Download appendix: making and using graphs

1
Getting Started
CHAPTER CHECKLIST
When you have completed your
study of this chapter,
chapter you will be able to
1 Define economics and explain the questions that economists
try to answer.
2 Explain the core ideas that define the economic way of
thinking.
© 2011 Pearson Education
1.1 DEFINITION AND QUESTIONS
All economic questions and problems arise because
human wants exceed the resources available to satisfy
them.
them
Scarcity
Scarcity is the condition that arises because wants
exceeds the ability of resources to satisfy them.
Faced with scarcity, we must make choices —we must
choose among the available alternatives.
The choices we make depend on the incentives we face.
1.1 DEFINITION AND QUESTIONS
Economics Defined
Economics is the social science that studies the choices
that individuals, businesses, governments, and entire
societies make as they cope with scarcity,
scarcity the incentives
that influence those choices, and the arrangements that
coordinate them.
Jacob
J
b Vi
Viner: “E
“Economics
i iis what
h economists
i
do.”
Jim Duesenberry: “Economics is all about how
people make choices. Sociology is about why
there isn
isn’tt any choice to be made
made.”
1.1 DEFINITION AND QUESTIONS
Two big economic questions:
• How do choices determine what,
what how,
how and
for whom goods and services get
produced?
• When do choices made in self-interest also
promote the social interest?
What, How, and For Whom?
What goods and services get produced and in what
quantities?
How are goods and services produced?
For Whom are the various g
goods and services
produced?
The price of oil
Tripled in 1973
1973-74,
74, and doubled again in 1979
1979-80
80
… and affected people all over the world.
60
US$ per b
barrel
50
40
30
20
10
0
1965
1970
1975
Source:McGraw-Hill, 2005
1980
1985
1990
1995
2000
An increase in the price of oil affects
What to produce
less oil-intensive products
How to produce
p
less oil-intensive techniques
For whom to produce
oil producers have more buying power, importers have
less
...are the goods produced go to the people who benefit
most from them?
Source:McGraw-Hill, 2005
When Is the Pursuit of Self-Interest in the
Social Interest?
The choices that are best for the individual who
pursuit of
makes them are choices made in the p
self-interest.
The choices that are best for society as a whole are
choices made in the social interest.
A Beautiful Mind
A Beautiful Mind 3 11 flv
A_Beautiful_Mind_3_11_.flv
Beautiful Mind Script
Nash : If we all go for the blonde...we block each other. Not a
single one of us is gonna get her. So then we go for her
friends, but they will all give us the cold shoulder because
nobody likes to be second choice. Well, what if no one goes
for the blonde?
We don't get in each other's way, and we don't insult the other
girls.That's the only way we win.
…. Because the best result will come...from
come from everyone in
the group doing what's best for himself...and the
group.
http://adamsmithslostlegacy.blogspot.com/2009/02/
hollywood-john-nash-was-wrong.html
1.1 DEFINITION AND QUESTIONS
Can choices made in self-interest also serve the
social interest?
1 Financial Crisis and Global Slump
The bankers
Th
b k
th t were eager to
that
t lend
l d to
t home
h
buyers between 2000 and 2006 were pursuing their
self-interest.
Borrowers and homebuyers also acted in what they
saw as their
th i self-interest.
lf i t
t
An increase in loan incentives such as easy initial terms and
a long-term trend of rising housing prices had encouraged
borrowers to assume difficult mortgages in the belief they
would be able to quickly refinance at more favorable terms.
Additionally, there were economic incentives provided to the
originators of subprime mortgages
Once interest rates began to rise and housing prices started
to drop moderately in 2006–2007 in many parts of the U.S.,
refinancing became more difficult.
difficult Defaults and foreclosure
activity increased dramatically.
When the housing bubble burst and homeowners defaulted
on their loans, they acted in self-interest.
When banks foreclosed on borrowers, they acted in selfinterest.
 But
B t these
th
actions
ti
were nott in
i the
th social
i l iinterest.
t
t
The ongoing foreclosure epidemic, of which subprime loans are
one part, that began in late 2006 in the U.S. continues to be a key
factor in the global economic crisis, because it drains wealth
from consumers and erodes the financial strength of banking
institutions.
2 Globalization and International Outsourcing
Globalization
Gl
b li ti and
d iinternational
t
ti
l outsourcing
t
i
(production of components &services by firms in
other countries) are in the interest of owners of
multinational firms that profit (they have lower
production costs in China, India..), but is it in the
social interest?
How about the displaced American worker? Or the
worker in Malaysia who works for a few cents/hour?
3 The Information-Age
Information Age Economy
Makers of computer chip and programs
developed products in their self-interest
self interest but did
they develop their products in the social
interest?
Were resources used in the best way?
Did Intel made the best possible chips and sold
it att the
th right
i ht prices?
i
?
4 Disappearing
pp
g Rainforests and Fish Stocks
When we buy
yp
products made with
ingredients from rainforests are we
damaging the social interest?
....at the current rate of destruction almost all
tropical rainforest ecosystems will be gone by
2030
5 Water
W t Shortages
Sh t
Are the global water resources managed in the
self interest or in the social interest?
self-interest
6
Global Warming
The choices we make concerning how to produce and
use energy are made
d iin our self-interest,
lf i t
t but
b t do
d they
th
serve the social interest?
....Would the US signing onto the Kyoto Protocol
(agreement that seeks binding emission cuts) serve the
social interest?
1.2 THE ECONOMIC WAY OF THINKING
How economists approach their work
Core Economic Ideas:
•
•
•
•
•
Rational choice
Cost
Benefit
f
Margin
Incentives
1.2 THE ECONOMIC WAY OF THINKING
Rational Choice
A rational choice is a choice that uses the available
resources to
t best
b t achieve
hi
the
th objective
bj ti off the
th person
making the choice.
We make rational choices by comparing costs and
benefits.
……….why are u here in college?
1.2 THE ECONOMIC WAY OF THINKING
Cost: What You Must Give Up
Opportunity cost is the best thing that you must
give
i up tto gett something—the
thi
th hi
highest-valued
h t l d
alternative forgone.
....how
how much would u be making monthly if u
were working?
Sunk cost is a previously incurred and irreversible
cost.
A sunk cost is not part of the opportunity cost of a
current choice. ….u have already paid the tuition
1.2 THE ECONOMIC WAY OF THINKING
Benefit: Gain Measured by What You Are
Willing to Give Up
Benefit is the gain or pleasure that something brings.
On the Margin (border/edge)
A choice made on the margin is a choice made by
comparing all the relevant alternatives systematically
and incrementally.
1.2 THE ECONOMIC WAY OF THINKING
Marginal Cost
Marginal cost is the cost of a one-unit increase in an
activity.….seeing an additional movie lowers your grade
more and more…MC increasing
Marginal Benefit
Marginal benefit is the what you gain when you get one
more unit of something.
something …eating
eating 1 more slice of pizza
gives less and less pleasure..MB decreasing
1.2 THE ECONOMIC WAY OF THINKING
Making a Rational Choice
When we take those actions for which marginal benefit
exceeds or equals marginal cost.
….delaying graduation..Cost? Benefit?
Responding to Incentives
An incentive is a reward or a p
penalty—a
y
“carrot” or a
“stick”—that encourages or discourages an action.
1.2 THE ECONOMIC WAY OF THINKING
Micro and Macro Views of the World
Microeconomics: The studyy of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the global
economy of the choices that individuals,
individuals businesses
businesses,
and governments make.
1.2 THE ECONOMIC WAY OF THINKING
Economics as a Social Science
Economists distinguish between
• Positive statements: What is …the unemployment
rate is 9.4%
• Normative
N
ti statements:
t t
t What
Wh t ought
ht to
t be….the
b
th
government should change its unemployment
p y
policy
The task of economic science:
To test positive statements about how the economic
world works and to weed out those that are wrong.
1.2 THE ECONOMIC WAY OF THINKING
Ceteris paribus means “other things being equal” or
“other things remaining the same.”
By changing one factor at a time and holding other
relevant factors constant, we are able to investigate the
effects of the factor.
1.2 THE ECONOMIC WAY OF THINKING
In the real world, we observe the outcomes of
simultaneous operation of many factors
factors.
How to solve the problem?
T sortt off the
To
th effects
ff t off each
h factor,
f t economists
i t use
• Natural experiments
• Statistical investigations
• Economic experiments
1.2 THE ECONOMIC WAY OF THINKING
1. Natural experiments: A situation that arises in the
ordinary course of economic life in which the one
factor of interest is different and other things are
equal/similar.
Ex: Canada has higher unemployment benefits than US
US.
Compare th
C
the effects
ff t off UB on the
th unemployment
l
t rate
t in
i
US and Canada..
1.2 THE ECONOMIC WAY OF THINKING
2. A statistical investigation looks for a correlation.
Correlation is the tendency for the values of two
variables
i bl tto move ttogether
th ((same / opposite
it direction)
di ti ) iin
a predictable and related way… smoking & lung cancer,
education & income
3. An economic experiment puts people in a decisionmaking situation and varies the influence of one factor
at a time to discover how they respond.
1.2 THE ECONOMIC WAY OF THINKING
Economics as Policy Tool
Economics provides a way of approaching problems in
allll aspects
t off our lives:
li
Personal (should you take a student loan?),
Business (Should Taxeco get more oil from Gulf of
Mexico or Alaska?), and
Government (How can California balance its budget?).
Getting Started
CHAPTER
APPENDIX: MAKING AND USING GRAPHS
1
APPENDIX: MAKING AND USING GRAPHS
Basic Idea
A graph enables us to visualize the relationship
between two variables.
To make a graph, set two lines perpendicular to each
other:
• The horizontal line is called the x-axis.
• The vertical line is called the y-axis.
point is called the origin.
g
• The common zero p
APPENDIX: MAKING AND USING GRAPHS
Point A shows that when
the temperature is 40
degrees, ice cream
consumption is only 5
gallons a day
day.
Point B shows that when
the temperature is 80
degrees, ice cream
consumption jumps to
20 gallons a day.
APPENDIX: MAKING AND USING GRAPHS
Interpreting Data Graphs
Scatter diagram is a graph of the value of one
variable against the value of another variable.
Time series graph is
Time-series
i a graph
h th
thatt measures titime on
the x-axis and the variable or variables in which we are
interested on the y-axis.
y
APPENDIX: MAKING AND USING GRAPHS
Figure A1.2(a) shows a
scatter diagram.
In 2000 (marked 00),
income per person
was $25
$25,500
500 and
expenditure per
person was $23,900.
The data for 1995 to
2005 show that as
income increases
increases,
expenditure
increases.
APPENDIX: MAKING AND USING GRAPHS
Figure A1.2(a) shows a
scatter diagram.
In 2000 (marked 00),
income per person
was $25
$25,500
500 and
expenditure per
person was $23,900.
The data for 1995 to
2005 show that as
income increases
increases,
expenditure
increases.
APPENDIX: MAKING AND USING GRAPHS
Trend is a general tendency for the value of a variable
to rise or fall.
Cross-section graph is a graph that shows the
values of an economic variable for different groups in a
population at a point in time.
Gender/age/income groups
APPENDIX: MAKING AND USING GRAPHS
Figure A1.2(d) shows a
cross-section graph.
g p
The graph shows
the percentage of
people who
participate
p
p
in
various sports
activities.
APPENDIX: MAKING AND USING GRAPHS
Interpreting Graphs Used in Economic
Models
Positive relationship or direct relationship is a
relationship between two variables that move in the
same direction.
Linear relationship is a relationship that graphs as
a straight
t i ht line.
li
APPENDIX: MAKING AND USING GRAPHS
Figure A1.3(a)
Fi
A1 3( ) shows
h
a
positive (direct) relationship.
At a speed of 40 MPH
MPH, you
travel 200 miles in 5
hours—point A.
At a speed of 60 MPH, you
travel 300 miles in 5
h
hours—point
i t B.
B
As the speed increases, the
distance traveled in 5 hours
increases proportionately.
APPENDIX: MAKING AND USING GRAPHS
APPENDIX: MAKING AND USING GRAPHS
Negative relationship or inverse relationship is a
relationship between two variables that move in
opposite directions.
directions
APPENDIX: MAKING AND USING GRAPHS
Figure A1.4(a) shows a
negative (inverse)
relationship.
As the time playing tennis
increases, the time playing
squash decreases
decreases.
Because one more hour of tennis
means one hour less of squash,
squash
the relationship between these
two variables is described by a
g line.
straight
APPENDIX: MAKING AND USING GRAPHS
MAX AND MIN
Unrelated Variables
APPENDIX: MAKING AND USING GRAPHS
The Slope of a Relationship
Slope
p equals
q
the change
g in the value of the variable
measured on the y-axis divided by the change the value
of the variable measured on the x-axis. (rise over run)
Slope = y ÷ x.
APPENDIX: MAKING AND USING GRAPHS
Figure A1.7(a) shows
a positive
iti slope.
l
1 When ∆x is 4
1.
4,
2. ∆y is 3.
3. Slope (∆y/∆x) is 3/4.
APPENDIX: MAKING AND USING GRAPHS
Figure A1.7(b) shows
a negative
ti slope.
l
1 When ∆x is 4
1.
4,
2. ∆y is –3.
3. Slope (∆y/∆x) is
–3/4
3/4.