CHAPTER 1 - THE ART AND SCIENCE OF
ECONOMIC ANALYSIS (6e)
I.
The Economic Problem
Scarce resources v. unlimited wants
ECONOMICS:
A. Resources
1) Categories of resources
a) Labor
b) Capital
c) Land
d) Entrepreneurial ability
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2)
Payments to resource owners
a) Wages for labor
b) Interest for capital
c) Rent for land
d) Profit for entrepreneurship
B. Goods and Services
Resources are combined to produce:
Goods
Services
C. Economic Decision Makers
1) Households (leading role)
2) Firms
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3) Governments
4) The rest of the world
The economic decision makers interact by
means of markets.
MARKET:
Product market
Resource market
D. A Simple Circular Flow Model
Circular flow model:
Study the diagram on p. 5; be sure you
understand the flows of resources,
products, and money between households
and firms.
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II. The Art of Economic Analysis
Study pp. 6-8 carefully on your own.
Focus on the meaning of marginal analysis (p. 7).
Understand the difference between microeconomics
and macroeconomics (pp. 7-8).
III.
The Science of Economic Analysis
Study pp. 8-16 carefully on your own.
Understand the concept of an economic theory or
model (p. 8).
Know the difference between positive and
normative economic statements (p. 10).
Point of interest: The Case Study on p. 14 and
Exhibit 3 on p. 15 show the excellent earning
potential for economics majors (male and female)
compared to many other majors. If you would like
to talk about economics as a possible major for
you, please come by my office—I would be happy to
discuss this with you!
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APPENDIX TO CHAPTER 1 - UNDERSTANDING
GRAPHS
Graph: a picture showing how variables relate
Components of a Graph:
See Ex. 4
Origin - represents zero value for both variables
Horizontal axis - measures values for the variable
“x”
Vertical axis - measures values for the variable “y”
Note: It is often true that one variable depends on
(i.e., is determined by) the other. For example, if the
value of x depends on the value of y, then x is the
dependent variable and y is the independent
variable.
I. Drawing Graphs Based on the Relations Between
Variables
A. Positive (Direct) Relation Between Variables
See Ex. 6, Ex. 7, and Ex. 8(a) for examples
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B. Negative (Inverse) Relation Between Variables
See Ex. 8(b) for an example
C. Variables may the Independent (Unrelated)
See Ex. 8(c) and 8(d) for examples
II. Slopes of Straight Lines
Slope: how much the vertical axis variable’s value
changes for a given change in the horizontal axis
variable’s value
Slope = change in vertical axis value
change in horizontal axis value
Positive relation  positive slope
See Ex. 8(a)
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Negative relation  negative slope
See Ex. 8(b)
III. Slope, Units of Measurement, and Marginal Analysis
and
IV. Slopes of Curved Lines
Read pp. 21-23. Know how to calculate slopes.
V.
Line Shifts
See Ex. 12
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