OUTLINE

Why Study Economics?

To Learn a Way of Thinking
Introduction To Understand Society
To Understand Global Affairs
To Be an Informed Voter

The Scope of Economics

Microeconomics and
Macroeconomics

The Method of Economics

Theories and Models
Economic Policy

Appendix: How to Read

and Understand Graphs

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 Economics The study of how individuals and
societies choose to use the scarce resources
that nature and previous generations have
provided.

Economics is the study of how individuals and societies choose to

use the scarce resources that nature and previous generations
have provided. The key word in this definition is choose.
Economics is a behavioral, or social, science. In large measure it
is the study of how people make choices. The choices that people
make, when added up, translate into societal choices.

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Why Study Economics?

To Learn A Way Of Thinking

Three fundamental concepts:

(1) Opportunity cost
(2) Marginalism, and
(3) Efficient markets

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Why Study Economics?

To Learn A Way Of Thinking

Opportunity Cost

opportunity cost The best

alternative that we forgo, or give
up, when we make a choice or a
decision.

scarce Limited.

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Why Study Economics?

To Learn A Way Of Thinking

Marginalism and Sunk Costs

marginalism The process of

analyzing the additional or
incremental costs or benefits
arising from a choice or decision.

sunk costs Costs that cannot

be avoided, regardless of what is
done in the future, because they
have already been incurred.
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Why Study Economics?

To Learn A Way Of Thinking

Efficient Markets—No Free Lunch

efficient market A market

in which profit opportunities are
eliminated almost instantaneously.

The study of economics teaches us a way of thinking and helps

us make decisions.

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 ACTIVE LEARNING
Applying the principles
You are selling your 1996 Toyota. You have already spent
P10,000 on repairs.
CHAPTER 1 The Scope and Method of Economics

At the last minute, the transmission dies. You can pay

P6,000 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.

A. Book value is P65,000 if transmission works,

P57,000 if it doesn’t
B. Book value is P60,000 if transmission works,
P55,000 if it doesn’t
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Microeconomics 9e by Case, Fair and Oster
ACTIVE LEARNING
Applying the principles-More on Opportunity Costs

For each of the following situations, identify the full cost (opportunity
cost) involved:

a. A worker earning an hourly wage of P125 decides to cut back to part-time to

attend DLSU MBA.

b. Susan decides to drive to Canlubang from Manila to visit her son, who
attends DLSU-STC.

c. Tomas decides to go to a wild fraternity party and stays out all night before
his Business Economics exam.

d. Ana spends P2000 on a new dress.

e. The Confab Company spends P10 million to build a new branch plant that
will probably be in operation for at least 10 years. The owners borrowed half of
the required amount and used their own saving to finance the other half.

f. Juan’s father owns a small grocery store in town. Juan works 40 hours a
week in the store but receives no compensation.

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Why Study Economics?

 To Understand Society
 To understand Global Affairs
 To be informed Citizens

The study of economics is an essential part of the study of

society.

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The Scope of Economics
Microeconomics and Macroeconomics

 microeconomics The branch of economics that

examines the functioning of individual industries and the
behavior of individual decision-making units—that is,
business firms and households (study of how households
and firms make decisions and how they interact in
markets)

 macroeconomics The branch of economics that

examines the economic behavior of aggregates—income,
employment, output, and so on—on a national scale
(study of economy-wide phenomena, including
inflation, unemployment, and economic growth)

Microeconomics looks at the individual unit—the household, the

firm, the industry. It sees and examines the “trees.”
Macroeconomics looks at the whole, the aggregate. It sees and
analyzes the “forest.”

 These two branches of economics are closely intertwined, yet distinct – they address different
questions.
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The Scope of Economics

Microeconomics and Macroeconomics

TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns

Divisions
of Economics Production Prices Income Employment
Microeconomics Production/output in Price of individual Distribution of Employment by
individual industries and goods and services income and individual businesses
businesses wealth and industries

How much steel Price of medical care Wages in the auto Jobs in the steel
How much office Price of gasoline industry industry
space Food prices Minimum wage Number of employees
How many cars Apartment rents Executive salaries in a firm
Poverty Number of
accountants

Macroeconomics National Aggregate price level National income Employment and

production/output unemployment in
the economy

Total industrial output Consumer prices Total wages and Total number of jobs
Gross domestic Producer prices salaries Unemployment rate
product Rate of inflation Total corporate
Growth of output profits

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The Method of Economics

positive economics An approach to

economics that seeks to understand
behavior and the operation of systems
without making judgments. It describes
what exists and how it works.

normative economics An approach to

economics that analyzes outcomes of
economic behavior, evaluates them as good
or bad, and may prescribe courses of
action. Also called policy economics.

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ACTIVE LEARNING
Identifying positive vs. normative
Which of these statements are “positive” and
which are “normative”? How can you tell the
difference?
a. Prices rise when the government increases
the quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause
an increase in consumer demand for video
rentals.
13
USEFUL NOTES

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The Method of Economics

Descriptive Economics and Economic Theory

descriptive economics The

compilation of data that describe
phenomena and facts.

economic theory A statement or set of

related statements about cause and
effect, action and reaction.

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The Method of Economics

Theories and Models

model A formal statement of a theory, usually

a mathematical statement of a presumed
relationship between two or more variables.

variable A measure that can change from time

to time or from observation to observation.

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The Method of Economics

Theories and Models

All Else Equal: Ceteris Paribus

ceteris paribus, or all else equal A device

used to analyze the relationship between two
variables while the values of other variables
are held unchanged.

Using the device of ceteris paribus is one part of

the process of abstraction. In formulating
economic theory, the concept helps us simplify
reality to focus on the relationships that interest
us.
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The Method of Economics

Theories and Models

Expressing Models in Words, Graphs, and Equations

The most common method of expressing

the quantitative relationship between two
variables is graphing that relationship on
a two-dimensional plane.

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The Method of Economics

Theories and Models

Cautions and Pitfalls

The Post Hoc Fallacy

post hoc, ergo propter hoc Literally, “after this (in time),
therefore because of this.” A common error made in thinking
about causation: If Event A happens before Event B, it is not
necessarily true that A caused B.

The Fallacy of Composition

fallacy of composition The erroneous belief that what is true
for a part is necessarily true for the whole.

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The Method of Economics

Theories and Models

Testing Theories and Models: Empirical Economics

empirical economics The collection

and use of data to test economic
theories.

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The Method of Economics

Economic Policy

Criteria for judging economic outcomes:

1. Efficiency
2. Equity
3. Growth
4. Stability

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The Method of Economics

Economic Policy

Efficiency

efficiency In economics, allocative

efficiency. An efficient economy is one that
produces what people want at the least
possible cost.
Equity

equity Fairness.

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The Method of Economics

Economic Policy

Growth

economic growth An increase in the

total output of an economy.

Stability

stability A condition in which

national output is growing steadily, with low
inflation and full employment of resources.

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 APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS

A graph is a two-dimensional
representation of a set of numbers, or
data.

TIME SERIES GRAPHS

A time series graph shows

how a single variable changes
over time.

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 APPENDIX
HOW TO READ
AND UNDERSTAND GRAPHS
TIME SERIES GRAPHS

TABLE 1A.1 Total Disposable

Personal Income in the United States,
1975–2006 (in billions of dollars)
Total Total
Disposable Disposable
Personal Personal
Year Income Year Income
1975 1,181.4 1991 4,474.8
1976 1,299.9 1992 4,754.6
1977 1,436.0 1993 4,935.3
1978 1,614.8 1994 5,165.4
1979 1,808.2 1995 5,422.6
1980 2,019.8 1996 5,677.7
1981 2,247.9 1997 5,968.2
1982 2,406.8 1998 6,355.6
1983 2,586.0 1999 6,627.4
1984 2,887.6 2000 7,120.2
1985 3,086.5 2001 7,393.2
1986 3,262.5 2002 7,827.7
1987 3,459.5 2003 8,159.9
1988 3,752.4 2004 8,646.9
1989 4,016.3 2005 8,945.6  FIGURE 1A.1 Total Disposable Personal
1990 4,293.6 2006 9,501.5 Income in the United States: 1975–2006 (in
billions of dollars)

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 APPENDIX
Appendix
HOW TO READ AND UNDERSTAND GRAPHS

GRAPHING TWO VARIABLES ON A CARTESIAN

COORDINATE SYSTEM

 FIGURE 1A.2 A Cartesian Coordinate

System
A Cartesian coordinate system is
constructed by drawing two
perpendicular lines: a vertical
axis (the Y-axis) and a horizontal
axis (the X-axis). Each axis is a
measuring scale.

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 APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS
PLOTTING INCOME AND CONSUMPTION DATA
FOR HOUSEHOLDS
TABLE 1A.2 Consumption Expenditures
and Income, 2005
Average
Average Income Consumption
Before Taxes Expenditures

Bottom fifth $ 9,676 $ 19,120

2nd fifth 25,546 28,921
3rd fifth 42,622 39,098
4th fifth 67,813 54,354
Top fifth 147,737 90,469

 FIGURE 1A.3 Household Consumption and

Income
A graph is a simple two-dimensional geometric
representation of data. This graph displays the
data from Table 1A.2. Along the horizontal scale
(X-axis), we measure household income. Along
the vertical scale (Y-axis), we measure
household consumption.
Note: At point A, consumption equals $19,120
and income equals $9,676.
At point B, consumption equals $28,921 and
income equals $25,546.

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 APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS
SLOPE
Y Y2  Y1

X X 2  X 1
 FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope

A positive slope indicates that increases in X are A negative slope indicates the opposite—
associated with increases in Y and that decreases when X increases, Y decreases and when
in X are associated with decreases in Y. X decreases, Y increases.

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 APPENDIX
HOW TO READ AND UNDERSTAND GRAPHS

 FIGURE 1A.5 Changing Slopes Along Curves

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 APPENDIX
SOME PRECAUTIONS

TABLE 1A.3 Aggregate National Income and

Consumption for the United States,
1930–2006 (in billions of dollars)

Aggregate National Income Aggregate Consumption

1930 $ 75.6 $ 70.2
1940 81.1 71.2
1950 241.0 192.7
1960 427.5 332.3
1970 837.5 648.9
1980 2,243.0 1,762.9
1990 4,642.1 3,831.5
2000 7,984.4 6,683.7
2004 10,306.8 8,195.9
2005 10,887.6 8,707.8
2006 11,655.6 9,224.5

 FIGURE 1A.6 National Income and

Consumption
It is important to think carefully about what is
represented by points in the space defined by the axes
of a graph. In this graph, we have graphed income
with consumption, as in Figure 1A.3, but here each
observation point is national income and aggregate
consumption in different years, measured in billions of
dollars.

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 REVIEW TERMS AND CONCEPTS

Cartesian coordinate system slope

graph time series graph
negative relationship X-axis
origin X-intercept
positive relationship Y-intercept

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