relative value that consumers place on those products • Reflects the _______ a buyer places on a good • Reflects the cost to society of producing that good ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Market Prices provide Important Information • The basis of a market economy • Voluntary __________ • Price _______ • Guides people’s choices • Produces solutions to the questions of • What goods to produce • How to produce and distribute them ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Markets • Countries that do not rely on a market system • Have no clear communication between buyers and sellers • ___________ of quality goods • ___________ of low quality goods ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Market Failure • Market failure • When the economy fails to allocate resources efficiently on its own • Pollution • Produce too little of a good • _________ • Market power • Government: can help promote efficiency when there is a market failure • Making the economic pie larger ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 Market Failure • Does the market distribute income fairly? • Trade-off between efficiency and equality • How much an economy can produce efficiently • How that output is distributed • Efficient market does not guarantee a “_______” or equal distribution of income • What is “fair” for one person may seem highly “______” to someone else ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 Market Failure • Government is not always the solution • Just because the gov’t could improve the situation does not mean it will • The political _________ has its own set of problems • Special interests • Shortsightedness • Imperfect information ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 The Circular Flow Model • Product markets: goods and services • _________: producers of goods and services • Households: buyers of goods and services • __________: from households to firms • Factor markets: inputs • Firms: buy inputs to produce the goods and services • Households: sell the inputs • Payments: from firms to households ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 The Simple Circular Flow Model • Product market • Firms produce goods and services • Earn __________ • Households buy goods and services • Consumption spending • Factor market • Households sell labor, land, capital, entrepreneurship - earn money (income) • Firms purchase inputs • Pay wages, rent, interest, profit ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 EXHIBIT 1.1 The Circular Flow Diagram ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Economic Theory • Economic theories • Statements or propositions about __________ of human behavior that occur expectedly under certain circumstances • Ignores the irrelevant details • ___________ assumptions • A good theory • Explains and predicts well ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Economic Theory • Hypothesis: testable proposition • How people will _______ or react to a change in economic circumstances • Empirical analysis • Use of data to test a hypothesis • Evaluate the results • Accept or _____ the hypothesis • The ceteris paribus assumption • Holding all other things ____________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Economic Theory • Observation and prediction are more difficult in the social sciences • Human behavior: more ___________ & often less readily predictable • Group behavior • More _____________ than individual behavior • Reliable predictions about human behavior ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Economic Theory • Economists do not typically use survey data • Prefer to look at revealed preferences • How people _________ behave • Rather than declared preferences • How they say they behave • Microeconomics • Household and firm behavior and how they ________ in the marketplace • Macroeconomics • Study of the _________ economy ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Pitfalls to Avoid in Scientific Thinking • Confusing correlation and causation • Correlation: when two events occur __________ • Causation: when one event _______ ________ another event • Consider in which direction causality runs • Fallacy of composition • Incorrect view that what is true for the individual is always true for the group ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Positive and Normative Economics • Positive analysis • Factual statements trying to explain the ________ • Positive statement • Objective, testable statement that describes what happens & _______ it happens • Doesn’t have to be true, it has to be testable ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Positive and Normative Economics • Normative analysis • Value judgments trying to __________ the world • Normative statement • Subjective, contestable statement that attempts to describe what should be done • Judgments about what should be or what _______ to happen ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Disagreement Is Common in Most Disciplines • Disagreements in economics • Opposing views on economic policy questions • Stem from normative issues • Differences in values or policy beliefs result in ___________ • Most economists agree on a wide range of issues ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Economists do agree 1. A ceiling on rents (Rent Control) • Reduces the quantity and quality of rental housing available (93% agree) 2. Tariffs and import quotas • Reduce general economic welfare (93%) 3. The United States should not restrict employers • From _____________ work to foreign countries (90%) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Economists do agree 4. Fiscal policy (e.g., tax cuts &/or increases in government expenditure) • Significant stimulative impact on an economy that is less than fully employed (90%) 5. Flexible and floating exchange rates • Effective international monetary arrangement (90%) 6. The gap between Social Security funds and expenditures will become unsustainably large • Within the next 50 years if the current policies remain unchanged (85%) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Economists do agree 7. The United States • Should eliminate agricultural subsidies (85%) 8. Local and state governments in the United States • Should eliminate subsidies to professional sport franchises (85%) 9. A large budget deficit has an adverse effect on the economy (83%) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Economists do agree 10. A minimum wage • Increases unemployment among young and unskilled workers (79%) 11. Effluent taxes and marketable pollution permits • Represent a better approach to pollution control than imposition of pollution ceilings (78%) 12. Economists favor expanding competition and market forces in education (67.1%) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Working with graphs Graphs are an important economic tool • Understand better the workings of the _______ • Can be worth a _________ words Graph • • • • Y-axis: _________ axis on a graph X-axis: _________ axis on a graph Origin Quadrants ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 EXHIBIT 1.2 Plotting a Graph Y 40 30 20 10 -40 -30 -20 -10 0 -10 X 10 20 30 40 -20 -30 -40 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Working with graphs Pie chart • Relative size of various quantities that add up to ______ percent Bar graph • _______ of quantities Time-series graph • Changes in a variable’s value over _______ Variable • Something that is measured by a number ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 EXHIBIT 1.3 Pie Chart, Bar Graph, and Time-Series Graph a. Pie Chart—Tax Revenues—Federal Government, 2011 SOURCE: Economic Report of the President, 2012. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 EXHIBIT 1.3 Pie Chart, Bar Graph, and Time-Series Graph b. Bar Graph—U.S. Unemployment, by Sex and Age, 2011 SOURCE: Bureau of Labor Statistics ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 EXHIBIT 1.3 Pie Chart, Bar Graph, and Time-Series Graph c. Time-Series Graph—Inflation in the United States, 1913–2011 SOURCE: Bureau of Labor Statistics, Consumer Price Index ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Working with graphs Positive relationship • When two variables change in the _______ direction Negative relationship • When two variables change in __________ directions ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 A Positive Relationship EXHIBIT 1.4 D 10 (40, 10) Scores at Z Games 9 C 8 (30, 8) 7 B 6 5 4 (20, 6) A (10, 4) 3 2 1 0 10 20 30 40 Practice Time per Week ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 The graph of a demand curve Graph of the demand curve • Horizontal axis: quantity purchased per period of time • Vertical axis: price per unit • Every point: price and quantity combination • Downward-sloping line ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 A Negative Relationship EXHIBIT 1.5 $25 (1, $25) A Price of Pizzas 20 (2, $20) B Demand curve (3, $15) 15 C (4, $10) 10 D (5, $5) 5 E 0 1 2 3 4 5 6 Quantity of Pizzas Purchased (per month) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 Relationship among three variables Add a third variable, income • Not shown on a axis • Change in income: shift in the demand • Increase in income • Increase in demand • Demand curve shifts outward (to the right) • Decrease in income • Decrease in demand • Demand curve shifts inward (to the left) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 EXHIBIT 1.6 Shifting a Curve b. Demand Curve with Lower Income Price of Pizzas Price of Pizzas a. Demand Curve with Higher Income D D (with lower income) D (with higher income) 0 D 0 Quantity of Pizzas Purchased Quantity of Pizzas Purchased ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Movement along vs. shift Movement along • Movement between one point and another along a curve • Cause: change in one of the variables on the graph Shift • Shift in the whole curve • Cause: change in one of the variables not shown ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Shifts versus Movements Price of Pizzas EXHIBIT 1.7 A B D2 D1 0 Quantity of Pizzas Purchased ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 Slope Slope • The ratio of rise (change in the Y variable) over run (change in the X variable) • Steepness of a line or curve on a graph Positive slope: upward-sloping • Direct, or positive, relationship between the two variables • Slants upward from left to right ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Slope Negative slope: downward-sloping • An inverse, or negative, relationship between the two variables • Slants downward from left to right Linear curve • A straight line Slope of a linear curve • Rise over run ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 Downward- and Upward-Sloping Linear Curves EXHIBIT 1.8 a. Downward-Sloping Linear Curve 25 Downward-sloping b. Upward-Sloping Linear Curve 25 20 20 15 15 10 10 5 5 0 5 10 15 20 25 0 Upward-sloping 5 10 15 20 25 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 Slopes of Positive and Negative Curves EXHIBIT 1.9 b. Negative Slope 10 10 9 9 8 8 7 7 6 Y-axis Y-axis a. Positive Slope Positive Slope 1/2 5 4 A 2 1 2 5 B 2 2 Run 0 -8 Rise 3 1 Rise 1 6 Negative Slope -4 4 B 3 A +2 Run 1 3 X-axis 4 5 6 0 1 2 3 4 5 6 X-axis ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Slope Slope of a non-linear curve (line that curves) • The slope varies from point to point along the curve Slope of a non-linear curve at any given point • Draw a straight line tangent to that point on the curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 EXHIBIT 1.10 Slopes of a Nonlinear Curve 5 Y-axis 4 Slope = 0 3 B A C 2 1 0 1 2 3 4 5 6 7 X-axis ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57