Learning Objectives

LO1: Define economics, microeconomics, and macroeconomics.

LO2: Identify John Maynard Keynes, Alfred Marshall, and Adam Smith, and their
influence in economics.

LO3: State and explain the problem of scarcity and its relation to opportunity
cost.

LO4: Explain how a rational decision maker applies the cost–benefit principle.

LO5: State how three pitfalls can undermine rational economic decisions.

LO6: Explain how data are used to evaluate economic theories.

LO7: Distinguish positive economics from welfare economics.

LO8: Define an economic naturalist.
© 2012 McGraw-Hill Ryerson Limited
Ch1 -1
LO1: Define economics,
microeconomics, and macroeconomics

“Economics is the science which studies human behaviour as a
relation- ship between given ends and scarce means which have
alter- native uses.” (British economist Lionel Robbins 1932)

“Economics the study of how people make choices under
conditions of scarcity and the results of those choices for
society.”

Microeconomics the study of individual choices under scarcity
and the implications of these choices for the behaviour of prices
and quantities in individual markets

Macroeconomics the study of the performance of national
economies and the policies that governments use to try to
improve that performance
© 2012 McGraw-Hill Ryerson Limited
LO1: Definition of Economics
Ch1 -2
LO1: Define economics,
microeconomics, and macroeconomics

Microeconomics studies subjects like
 Choices of individuals
 Choices of Firms
 The determinants of prices and quantities in specific markets

Macroeconomics studies subjects like
 The performance of national economies

Long run growth and prosperity

Short run booms and busts
 Government policies to change performance
© 2012 McGraw-Hill Ryerson Limited
LO1: Definition of Economics
Ch1 -3
LO1: Define economics,
microeconomics, and macroeconomics

One distinguishing feature of economics as a social science is
that economic theories are often expressed as abstract models.

Economic model is a representation of economic reality that
highlights particular variables and the relationships among
them.

Another feature of economics has been the tendency of
economists to assume in their theories that human beings are
rational.

Rational decision maker is someone with clear objectives who
behaves logically to achieve those objectives.
© 2012 McGraw-Hill Ryerson Limited
LO1: Definition of Economics
Ch1 -4
Using a Verbal Description to
Construct a Equation I of II

Equation: a mathematical expression that describes the relationship
between two or more variables

Variable: a quantity that is free to take a range of different values

Dependent Variable: a variable in an equation whose value is
determined by the value taken by another variable in the equation

Independent variable: a variable in an equation whose value
determines the value taken by another variable in the equation

Constant (or parameter): a quantity that is fixed in value
© 2012 McGraw-Hill Ryerson Limited
LO1A.1: Using a Verbal Description to Construct a Graph
Ch1 -5
Using A Verbal Description To
Construct An Equation II of II
 My telephone bill is $5.00 per month plus 10 cents for every minute
that I talk
 Telephone Bill
= 5.00 + 0.10 * (Minutes Talked)
B = 5.00 + 0.10 T
 If you make 32 minutes phone call, monthly bill will be
B = 5.00 + 0.1 (32) = 8.20
 Or one can draw a picture of the relationship
© 2012 McGraw-Hill Ryerson Limited
LO1A.1: Using a Verbal Description to Construct a Graph
Ch1 -6
Graphing the Equation of
a Straight Line I of II
B = 5 + 0.1T
Dependent
Variable
12 = 5 + 0.1(70)
8 = 5 + 0.1(30)
6 = 5 + 0.1(10)
Independent
Variable
© 2012 McGraw-Hill Ryerson Limited
LO1A.2: Graphing the Equation of a Straight Line
Ch1 -7
Graphing the Equation of
a Straight Line II of II
The graph of the equation B =5 + 0.10T is the straight line shown;
its vertical intercept is 5, and its slope is 0.10
Slope = Rise/Run
Slope = 2/20 = 0.1
Vertical Intercept
(Constant) is 5
© 2012 McGraw-Hill Ryerson Limited
LO1A.2: Graphing the Equation of a Straight Line
Ch1 -8
Deriving the Equation of a Straight
Line from its Graph
The Equation For the
Billing Plan: B = 4 + 0.20T
Slope = Rise/Run
Slope = 4/20 = 0.2
Vertical Intercept
(Constant) is 4
© 2012 McGraw-Hill Ryerson Limited
LO1A.3: Deriving the Equation of a Straight Line from its Graph
Ch1 - 9
Shifting the Curve – Intercept
Changes
D′ New monthly bill
C′

Original monthly bill
Suppose the fixed fee
increases from $4 to $8 ?
 But the per-minute
charge remains the same
D
A′
C

A
Old Telephone Bill was
determined by the equation
 B = 4 + 0.20 T

New Bill is determined by
the equation
 B = 8 + 0.20 T
© 2012 McGraw-Hill Ryerson Limited
LO1A.4: Changes in the Vertical Intercept
Ch1 - 10
Shifting the Curve – Slope Changes
C′
Rise = 8
A′

The slope of a graph indicates
how much of a “rise” one can
expect, for a given “run”

Old Telephone Bill was
determined by the equation
New monthly bill
Original monthly bill
Run = 20
C
 B = 8 + 0.20 T
A

New Telephone Bill is
determined by the equation
 B = 8 + 0.40 T
© 2012 McGraw-Hill Ryerson Limited
LO1A.5: Changes in the Slope
Ch1-11
Constructing Equations and Graphs
from Tables
Point A
Point C
Slope = Rise/Run
Slope = 1/20 = 0.05
Vertical
Intercept
(Constant) is 10
The Equation For the
Billing Plan: B = 10+ 0.05T
© 2012 McGraw-Hill Ryerson Limited
LO1A.6: Constructing Equations and Graphs from Tables
Ch1 -12